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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi, my husband and I moved to the U.S. and bought a house for about $7

Resolved Question:

Hi, my husband and I moved to the U.S. and bought a house for about $700,000. It is worth close to $2,000,000 now. I am a citizen, but my husband has forfeited his citizenship. We are still married. This is a two part question:

1. If in the future we sell the house, is the proceeds subject to more taxes because he is a non-resident alien?

2. If it is, would it be beneficial for us, to do a quit claim deed to transfer the property to just under my name? Would we have to pay any gift taxes?

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

NPVAdvisor :

Hi,

NPVAdvisor :

First a questions

NPVAdvisor :

Sorry, "question" .... Is this youi primary residence?

Customer:

yes it is

NPVAdvisor :

THe if you file jointly, 500,000 of the gain will be excludble

NPVAdvisor :

ON the 1st first question....

Customer:

the $250,000 also applies to my non resident alien husband who is not currently living in the states?

Customer:

he currently resides in another country

NPVAdvisor :

How do you file your taxes?

Customer:

i have no income in the states, so thus, i do not need to file

NPVAdvisor :

OK, let me look somethng up quickly

Customer:

ok thank you.

NPVAdvisor :

First see this: from IRS ... more to come

NPVAdvisor :

Married to U.S. citizen or resident alien. Nonresident alien individuals married to U.S. citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes.

Customer:

even though he does not actually live here?

NPVAdvisor :

That is the next question I need to see what the (for certain purposes ) is ... but yes, this waives the need to pass either the greed card test or the substantial presence test

Customer:

will i be receiving a copy of this chat in an email or something?

NPVAdvisor :

I'm sorry the exclusion does not apply to those subject to the Expatriation tax rules.... first see this:

NPVAdvisor :


Gain From the Sale of Your Main Home





If you sold your main home, you may be able to exclude up to $250,000 of the gain on the sale of your home. If you are married and file a joint return....This exclusion does not apply to nonresident aliens who are subject to the expatriation tax rules

NPVAdvisor :

The see this:

NPVAdvisor :


Expatriation Tax




The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. The rules that apply are based on the dates of expatriation, which are described in the following sections.





  • Expatriation Before June 4, 2004.




  • Expatriation After June 3, 2004, and Before June 17, 2008.




  • Expatriation After June 16, 2008.





 


Long-term resident defined. You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits.
NPVAdvisor :

Would he come under this definition?

Customer:

yes he would

Customer:

he had a green card at one point

Customer:

and he then gave it up

NPVAdvisor :

So sorry, at least having all the facts here, may allow you to see around some corners

NPVAdvisor :

Now

Customer:

ok

NPVAdvisor :

back to your questions

Customer:

so to continue with the 1st question

Customer:

does the fact that he is a joint tenant as a non resident alien

Customer:

subject the sale of the home to higher tax rates?

NPVAdvisor :

looking at something .... he will probably need to file a 1040 NR, but be subject to same level of taxation ... let me see

NPVAdvisor :

If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other spouse is a nonresident alien, you can choose to treat the nonresident spouse as a U.S. resident. This includes situations in which one spouse is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other spouse is a nonresident alien at the end of the year.

NPVAdvisor :

Further:

NPVAdvisor :

If you are married and both you and your spouse are required to file, you must each file a separate return, unless one of the spouses is a U.S. citizen or a resident alien, in which case the departing alien could file a joint return with his or her spouse

Customer:

ok

Customer:

but he still wouldn't qualify for the $250,000 exclusion

NPVAdvisor :

That's right, he would not, because of the Expatriation tax rules

Customer:

so to make things easier, we're thinking about gifting the property to me, so i own it as the sole owner

NPVAdvisor :

You will however, be able t file jointly and take the itemized deductions or standard deduction for married filing jointly

NPVAdvisor :

2 dependency exemptions, etc

Customer:

this way if i pass away

Customer:

i can use my lifetime exclusion

Customer:

and pass it to my kids

Customer:

are there any issues with a non-resident alien spouse gifting property to a citizen spouse?

