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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22749
Experience:  Taxes, Immigration, Labor Relations
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My father a non US citizen/resident in 2004 deeded a house

Resolved Question:

My father a non US citizen/resident in 2004 deeded a house to me
in Italy retaining life estate (usufruct).
I am a US resident in NY and as such liable to US capital gains tax.
As a remainderman do I receive stepped up basis ( FMV at time of life tenant`s death ) upon my father`s passing and I decide to sell ?

Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
The primary issue is - if the property is included into your father's estate for estate tax purposes (under US laws) - if yes - the property is considered as inherited and you would get a stepped up basis.
If the property would not be included into your father's estate - there is no stepped basis.
Based on your information - the property is included into your father's estate and you should have stepped up basis and should report the property as inherited upon your father`s passing.

Customer:

My father is a non US person so he is not liable for US estate tax but he is

Customer:

a german citizen and I am liable for german inheritance tax

Customer:

Hello ?

LEV :

I am not telling that your father's estate will be liable for US estate tax - that is not an issue.
However - when you are asking about your eligibility for the stepped up basis equal to the FMV of the property at time of life tenant`s death - that is determined based on the US law.
The US law dictates - if the property is included into your father's estate for estate tax purposes - then - the property is considered as inherited and you would get a stepped up basis.
That is not an issue of the estate tax liability.

LEV :

1. Under IRC section 1014(b)(9) - any property that is required to be included in the value of a decedent's gross estate for estate tax purposes shall receive a stepped-up
http://www.law.cornell.edu/uscode/text/26/1014
9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent.
2. According to IRC section 2036 - the full value of the property in the retained life estate - is subject of inclusion into decedent's gross estate.
http://www.law.cornell.edu/uscode/text/26/2036
The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—(1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
3. Therefore under IRC section 1014(b)(9) you should have a full stepped-up basis for the life estate deed.
I hope that helps.

Customer:

yes it is included in my father`s estate because I pay inheritance tax.

Customer:

Do I need to file form 3520 as a remainderman and do I need to file it again after

Customer:

my father`s passing ?

LEV :

You pay inheritance tax in Germany - there is no inheritance tax in the US.

LEV :

Yes - for the inheritance - you need to report on form 3520 - there is no tax associated with that form - it is for information only.

LEV :

As a remainderman - you received a gift - you need to report that fact on form 3520 only if the total gift value is above $100,000.

Customer:

What about the remainder interest that was given to me , does that need to be

Customer:

reported on 3520 ?

Customer:

ok

LEV :

As a remainderman - you received a gift - you need to report that fact on form 3520 only if the total gift value is above $100,000.

Customer:

I am doing that right now and when my father passes I will than report the stepped up basis FMV

Customer:

as an inheritance ?

LEV :

That is correct - please see code sections I provided above.

Customer:

According to your note above (IRC 2036) Life estate interest for US tax purposes

Customer:

gets included in a person`s estate , so that should answer all questions than

Customer:

under Us law my father`s life tenancy would be part of his estate .

Customer:

correct ?

LEV :

Yes - that is correct.

Customer:

Thank you very much between Italian , German and US law it gets confusing to say the least..

LEV :

You are welcome - I am glad to be helpful.

Customer:

Just one more question.

LEV :

sure

Customer:

Since I am a US resident I am responsible under US law so that applies to my
US capital gains responsibilities so than everything IRC 1014 , 2036 rules should

Customer:

be applied to my inheritance from my father.

LEV :

As US resident - you are required to report all your worldwide income - including the gain from the sale of inherited property.
Inheritance itself is not taxable income in the US, but the gain realized after the property is inherited - is taxable.
That is your responsibility to report the sale transaction and to determine the taxable gain.

Customer:

One thing that throughs me of a bit.

Customer:

Your first response was that my father`s life estate gets stepped up when it is part of his
estate but than there is IRC 2036 that life estate interest is to be included in someon`s
estate.

Customer:

So why is not a slam dunk with life estates being stepped up after the life tenant
passes ?

