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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hi Merlo,My appologies for the name mix up, and thank

Resolved Question:

Hi Merlo,

My appologies for the name mix up, and thank you for the advice. I have a couple of additional questions that I would like to ask. They are pretty specific, but I am hoping you can help.

One is about my status in the inheritance. My mother (my aunt's sister) is living, so under Japanese law, I am not a legal heir, and the property I received through the will was technically not an inheritance, it was a bequest. Is this distinction the same under US law? And if so, does it affect my tax liabiilty at all?

Re the 3520, when I fill out the form, there is a space to declare the value of what I recieved. One area of concern that I have is the valuation of the real estate.

In Japan, there are about 5 different ways to appraise real estate, from the value used to determine property tax value to that for estate tax, etc., and most are based on a government published valuation index. There is no real "fair market value" index, so to get that, I would need to hire an appraiser, costing 5k to 10k.

For the estate return and other filings in Japan, I did not need the fair market value, so I did not have the property appraised - I simply used the published indexes.

However, now that I have to file the 3520, will I need to have the real estate appraised (as of the value at the time of death)? Or could I just used the values published by the government?

Also, in Japan, there is not bump up to market value of the cost basis at inheritance, so in Japan, I will need to pay some pretty heavy capital gains taxes. These taxes should offset (through foreign tax credit) any capital gains taxes I may owe when I sell in the US, so I imagine I will not owe any taxes on capital gains in the US then, but do I need the "fair market value" just to be able to file the necessary forms?    

Thanks again,
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

HelloCustomer

Sorry to be so long in answering, but I have not been in the forum much of today due to the holiday.

On your questions, the Form 3520 would still be filed even though you received the property as a bequest. Whether it was an inheritance, bequest or even a gift, the from 3520 needs to be filed.

When determining the fair market value of the property, the IRS defines fair market value as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. I would not go to the expense of paying someone $5,000 to $10,000 for an appraisal, particularly since the Form 3520 is strictly an informational form with no tax consequences. If you could find a similar property in the same general area and find the selling price on that property, that should be sufficient for determining fair market value. A real estate agent in your area may be able to help you with this for no fee, or at least a nominal fee in comparison to $5,000 or $10,000.

If and when you sell the property, for US purposes of determining your capital gain, that same fair market value would then be used as your basis in the property, and your gain would then be the selling price less your basis. If you sell the property relatively soon after you acquired it, then the gain should not be monumental. And under the terms of the tax treaty between the US and Japan, you would be allowed a credit for the foreign tax you paid to avoid double taxation.

I hope this is the information you were looking for.

Thanks again and good luck to you.

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 7 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Reply to Merlo's Post: Hi Merlo,

One point I would like to have some clarification on - in my case, would the money and real estate I received be an inheritance or a bequest under US tax law? And would this change my tax liability in any way, not just filing the 3520, but in other reporting or tax payment?

Also, with respect to the appraisal of the property, part of the problem is that there are no similar properties to compare with. Each lot size and and building is different, so each property is sort of unique. The indexes I used for my filings gave values ranging from 400K to 900K and my guess is that the FMV as per the definition you provided would be on the high end of that range. Is there any downside to reporting a high FMV? This would lessen the capital gains tax for calculation purposes in the US filing when I do sell, but as there will be no capital gains tax due in the US due to the credit for the tax I will pay in Japan, does it matter?

Thanks again...
Expert:  Merlo replied 6 years ago.

Hello again Bart,

As far as the money and real estate being treated as an inheritance or a bequest, in the US they are basically considered to be one and the same. It will not change the fact that you have to file a form 3520, and it will not change your tax liability in any way. Your basis in the real estate will still be considered the fair market value on the day your aunt passed away.

Now as far as determining what the fair market value is of the real estate, since there is such a wide range of values in the indexes, you may have no choice but to hire an appraiser if you have no other way of reasonably determining the fair market value. If one of the indexes is closely associated with the price a property might sell for, then you could probably use that index as your value, but you need to come up with a figure that is reasonably close to what the fair market value truly would be if you had sold the property on the day it passed to you.

It is true that in all likelihood you will not really owe any US capital gains tax on the sale of this property once you use the foreign tax to offset any US taxes due on that gain, but your estimate still needs to be reasonably accurate based on some commonly accepted form of appraisal.

It's unfortunate that the appraisal costs are so high, and hopefully you can find an alternate method for determining the fair market value of this property, but it should be something that can be reasonably verified based on history of similar property sales or something of that nature.

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 7 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Reply to Merlo's Post: Thanks of rhte advice.....

Can you tell me, will I need strong documentation to suuport the FMV I report? I should be able to talk to some real estate agents and other to get an accurate market price, but having them issue the certification is the part that costs the most...

Thanks...
Expert:  Merlo replied 6 years ago.

Hello again Bart,

The only time you would need any documentation at all is in the event you were ever to be audited. It's hard to say what the likelihood is of that happening, However, since your basis in the property will be the "stepped up" basis on the day of your aunt' passing, and your gain will be the selling price less the basis, then assuming that the sale is made relatively soon after you acquired the property, then the gain itself should not be of great magnitude. And as we discussed before, the taxes you pay in Japan should more than offset any gain you have on the US side. That being the case, it is doubtful that this transaction alone would be cause for an audit. If you are able to get a FMV from a local real estate agent, then just make sure that you document who you talked to and the date and the details of what they gave you.

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 7 other Tax Specialists are ready to help you

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