Consequences of a U.S. Citizen Inheriting Foreign Real Property

There's no law against receiving a foreign inheritance, and there's no US federal income tax due on such a bequest. But any inheritance you receive from abroad, or from a nonresident alien, may be reportable to the IRS on Form 3520. If the value of all foreign gifts or bequests during a single year is greater than $100,000, the agency wants a detailed description of property worth more than $5,000, including the date and the fair market value of the bequest or the date of death of the individual who willed it to you. A few states still levy inheritance tax, and may include foreign property in the taxable category.

The IRS levies tax on worldwide income, meaning you must report all foreign interest or dividends earned, all foreign rents received, or capital gains realized on the sale of any foreign property. This holds true even if you are a US citizen or resident alien living abroad, with the exception of individuals who can show at least 330 days of "physical presence" outside of the United States. Since foreign banks, brokers and financial companies have reporting requirements, just as domestic firms do, attempting to evade IRS taxes on foreign income is not a good idea. You can, however, exclude a portion of your foreign income and take a credit against US taxes in the amount of any foreign income tax you've paid.

Holding money in a foreign bank account is not a problem, but the Treasury Department would like you to check in if all of your foreign balances at any time during the year is greater than the equivalent of $10,000. The information is reported on Form TD F 90-22.1 and is due to the Treasury Department by June 30 of the reported year. Foreign accounts also must be reported on Form 1040, Schedule B of your federal tax return.

A will that leaves you foreign property may involve you in some legal tangles. Not all nations allow foreigners to own land. In Thailand, for example, you would have to be a citizen, even if the will is legal; foreigners can own apartments and condominiums, but may only hold land through a lease or as a minority partner with a Thai individual or company. The country of location also may levy real estate taxes on the property and subject it to liens and/or seizure for any failure to abide by the rules.