Do Foreign Inherited Foreign Assets Get a Step-up Tax Basis?
When a person passes away and leaves assets to their heirs and beneficiaries, the US government allows for the recipients to receive a step-up basis for tax purposes. This is very important — and can significantly impact the outcome of a future sale of the property. With the globalization of the US economy, it is not uncommon for taxpayers who are considered US persons to receive foreign inherited assets as part of an overseas estate. One common question we receive often is whether or not the foreign inherited assets would receive a step-up basis – – and the answer is that generally, it would. Let’s walk through a basic example to explain how the concept works.
US Person Inherits a Foreign Asset
Peter is a US person. He has family members across the globe and recently one of his uncles passed away. His uncle is a US person as well but has assets across many different foreign countries. One of the assets that Peter inherits is a rental property located abroad. Peter’s uncle had acquired the asset for $300,000 equivalent USD. When Peter’s uncle passed away the property was worth $800,000 USD.
What is the value of Peter’s cost basis in the foreign asset?
Form 3520 Reporting is Required as well
As a side note, since Peter received a gift (For IRS Form 3520 purposes, a foreign inheritance would qualify as a gift), from a foreign person and the total value of the gift received from that foreign person in a year exceeded $100,000 – he is required to file form 3520 to report the value of the gift. The failure to do so could result in Peter being assessed a penalty upwards of 25% value of the gift, so it is important that Peter files IRS Form 3520 timely.
Step-Up basis (Gift vs Inheritance)
Since Peter received the property by way of inheritance and not a gift, he receives a step-up basis so that the value of the asset and Peter’s hand would be $800,000. Thus, if Peter was to sell that property for $800,000, he would not have any capital gains. To further illustrate the concept, if instead while peters uncle was alive, Peter’s uncle gifted him the same property, then Peter does not get a step-up basis and instead received the property with the same cost basis that his uncle had, $300,000 USD.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
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