LEV :

First that is a question - why the tax law is written in certain way? There is probably the reason or at least explanation - but that would be require a historical research - and I do not have the answer.
Then - the life estate is not always included into someone's estate and the section 2036 provides conditions under which it should be included.

Customer:

and the conditions are that the life tenant enjoys all rights to the property and all enjoyment
during life time which is what the italian usufruct definition is

LEV :

Yes - and owned the property before the transfer.
If for instance - your father transfer the life estate to his friend - the property would not be included into the estate of that friend.

Customer:

I don`t understand , the whole point of life estate was that the property becomes mine when he
passes and to accomplish that we did life estate where he retains all rights to the property until
he passes. After that I become the outright owner but until than I only own remainder interest which I need to report on 3520 as a gift and which the percentage of remainder interest of the
FMV at time of gifting. When my father passes I will file a new 3520 with the stepped up gain.

Customer:

Correct ?

LEV :

There is no "stepped up gain"
You file form 3520 - to report a gift (above $100,0000 and inheritance - that you receive from a nonresident alien. That is for reporting purposes only - there is no tax liability.
You might have a gain or loss ONLY when you sell the property. The gain or loss will be based on the selling price and the basis of the property.
The purpose of the life estate might be different based on circumstances - it might be "the possession or enjoyment of, or the right to the income from" - but you may have other purposes as well.

Customer:

When my father passes I now own the property outright. I do not to report that no ?
and I already own and reported the remainder interest at that point. So don`t I have to report the
difference in FMV ?

LEV :

Because the property is considered inherited at the time your father passes - you do need to report the fact of receiving inheritance from a nonresident alien on form 3520. There is no any tax liability associated with that reporting. You need to report the total value of the property - assuming the total value is included into your father's estate under section 2036.
Inheritance is not taxable income - so nothing is reported at this moment on your income tax return.

Customer:

OK

Customer:

I don`t see how 2036 can not apply in our situation:

LEV :

Why do you think - it is not applied?

Customer:
(a)General rule
The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer , by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

LEV :

Why do you think - it is not applied?

Customer:

misunderstanding , I do very much think 2036 applies just being the devil`s advocate
trying to find a reason this could be argued against... I like certainty when it comes to these
things plus the asset is sizeable

My father`s life estate interest is entered clearly in the italian titlebook .It is called usufrutto in italian .

LEV :

I agree with your assessment - and based on your information - 2036 applies to your situation.

Customer:

Thank you , I needed that....

LEV :

You are welcome.

Customer:

What gets me worried with international issues is that somehow certain things can apply and others do not. But if my situation falls under US law which it does than it should in its entirety so in terms of my father even though US law does not apply to him for my US tax purposes it should be seen as if it applies to him.

Customer:

correct ?

LEV :

That is correct - US tax law doesn't applies to your father and doesn't applied to your father's estate.
However - because you are an US resident - the US tax law does applies to you. In particular - the US tax law determines if you receive an inheritance and what is the basis of the property you own.

Customer:

I guess that`s as good as it gets for now until things actually happen.
I have a tax attorney that passed the same issue on to his estate planning dept.
hope they come up with the same answer.If not I will let them know about your
reasoning in regards XXXXX XXXXX ect....

Thanks again for your patients

LEV :

I am glad to be helpful. Please feel free to provide all our conversation to your attorney for considerations.

Customer:

It has been argued by you that life estate gets step up s because of IRC 1014 and 2036 but it has also been argued by someone else that it does not because of IRC 2031. Also he has another property also in a foreign counrty that he did no life estate and that I will inherit after his passing.Does that get stepped up ? The point is he is a non US resident and the property is not in the US he does not have any US estate.

LEV :

If the person is neither US citizen nor US resident - and the property is not located in the US - the US law is not applicable.
However since you are US resident - the US tax law is applicable to you - and you do get stepped up basis on any inherited property - for US tax purposes - regardless if the property is located in the US or abroad.

