Foreign Inheritance and Form 3520

Foreign Inheritance and Form 3520

QUESTION: My brother passed away in UK in 2017 (Brother born and raised in UK, not a US Citizen).

I immigrated to US and became a citizen many years ago. The estate is now being settled. I am about to receive over $100,000. The property was sold for a gain in 2019

The property was purchased by my deceased brother in 1996 for $100,000, Date of death value of $120,000 in 2017. Property was sold in 2019 for $150,000. The estate is distributing the money (less attorney fees and taxes paid to UK).

  1. How Do I Determine my basis in this property?
  2. Do I have any gains to report on my US Tax Return?
  3. Do I need to file form 3520?
  4. What other forms do I need to be aware of?

ANSWERS:

  1. BASIS IN INHERITED PROPERTY OF A DECEASED NON-RESIDENT ALIEN

    Section 1014(a)(1) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be the fair market value of the property at the date of the decedent’s death.

    Section 1014(b)(1) provides that property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent shall be considered to have been acquired from or to have passed from the decedent for purposes of § 1014(a).

    According to Section 1014(a)(1) and Section 1014(b)(1), if you received the property through a bequest, devise, or inheritance, or through your deceased brothers’ estate, the basis of such property will be valued at Fair Market Value at the Date of Death.

    The property you inherited from your brother’s estate are within the description of property acquired from a decedent under § 1014(b)(1).

    Therefore, the Estate will receive a step-up in basis in Estate assets under § 1014(a) determined by the fair market value of the property on the date of Taxpayer’s death.

    In this case we will use $120,000 which was the Fair Market Value determined in 2017.

    Rev. Rul. 84-139, 1984-2 C.B. 168 (holding that foreign real property that is inherited by a U.S. citizen from a nonresident alien will receive a step-up in basis under § 1014(a)(1) and 1014(b)(1))

  2. REPORTING CAPITAL GAINS ON US TAX RETURN

    Inherited property is considered long term property.  If you sell or dispose of inherited property, you have a long-term gain or loss regardless of how long you held the property.

    To calculate the gains on inherited assets, you must generally use the asset’s fair-market value at the time of your brother’s death.

    Capital gains are reported on Schedule D of your 1040.

    It is also important to note that Inherited properties do not qualify for the home sale Capital Gain exclusion, unless you’ve lived in the home you’ve inherited for at least two years.

    According to the IRS, you must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest.

    Include on Form 3520:

    • Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate);
    • or

    • Gifts valued at more than $16,076 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).

    You must aggregate gifts received from related parties.  For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000.

    File Form 3520 separately from your income tax return.  In general, the due date for a U.S. person to file a Form 3520 is the 15th day of the 4th month following the end of the U.S. person’s tax year.

    If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month following the end of the U.S. person’s tax year.  See the Instructions for Form 3520 for additional information.

  3. OTHER INFORMATIONAL FORMS RELATING TO FOREIGN ASSETS OF US PERSONS

    You may be required to file FinCEN Form 114 or Form 8938 or BOTH

    if the proceed from the sale was held or deposited in a foreign bank account you own, control or have a signature authority

    (a) Form 8938 

    U.S Persons must report the Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets.

    Specified individuals living in the US:

    • Unmarried individual (or married filing separately): Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
    • Married individual filing jointly: Total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.

    Specified individuals living outside the US:

    • Unmarried individual (or married filing separately): Total value of assets was more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
    • Married individual filing jointly: Total value of assets was more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year.

    (b) FINCEN 114

    U.S Persons must report the Aggregate value of financial accounts that exceeds $10,000 at any time during the calendar year.

    This is a cumulative balance, meaning if you have 2 accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported

***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**

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