Question: I am a US resident and my parents back in Canada
left some property for me in Canada when they died in early 2015. I just sold
the property seven months after inheriting it. What are the tax
consequences of inheriting and selling this Canadian property?
Answer: You will
potentially need to report the inheritance to the IRS on many different forms and
you may have a capital gain transaction when you sell the property.
IRS Form 3520 Part IV on
Page 6 is used to report foreign inheritances/bequests in excess of $100,000.
In computing the $100,000 threshold, you would consider your parents as one
because they are married. For example, if your mother left you $60,000 in cash
and property and your dad also left you $60,000, the inheritance would be
reportable. While the inheritance is reportable on Form 3520, it is not
considered income and you do not have to pay U.S. income taxes on the value of
the property in most circumstances. An exception would be if your parents left
you some form of income such as a rental property.
You may also have to
disclose your foreign estate interest on Form 8938 or at least file that form
and refer to your Form 3520 filing. If you received cash or securities in a
foreign financial account in excess of $10,000 at any time during the year, you
may also need to file FinCEN Report 114, or foreign bank account report (FBAR).
The penalties are steep for not complying with the disclosure requirements.
A Form 8621 may need to
be filed for inherited Canadian property that qualifies as a Passive
Foreign Investment Company (PFIC), for example
non-registered Canadian mutual funds or shares in a Canadian corporation that
is mainly invested in passive holdings and/or generates passive income. The rules for dealing with inherited PFICs
are very complex and beyond the scope of this article.
Lastly, the sale of the
property may need to be reported on Schedule D of your Form 1040. The rules of
inheritance that apply to domestic inheritances apply similarly to foreign
inheritances. Specifically, your basis in the assets that you inherit is
stepped up to the date of death value. In other words, you would use the fair
market value at the date of death of your parents as your cost of the property
that you sold, and that should be reported on Schedule D. Therefore, if the property was sold for a
value greater than the market value determined on your parent’s death, capital
gains rates will apply.
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