If you’re a U.S. person receiving a foreign inheritance, you may be wondering about your tax obligations. The good news? The U.S. generally does not impose a foreign inheritance tax on amounts you receive from a foreign person or foreign estate. However, there are strict reporting requirements, and any income earned from the inherited assets could be taxable under U.S. law.
Do I Have to Pay Tax on Inheritance from Overseas?
No, the U.S. income tax system does not tax the receipt of a foreign inheritance itself. Whether you are receiving foreign property, foreign bank accounts, or foreign business interests, inherited property from a non-U.S. person is not considered taxable income. That said, you still have several tax compliance steps to follow.
How to Report Foreign Inheritance?
If you receive a foreign inheritance of more than $100,000 in a tax year from a foreign estate or foreign persons, you must file Form 3520. This is an informational return, not an income tax return, but the reporting requirements are serious.
- Form 3520 must be filed separately from your income tax return
- Failure to file could result in significant penalties—up to 25% of the amount received
- The rule applies to foreign gifts as well as foreign inheritance
Tax on Income from Inherited Foreign Assets
Although the foreign inheritance itself is not taxed, any income generated from inherited assets is taxable. This includes:
- Rental income from foreign property
- Interest or dividends from foreign financial assets
- Capital gains on the sale of inherited foreign assets
You’ll need to include this income on your income tax return, and you may face capital gains tax, depending on your income tax basis and holding period.
FBAR, FATCA, and Foreign Financial Assets
If you inherit foreign bank accounts, foreign trusts, or other specified foreign financial assets, additional reporting is required:
- FBAR (FinCEN Form 114): Required if total foreign financial accounts exceed $10,000 at any point in the year
- Form 8938 (FATCA): Required if foreign assets exceed IRS thresholds (varies by filing status)
These forms help the Financial Crimes Enforcement Network (FinCEN) and IRS monitor compliance. Not filing them can trigger audits and penalties.
Foreign Inheritance Tax Rules for the Donor
While you, the recipient, typically do not pay inheritance tax, the estate or donor may have estate tax liability if:
- They are a U.S. citizen or green card holder
- The foreign estate holds U.S.-situated property
In some cases, estate tax exemption amounts may apply, but if the foreign property falls under U.S. situs rules, estate tax could be assessed on the fair market value.
Special Case: Covered Expatriates
If your foreign inheritance comes from a covered expatriate—a former U.S. citizen or long-term resident who renounced U.S. status—then the inheritance could be taxable at the highest estate tax rate (up to 40%). This rule under the Jobs Act applies even though the recipient is not paying a traditional inheritance tax.
Tax Treaties and Avoiding Double Taxation
The U.S. has tax treaties with several countries to help avoid double taxation. Depending on the foreign country involved, you may be able to claim a foreign tax credit for taxes paid abroad on inherited property.
Always consult a qualified financial advisor or international tax law expert to understand how tax treaties, foreign legal jurisdiction, and local inheritance laws apply to your case.
How to Avoid Paying Capital Gains Tax on Inherited Property?
Here are some strategies to manage or reduce capital gains tax on inherited foreign assets:
- Use the fair market value at date of death as your new income tax basis
- Hold the inherited property long enough to qualify for long-term capital gains
- Claim relevant foreign tax credits if the asset is also taxed abroad
- Consider selling inherited property in a low-tax foreign country
- Engage a financial advisor to explore private business ownership structures or trusts
Key Takeaways: Foreign Inheritance Tax and U.S. Compliance
[table “41” not found /]Staying Compliant Matters
Receiving an inheritance from a foreign country may not trigger foreign inheritance tax, but the reporting requirements, tax rules, and income tax obligations can be complex. Nonresident aliens, green card holders, and U.S. persons must remain vigilant.
To avoid penalties, ensure you:
- File Form 3520 on time
- Report all foreign financial assets
- Track any capital gains or rental income from inherited foreign assets
- Get professional financial advice tailored to your foreign inheritance
By staying compliant and informed, you can reduce your tax liability and protect your inherited funds.
We offer free tax advice to all U.S. expats—get in touch to ensure you’re fully compliant and making the most of any available exemptions, credits, or planning strategies.
