Do Inherited Foreign Assets Receive a Step-up in Cost Basis for U.S. Tax Purposes?

A common question asked by clients when receiving an inheritance from outside the United States is about the U.S. cost basis and receiving a step-up in basis on foreign assets owned by a non-U.S. person. Understanding the U.S. cost basis is important when assets are eventually sold as gains may be subject to U.S. taxation. There are a few nuances related to cost-basis for inherited non-U.S. assets.

What is a “step-up” in cost basis at death?

Under current U.S. tax law, the income tax basis of inherited assets is updated to the fair market value of the assets on the decedent’s date of death (or six months later, if elected). This is referred to as the “step-up” in basis at death. Receiving assets at their fair market value may be a tremendous benefit, especially if assets increased significantly in value since their purchase or if the original purchase price is unknown. This applies broadly to stocks, private business ownership, real estate, collectibles, and other assets.

Do foreign assets get a U.S. cost-basis step-up at death?

Foreign assets received by a U.S. taxpayer due to death may also receive a step-up in basis. Even though the foreign inherited property was not subject to an estate tax in the United States, the IRS states through various revenue rulings that foreign property is entitled to a step-up in its basis. Section 1014(b)(1) of the U.S. tax code adds that inherited property is deemed acquired under IRC Section 1014(a)(1) which may be useful for making other U.S. tax claims.

For example, an individual who inherits a Mumbai apartment currently valued at $2m that their deceased mother originally purchased for $500,000 would be entitled to receive a cost basis of $2m on the property. If the apartment continues to appreciate, the amount above $2m would be taxed as long-term capital gains in the event the apartment was sold at a later date. This is tremendous tax benefit for the U.S. taxpayer who inherits the appreciated assets (however, be aware that local country tax laws may still also apply and the property may be subject to other taxation in the local jurisdiction). This U.S. person must report the foreign inheritance on IRS Form 3520 in the year it was received. This form can be an important strategic document for claiming a future cost-basis when the asset is eventually sold and subject to U.S. capital gains tax.

Patel Law Offices has been helping global families make sense of complex cross-border tax and investment issues for over 25 years. We look forward to reviewing your individual circumstances with you.

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