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What's the US tax on a sale of inherited foreign property?
The following is from Bill Hodgen at HodgenLaw PC u2022 International Tax:u00a0 Ignore the tax imposed in the country where the real estate is located. Pretend there is no tax imposed. All we care about is capital gain tax for the U.S. heir who sells the property.The capital gain must be reported on the U.S. heiru2019s personal Form 1040 in the year of sale. So the question is how do we calculate that capital gain? The answer u2022 sale price minus expenses of sale minus the selleru2019s basis in the property equals capital gain for U.S. tax purposes.The sale price is whatever it is. Expenses of sale are whatever they are. But basis. A U.S. taxpayer who inherits foreign real estate from a nonresident/noncitizen of the USA u2022 this is interesting. The real estate was never subjected to U.S. estate tax. The deceased person never filed a U.S. income tax return, and the executor never filed a U.S. estate tax return, because they didnu2019t have to.Does an asset inherited from a nonresident/noncitizen get a step up in basis even though no estate tax was ever imposed?Yes, indeed.Back to our little example. Pretend that Dad bought the land in the old country for $10,000 way back when. At the time of death the land was worth $100,000. The U.S. son who inherited the property immediately sold it for $100,000. Pretend that sale expenses are zero, because that makes my example a bit easier.The U.S. son reports the sale on Schedule D. Proceeds of sale of $100,000 minus basis of $100,000 equals capital gain of zero.For your light reading, here is Rev. Rul. 84-139, 1984 C.B. 168, which describes the situation and the reason why we get the results that we do.u00a0 Study hard.u00a0 There is a quiz at the end of the period.REV. RUL. 84-139, 1984-2 C.B. 168ISSUEWill a United States citizen who inherits foreign real property from a nonresident alien receive a stepped-up basis in such property under section 1014 of the Internal Revenue Code even though the property is not includible in the value of the decedentu2019s gross estate?FACTSD, who was a citizen and a resident of Z, a foreign country, died in 1982 owning real property located in Z. B, a United States citizen, inherited the real property in accordance with the laws of Z. At the time of Du2019s death, the real property had a basis of 100 x dollars and a fair market value of 1000x dollars. Because the real property is located outside the United States and D was a nonresident alien, the value of such property is not includible in Du2019s gross estate under section 2103 of the Code for purposes of the United States federal estate tax. B sold the real property in 1983 for 1050x dollars, claiming a basis of 1000x and a gain of 50x dollars.LAW AND ANALYSISSection 1014(a)(1) of the Code states 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 decedentu2019s death by such person, be the fair market value of the property at the date of the decedentu2019s death.Section 1014(b)(1) of the Code provides that property acquired by bequest, devise, or inheritance, or by the decedentu2019s estate from the decedent shall be considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a).Section 1014(b)(9)(C) of the Code further provides that section 1014(b)(9) shall not apply to property described in other paragraphs of section 1014(b).Section 1014(b)(9) of the Code provides that, in the case of a decedent dying after December 31, 1953, property acquired from a decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of a decedentu2019s gross estate shall be considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a).Section 1.1014-2(b)(2) of the Income Tax Regulations provides that section 1014(b)(9) property does not include property that is not includible in the value of a decedentu2019s gross estate, such as property not situated in the United States acquired from a nonresident who is not a citizen of the United States.In this case, B inherited the real property from D, and such property is within the description of property acquired from a decedent under section 1014(b)(1) of the Code. Therefore, B will be entitled to a stepped-up basis under section 1014(a). Under section 1014(b)(9)(c), section 1014(b)(9) does not apply to property described in section 1014(b)(1); hence, the requirement of section 1014(b)(9) that property be includible in the value of a decedentu2019s gross estate does not apply here.HOLDINGForeign real property that is inherited by a United States citizen from a nonresident alien will receive a step-up in basis under sections 1014(a)(1) and 1014(b)(1) of the Code. Bu2019s basis in the real property sold is 1000x, the fair market value of the property on the date of Du2019s death, as determined under sections 1014(a)(1) and 1014(b)(1) of the Code.And this, ladies and gents, is why you want a CPA and/or a tax attorney in your corner. You're welcome.
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