It may be uncommon, but it sometimes passes that an American citizen inherits property in another country after the death of a relative. However, even if the property in question lies outside the borders of the United States, the citizen who now owns it is still subject to taxation themselves, whether they live in the U.S. or not. If you or someone you know has been the recipient of this kind of bittersweet windfall, you might be wondering if you have to pay U.S. taxes on the sale of inherited foreign property and, if so, how that process might work. To find out, keep reading as the international tax accounts at US Tax Help lend their expertise and provide some answers.
How the U.S. Taxes the Sale of Property in General
In the United States, the federal Internal Revenue Service (IRS) tends to view the proceeds of the sale of property as a type of capital gains, which means that the money you make from it is subject to capital gains taxes. There are some caveats and exceptions to this, however, including a few that apply specifically to American taxpayers living outside the United States.
One important factor to consider is whether the property in question was used as your primary residence within the past few years. If you or your spouse lived in the home for at least two of the last five years, you may be able to exclude a significant amount of the profits you make from the sale from your total tax liability. For a taxpayer filing alone, the maximum amount that can be excluded is $250,000; for a married taxpayer filing a joint return, the maximum is $500,000.
Beyond the applicable amount, any profits will be subject to taxation by the IRS. If you owned the property for less than a year, the short-term capital gains tax rate will be applied, whereas property owned for longer than a year will be taxed at the lower long-term capital gains rate. Other factors, such as whether the property was used as a rental property or business, can affect your tax liability as well; contact a qualified accountant for Americans who own real estate overseas to discuss your particular situation.
How U.S. Taxes Apply to the Sale of Foreign Property
Though the general principle governing the taxation of the sale of foreign property is essentially the same as that governing the sale of domestic property, there are a few things to keep in mind when selling real estate overseas; perhaps the most important of these is the foreign tax credit.
To avoid imposing double taxation on its citizens living abroad, the United States offers this credit to expats. To qualify for the foreign tax credit, you must meet the following requirements:
- You must have a foreign tax liability in the current tax year.
- Those foreign taxes must apply to income.
- These taxes must be imposed on an individual person.
- The taxes must have been imposed legally by a foreign government.
Assuming you clear all four of these hurdles, you can file IRS Form 1116, Foreign Tax Credit (Individual, Estate, or Trust). Keep in mind, however, that you can’t exclude the same income twice, so those who are looking to take advantage of the Foreign Earned Income Exclusion (FEIE) may find only limited use with this credit. That said, because the FEIE doesn’t apply to income earned through the sale of a foreign property – inherited or otherwise – you should be fine using the foreign tax credit.
Does It Matter If the Foreign Property Was Inherited?
If the foreign property being sold was inherited, the rules outlined above still apply, but there will be another step to the process. Since the amount subject to taxes is the gain made from the sale, you will first have to figure out the fair market value of the property on the date the original owner passed away; your taxable gains will then be any money you made over this amount.
Reporting the Sale of Inherited Foreign Property
As with any type of income, even if you don’t owe taxes to the IRS, you still have to report the income to the agency. In a tax year in which you sold an inherited foreign property, you must report the sale on Schedule D of IRS Form 1040, U.S. Individual Income Tax Return. In addition, you will have to submit IRS Form 8949, Sales and Other Dispositions of Capital Assets.
If the proceeds from your sale are deposited into a foreign bank account, be aware that you will likely need to also file a Report of Foreign Bank and Financial Accounts, also called an FBAR; you can do so by filling out FinCEN Form 114 online and submitting it electronically. For amounts of hundreds of thousands of dollars or more, you could also be required to submit IRS Form 8938, Statement of Specified Foreign Financial Asset, as well. A knowledgeable accountant for foreign financial account reporting can guide you through this process and help you avoid potentially costly mistakes.
Skilled International Tax Accountants Available to Help with the Sale of Inherited Foreign Property
If you or someone in your family has recently inherited foreign property and is looking to sell it, you should know that the process can be quite complicated. With the assistance of a skilled international tax specialist, however, you can avoid errors and ensure that the sale complies with all U.S. tax laws while minimizing your tax liability. Whether you’re a U.S. expat living abroad or a domestic citizen with property in another country, know that the team at US Tax Help is there for you. To learn more, visit us online or call (541) 362-9127 today.