Customer:

The person being the decendent ....They argued that the property is not includible in the US estate because of IRC 2031 which is required for 2036 that therefore there is no step up under IRC 1014.

Customer:

What about the step up for life estate ?

LEV :

Here is the section 2031 - http://www.law.cornell.edu/uscode/text/26/2031
I do not see why it is not included into the estate?

Customer:

This what I am told

Customer:

Actually, the fact that your father is not a US person is likely determinative to this question. IRC 1014(b)(9) gives the step-up in basis only if the property must be included in the decedent’s estate for US estate tax purposes. The Internal Revenue Code has two separate chapters that deal with when property is included in the gross estate. One chapter addresses residents and citizens, and the other addresses nonresidents who are noncitizens. In that chapter is IRC 2103 – which states that “the value of the gross estate of every decedent nonresident not a citizen of the United Stated shall be that part of his gross estate (Determined as provided in section 2031) which at the time of his death is situated in the United States.”


 


Accordingly, because your father is a nonresident noncitizen, and because the property is not situated in the US, the property will not be included in his gross estate for US tax purposes, and therefore it will not meet the requirement of IRC 1014(b)(9).

LEV :

Stepped up basis is not for the life estate - but for the property - it is equal to the fair market value at the time teh decedent passed away.

LEV :

Based of these arguments - none of foreign property inherited from nonresident aliens gets stepped up basis - that is not correct.

Customer:

What should I do ? In terms of 3520s the remainder interest needs to be reported correct ?

Customer:

sorry you already answered that before.

Customer:

I will forward your response.... Thanks a lot stay tuned....

LEV :

You are welcome. As you still have doubts - I suggest to consult with a local attorney specialized in tax area.

Customer:

Lev ,

Customer:

Based of these arguments - none of foreign property inherited from nonresident aliens gets stepped up basis - that is not correct.


Customer:

Well that came from a local tax attorney.....

LEV :

What could I say...
I never had issues with the IRS when clients claimed stepped up basis on foreign properties inherited from nonresident aliens.
I had never saw that the IRS objects claiming stepped up basis on foreign properties inherited from nonresident aliens.
May be your attorney could provide references for court cases?

Customer:

Lev,

Customer:

did you have clients claiming stepped up basis on life estate property after the life tenant passed away
with the life tenant being a non resident alien and the property outside US ?

Customer:

I will asked for court cases , the thing is also they are charging me a lot of money every time I ask a question
it seems to become more questions and unsatifying aswers...

Customer:

I am very greatful for your help I don`t know where to turn on these issues.

Customer:

The deal is a have a remainder interest in more than one property where my father (non resident , non citizen0

Customer:

and I would like to know with certainty what happens when he passes away so I can act accordingly and do
all the proper reporting and have an idea wether to sell or whatever...

LEV :

did you have clients claiming stepped up basis on life estate property after the life tenant passed away with the life tenant being a non resident alien and the property outside US ?
I have not had clients specifically with foreign live estate, however I had multiple clients with foreign property inherited from nonresident aliens.
I feel your concern. Another option - you may contact the IRS directly.

Expert:  Lev replied 1 year ago.
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Expert:  Lev replied 1 year ago.
See this article - http://www.nysscpa.org/cpajournal/2001/0900/features/f093201.htm
Scroll down to Transfers upon Death:
Although non-U.S. assets held by a non-U.S. citizen nonresident are exempt from U.S. estate tax, there remain issues concerning the basis of the property and the application of IRC section 684 to the transfer of these assets. Under a longstanding revenue ruling, all assets held by a non-U.S. resident at death receive a step-up in basis under IRC section 1014, including property not subject to U.S. estate tax. Under sections 1014(b)(1)–(4), the stepped-up basis applies to all assets owned by the nonresident directly, through a revocable trust, or through a trust in which the nonresident possessed a general power of appointment exercised by will.
So far - that article contradicts position taken by your attorney. While your attorney made a valid point - I feel that is very conservative position and even the IRS doesn't take such position.
I were looking for the "longstanding revenue ruling" mentioned above - and that is Rev. Rul. 84-139 - see for instance here - http://www.charitableplanning.com/document/670319

