Tax liability on an inheritance from abroad

[NeilTheCop]

About 15 years ago I began paying the mortgage on my mother and stepfathers apartment in Canada because they were going through a rough spell financially. The deal was that upon their passing I would be left the apartment in their will, and they had the will drawn up by a local attorney.
The mortgage is now fully paid up and there is a lien free deed on the apartment.
My mother passed a few years back and my stepfather, who is in his mid 90’s is back in hospital probably for the last time.
There is no one to contest the will, and it is my intention upon my stepfathers passing to fly to Canada and simply sell the apartment for fair market value, or slightly less if that’s what it takes for a quick sale.
I have no desire to stay in Canada any longer than needed, because I’ve been there, once, it’s way too cold and they talk funny.
Canada has no inheritance tax or death tax so my intent after escrow is to deposit the money in a Canadian bank then have it wired to my local bank in New Mexico.
What are my tax liabilities in the US from the proceeds of the sale?

 

[Zigner]

You will likely need to address this through whatever probate process is utilized in Canada. You will need to seek out guidance from a legal professional in Canada - this forum deals only with US law matters.

 

[Taxing Matters]

What happened to your mother's share of the apartment when she died?

If I assume that it passed to your father such that your father is the sole owner of the apartment, then the way this would play out depends on what the real situation was with the deal you say you had. I see two possibilities.

If the deal you had with your parents was an enforceable contract then your parents sold you the property for the value of the mortgage you paid. That amount you paid is your basis in the property. Your gain is the difference between then net proceeds from the sale (gross proceeds less selling expenses) and your basis in it (what you paid in the mortgage payments). Since you won't own the property for at least a year, that's a short term capital gain or loss. If it is a gain, that means it gets taxed at ordinary income rates rather than the more favorable long term capital gain rates.

If the deal was not an enforceable contract and more in the nature of you making gifts to them with an unenforceable promise that they'd make the gift to you of the property when they died then what likely happens here is that you receive the property with a basis equal to the fair market value (FMV) on the date your father dies. If you promptly sell it right after he dies, that means you will have very little gain, if any (and perhaps a slight loss when fees are taken into account). The details of how the property passes to you under Canadian law would matter in this instance. If you receive it by inheritance via their will that's how it would come out. If it passes some other way, it might be different. I'm not familiar with all the different ways property might pass at death in Canada. I assume that most (if not all) of them are the same as what you'd see in the U.S., but I can't rule out that Canada might have something unusual that we wouldn't see here.

And, of course, what happened to your mother's share matters, too. If my assumption that it passed to your father isn't right, that might change the outcome a bit.

You will likely need to address this through whatever probate process is utilized in Canada. You will need to seek out guidance from a legal professional in Canada - this forum deals only with US law matters.

He's asking how the sale would be treated for U.S. tax purposes, so this is a question of U.S. law.

 

[Zigner]

He's asking how the sale would be treated for U.S. tax purposes, so this is a question of U.S. law.

Yes, that's true from the tax aspect.

 

[Taxing Matters]

Yes, that's true from the tax aspect.

Well, the question was a tax question, and it's on the tax board, so that's all I addressed. I didn't see anything asking about Canadian probate or other post-death transfers. Certainly questions about those sorts of issues, if he has them, are best directed to a Canadian solicitor (lawyer).

He might also have some Canadian tax to pay. Questions about that too should be directed to a Canadian solicitor or tax professional.

 

[LdiJ]

About 15 years ago I began paying the mortgage on my mother and stepfathers apartment in Canada because they were going through a rough spell financially. The deal was that upon their passing I would be left the apartment in their will, and they had the will drawn up by a local attorney.
The mortgage is now fully paid up and there is a lien free deed on the apartment.
My mother passed a few years back and my stepfather, who is in his mid 90’s is back in hospital probably for the last time.
There is no one to contest the will, and it is my intention upon my stepfathers passing to fly to Canada and simply sell the apartment for fair market value, or slightly less if that’s what it takes for a quick sale.
I have no desire to stay in Canada any longer than needed, because I’ve been there, once, it’s way too cold and they talk funny.
Canada has no inheritance tax or death tax so my intent after escrow is to deposit the money in a Canadian bank then have it wired to my local bank in New Mexico.
What are my tax liabilities in the US from the proceeds of the sale?

It would be a little less complicated for reporting purposes if you had the money directly wired to a US bank account (assuming that is possible). If the money is deposited in a foreign account there is all kinds of reporting that you will have to do to report the foreign bank account...yes, even if the money is only there for one or two days...sigh. You will need help from a tax professional who is experienced in dealing with reporting foreign assets. The penalties for not reporting the foreign bank account property are ridiculously high.

You will have to report the sale of the apartment as a capital asset sale, but you will get a stepped up basis to fair market value as of the date that your stepfather passed away, so odds are that after selling expenses you will actually end up with a small capital loss rather than a capital gain.

Again, I would really recommend that you use a tax professional who is experienced in dealing with foreign asset reporting for the tax year in question.

 

[NeilTheCop]

It would be a little less complicated for reporting purposes if you had the money directly wired to a US bank account (assuming that is possible). If the money is deposited in a foreign account there is all kinds of reporting that you will have to do to report the foreign bank account...yes, even if the money is only there for one or two days...sigh. You will need help from a tax professional who is experienced in dealing with reporting foreign assets. The penalties for not reporting the foreign bank account property are ridiculously high.

