What Happens If You Inherit Money From Another Country?

Inheriting assets from another country requires understanding relevant tax rules and reporting obligations. This article provides an overview of what happens when you inherit money or property from abroad, focusing on key requirements.

Understanding US Tax Implications

Receiving an inheritance from a foreign country generally does not subject the recipient to federal income tax on the inherited amount itself in the United States. This applies whether the inheritance consists of cash, real estate, business interests, or other assets.

However, any income subsequently generated by these inherited assets after their receipt is subject to U.S. federal income tax. For instance, if you inherit foreign stocks that pay dividends or a foreign rental property that generates income, these earnings would be taxable in the U.S. Similarly, capital gains realized from selling an inherited foreign asset, such as real estate or securities, would also be subject to U.S. taxation.

A distinction exists between an inheritance and a gift from a foreign person, though both are generally not subject to income tax for the recipient. For reporting purposes, an inheritance is typically considered a bequest, and specific thresholds apply for reporting these to the IRS.

For inherited property, including foreign assets, the U.S. tax code provides a “stepped-up basis.” This means the asset’s cost basis for tax purposes is adjusted to its fair market value on the decedent’s date of death. This adjustment can significantly reduce potential capital gains tax if the asset is later sold, as tax would only be owed on appreciation from the date of death, not the original purchase price.

State-level tax implications vary by jurisdiction. While most states do not tax foreign inheritances directly, some states may impose an inheritance tax based on the heir’s relationship to the deceased or an estate tax on the total value of the decedent’s estate before distribution. These state taxes are generally consistent with federal treatment, focusing on the inheritance itself versus income derived from it.

Navigating IRS Reporting Requirements

Reporting foreign inheritances to the IRS is distinct from paying income tax on the inherited amount. These requirements are informational, allowing the IRS to track assets and ensure compliance with U.S. tax laws. Failure to meet these obligations can lead to significant penalties, even if no tax is owed.

Form 3520 is required for reporting large foreign inheritances. This form is necessary if you receive bequests from a foreign person or estate exceeding $100,000 in a calendar year. This threshold applies to the aggregate amount of all such receipts from foreign sources within the year.

To complete Form 3520, you will need specific details about the inheritance, including the date received, fair market value of assets, and asset type. While the form requests information about the foreign person or estate, it does not typically require disclosure of the decedent’s identity.

FinCEN Form 114 (FBAR) is another reporting requirement. This form must be filed if the aggregate value of all foreign financial accounts in which you have a financial interest or signature authority exceeds $10,000 at any point during the calendar year. This includes bank accounts, brokerage accounts, and certain other financial accounts held abroad.

For FBAR reporting, you will need the name and address of each foreign financial institution, account numbers, and the maximum value of each account during the year. FinCEN Form 114 is filed electronically through the FinCEN BSA E-Filing System, not with your federal income tax return.

Form 3520 is generally due on the 15th day of the 4th month following the end of your tax year, typically April 15. If you receive an extension to file your income tax return, the Form 3520 due date extends to October 15.

Form 3520 must be mailed to a specific IRS center; it cannot be filed electronically. The FBAR has an annual due date of April 15, with an automatic extension to October 15. It must be filed electronically through the FinCEN BSA E-Filing System.

Penalties for non-compliance can be substantial. For Form 3520, penalties can be $10,000 or 35% of the reportable amount. For FBAR, non-willful violations can incur a penalty of up to $10,000, while willful violations may lead to significantly higher civil penalties and even criminal charges.

Practicalities of Receiving Foreign Assets

Accurately determining the value of inherited foreign assets is essential for reporting and future tax calculations. For assets denominated in a foreign currency, accurate conversion to U.S. dollars is essential. The IRS generally requires using the exchange rate on the date of inheritance for valuation purposes.

For non-cash assets like real estate or foreign securities, establishing the fair market value on the date of death is important. This value will serve as the stepped-up basis for U.S. tax purposes if the asset is later sold. Obtaining professional appraisals or valuations from qualified experts in the foreign country can help ensure this value is accurately determined.

Gathering all necessary documentation from the foreign estate is an important preparatory step. This includes the death certificate, will or trust documents, foreign probate documents, and bank or brokerage statements. These documents are often required by U.S. financial institutions to facilitate fund transfers and for proper reporting.

When it comes to transferring inherited funds from a foreign country to the U.S., several common methods are available. Wire transfers are a widely used option for moving large sums of money securely and efficiently between international banks. Other methods include international money orders or checks, though these may involve longer processing times and higher fees for larger amounts.

For an international wire transfer, you will need specific information about the receiving U.S. bank account, including the bank’s name, its SWIFT/BIC, your account number, and your full name and address. Confirm all details with your U.S. bank before initiating the transfer.

International transfers often involve various fees, including sending fees, receiving fees, and potential currency exchange fees. U.S. banks also have reporting requirements for large cash transactions, such as those exceeding $10,000, which they must report to the Treasury Department.