One may argue that is a very old document - but what we see - in this Private Letter Ruling - http://www.irs.gov/pub/irs-wd/1245006.pdf - which is dated by 2012 the IRS referenced Rev. Rul. 84-139 - so we may conclude - it is still in effect. Here is an extract :
In this case, Taxpayer’s issue will acquire, by bequest, devise, or inheritance, assets from Trust at Taxpayer’s death. The assets acquired from Trust are within the description of property acquired from a decedent under § 1014(b)(1). Therefore, Trust will receive a step-up in basis in Trust assets under § 1014(a) determined by the fair market value of the property on the date of Taxpayer’s death. See Rev. Rul. 84-139, 1984-2 C.B. 168 (holding that foreign real property that is inherited by a U.S. citizen from a nonresident alien will receive a step-up in basis under § 1014(a)(1) and 1014(b)(1)). This rule applies to property located outside the United States, as well as to property located inside the United States.
So far - what we see the IRS's position - at least that was taken in 2012 - contradicts with whatever you were told by the attorney.
I hope that clarifies your situation.
Customer: replied 1 year ago.

I would like to focus on the the life estate issue.

If my father were a US person the life estate proprty would be pulled into his estate and get step up.

He is not a US person so it is not part of a US estate but than neither

is a property without life estate and that gets stepped up.

The reason for that is that it is inherited without life estate and

with life estate it is not deemed inherited under 1014 because of

the previous gift of remainder interest. But 2036 allows that but only for

American estates?

 

Seeing that this is a very difficult subject what is the worst that could

happen when I just do the following :

 

1) Life estate deed is done I reported 3520 remainder interest of FMV at

time of the deed.

 

2) My father passes what do I do ?

I report full FMV at time of death as inheritence or what ?

The fact remains

once my father passes I own full rights to the property so FMV is a lot higher.

This will be a very sizeable inheritance with 4 properties out of

which 3 have life estate and I am the only one left in the family.

( Have you ever seen an information report (3520) being challenged?)

3) At some point later I sell and use FMV at my father`s death as basis

to report capital gains.

 

What is the worst that could happen if I just stay that course

 

Allthough it should not make any difference in terms of the law but because the properties being sizeable I fear attorneys having a feast over this the more I make

it an issue

 

 

What would you do in my situation ?

 

 

PS:

All this can give one thoughts of expatriating and I wonder what the basis of the property would be with my father still alive to determine exit tax .

 

 

Expert:  Lev replied 1 year ago.
I agree with your course of action and honestly do nont see any issues.
The worth case scenario would be if the law changes or if the IRS changes its position.
If as you stated - a large amount involved and you want to be absolutely sure - you may request a private letter ruling specific addressed to you.
However for me the situation is clear and I personally would not worry.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22749
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

 

"I agree with your course of action and honestly do dont see any issues.
The worth case scenario would be if the law changes or if the IRS changes its position."

 

At the very beginning you said it all comes down to the life estate property being part of the estate. What about the argument that because of IRC 2103 it

isn`t ?

 

How do you not see an issue with that ?

 

I am worried that when my father passes and I report the full FMV at that time

I could get penalized for filing inaccurate Form 3520 because it could be

construed that there was no step up ?

 

 

What is a private letter ruling , who does that and when should I get it ?

 

What if I don`t have one would could happen worth case in proceeding

as lined out above ?

 

I have a german official inheritence contract with my father in which he made me his sole inheritor , unless I pass out first there is no question of what will happen here.

 

Thank you again for all your valuable advise.

Can`t tell you what this means to me. I lost allmost all my family in

the past few years and now it is like being surrounded be vultures.

 

I am in desperate need of a good tax adviser CPA in the New York area
any reccomendation ?

 

Once I hit the rating button is there any way to get back in touch with you ?

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