You will have to report the sale of the apartment as a capital asset sale, but you will get a stepped up basis to fair market value as of the date that your stepfather passed away, so odds are that after selling expenses you will actually end up with a small capital loss rather than a capital gain.

Again, I would really recommend that you use a tax professional who is experienced in dealing with foreign asset reporting for the tax year in question.

Thanks for pointing out the potential banking problems.
I know it's morbid waiting for someones demise, but he was in building maintenance for decades and after all the years of falling off ladders and getting electrocuted it's in a way nice to know that he will finally only succumb to everyone's ultimate enemy; the calendar

 

[davew9128]

The previous responses didn't address the need to file a Form 3520 for the inheritance when it occurs (if an inheritance), nor also the likelihood of exchange rate gain/loss from the date of inheritance to the time you sell it in addition to any capital gain/loss.

There also should have been exchange rate gain/loss calculated on the mortgage payments as well.

 

[LdiJ]

What happened to your mother's share of the apartment when she died?

If I assume that it passed to your father such that your father is the sole owner of the apartment, then the way this would play out depends on what the real situation was with the deal you say you had. I see two possibilities.

If the deal you had with your parents was an enforceable contract then your parents sold you the property for the value of the mortgage you paid. That amount you paid is your basis in the property. Your gain is the difference between then net proceeds from the sale (gross proceeds less selling expenses) and your basis in it (what you paid in the mortgage payments). Since you won't own the property for at least a year, that's a short term capital gain or loss. If it is a gain, that means it gets taxed at ordinary income rates rather than the more favorable long term capital gain rates.

If the deal was not an enforceable contract and more in the nature of you making gifts to them with an unenforceable promise that they'd make the gift to you of the property when they died then what likely happens here is that you receive the property with a basis equal to the fair market value (FMV) on the date your father dies. If you promptly sell it right after he dies, that means you will have very little gain, if any (and perhaps a slight loss when fees are taken into account). The details of how the property passes to you under Canadian law would matter in this instance. If you receive it by inheritance via their will that's how it would come out. If it passes some other way, it might be different. I'm not familiar with all the different ways property might pass at death in Canada. I assume that most (if not all) of them are the same as what you'd see in the U.S., but I can't rule out that Canada might have something unusual that we wouldn't see here.

And, of course, what happened to your mother's share matters, too. If my assumption that it passed to your father isn't right, that might change the outcome a bit.

Since ownership never changed, and he made the gift to them in exchange for inheriting the property I still believe that your latter scenario is the correct scenario.

It is also the OP's stepdad, not his father.

 

[LdiJ]

The previous responses didn't address the need to file a Form 3520 for the inheritance when it occurs (if an inheritance), nor also the likelihood of exchange rate gain/loss from the date of inheritance to the time you sell it in addition to any capital gain/loss.

There also should have been exchange rate gain/loss calculated on the mortgage payments as well.

The tax professional he hires will be able to sort all of that out.

 

[Taxing Matters]

Since ownership never changed, and he made the gift to them in exchange for inheriting the property I still believe that your latter scenario is the correct scenario.

We don't have all the facts to know that. It is possible to make a contract for a will, at least in the U.S., and if that is what occurred here and there was an enforceable contract then my first scenario would be the one that applies.

 

[Just Blue]

I have no desire to stay in Canada any longer than needed, because I’ve been there, once, it’s way too cold and they talk funny.
?

Never visit South Boston in Feb.

 

[davew9128]

Never visit South Boston in Feb.

I agree. The Patriots championship duckboat parade starts at Fenway runs through Back Bay and works past city hall before going into the Charles River and heading back to Fenway.

 

[Just Blue]

I agree. The Patriots championship duckboat parade starts at Fenway runs through Back Bay and works past city hall before going into the Charles River and heading back to Fenway.

You know your go

I agree. The Patriots championship duckboat parade starts at Fenway runs through Back Bay and works past city hall before going into the Charles River and heading back to Fenway.

Dave, You know your going to have to do it all over again next month ...right?

No one around me likes the Pats...

 

[NeilTheCop]

Follow up and another question.
My stepfather passed away a few weeks ago just as he wanted, with an empty whisky glass in his hand. He fell asleep in his armchair and didn't wake again.
There was a hiccup with the will as it hadn't been drawn up by an attorney but just one of those fill it out yourself forms. This meant I didn't inherit the house, but as there is a track record of my paying the mortgage and no other claimants there was no issues and I am the sole beneficiary of his estate. The executor of the will, my niece, has sold the apartment and while she is waiting for the dust to settle the attorney has approved the release of about 50% of the proceeds, leaving more than enough for taxes, his exorbitant fee and other stuff that may unexpectedly pop out of the woodwork. Everything should be settled sometime in May next year. The long delay is something to do with the way Canadian tax system works.
So in about a week or two I will be getting a cashiers check for a sizeable chunk as sort of a down payment from the sale of the estate.
My question is do I have to send the IRS any information prior to declaring this on my 2019 taxes, and how do I deal with the second installment of the same estate payout for my 2020 taxes?