NPVAdvisor :

Yes, and lifetime exclusion is 5,250,000 now and will increase annually sincc the last tax act

Customer:

if we do that, would he need to file a gift tax return?

NPVAdvisor :

that's really a good one.... typically there is an unlimited deduction for spouses

NPVAdvisor :

Where doe he have citizenship/residency?

Customer:

taiwan

NPVAdvisor :

typically, the RECEIVER of a gift is never obliged ....but let me check something

Customer:

i thought there was a requirement if the gift was over $100,000

Customer:

but i'm confused because i thought there was unlimited gifting between spouses too

NPVAdvisor :

you are thinking of the information reporting form, which is used to track for money laundering, etc.... but that is not a tax form www.irs.gov/pub/irs-pdf/i3520.pdf‎

NPVAdvisor :

Logically, there would be no gift tax paid by you and that would certainly be trus for 2 us citizen spouse citizens

NPVAdvisor :

And it would be true if your spouse were in a country with an estate tax treaty

NPVAdvisor :

Germany, Austria, France, and the United Kingdom, all of which have modern, domicile based estate tax treaties with the U.S.

Customer:

ok

Customer:

thank you

NPVAdvisor :

just ne second

Customer:

is there a way to save this chat and send it to me?

Customer:

sure

NPVAdvisor :

Yes... you can copy and past into a document .... bookmark in your brower, or file-print from you browser ... you can also return to this url

NPVAdvisor :

See this:

NPVAdvisor :

For purposes of the U.S. estate and gift taxes, an alien is considered a U.S. resident if he or she is domiciled in the U.S. at the time of his or her death or at the time of a gift. If an alien enters the U.S. for even a brief period of time, with no definite present intention of later leaving the U.S., he or she is deemed to be domiciled in the U.S. and, therefore, is considered a U.S. resident for estate and gift tax purposes.1 Thus, an alien may be considered a nonresident for estate tax purposes and a U.S. resident for income tax purposes, or vice versa, since the estate tax residency test is the more subjective domicile test just described, while the income tax residency test is met if the alien satisfies an objective day count test known as the “substantial presence test” or holds a green card (i.e., is a lawfully admitted permanent resident of the U.S.)



1 Treas. Reg. §§ 20.0-1(b) and 25.2501-1(b).


NPVAdvisor :

Note that the more subjective test is DIFFERENT that the rules based income tax test

NPVAdvisor :

Diferent "than," (from)

Customer:

i understand this

Customer:

however, i'm not sure how it applies to my situation

Customer:

so as long as my husband is only coming here to visit, there will be no gift or estate tax issues?

NPVAdvisor :

NO, there could be... depending on the nature of the gift

NPVAdvisor :

See this:

NPVAdvisor :

Generally, nonresident aliens are subject to Federal estate tax only on “U.S.-situs” property, with no credit for foreign death taxes paid.1 (The foreign country may allow a credit against its death taxes for Federal estate tax paid2). Nonresident aliens are also subject to Federal gift tax on lifetime gifts of U.S. situs property, but not on gifts of U.S. situs intangible property.3



1 Sections 2101, 2103, and 2106 of the Internal Revenue Code of 1986, as amended (the “Code”).




2 See German Inheritance Tax Law § 26 ErbStG; French Tax Code Article 784 A CGI; United Kingdom Inheritance Tax Act 1984 §§ 158 (treaty relief) and 159 (unilateral relief) (if unilateral relief is more favorable than treaty relief, the taxpayer chooses the former). To this author’s knowledge, the Austrian inheritance tax law does not provide for an automatic tax credit with respect to inheritance tax paid in another country, unless a treaty provides otherwise. It is this author’s understanding that in the absence of a tax treaty, under article 48 Bundesabgabenordnung (BAO) it is possible to apply for tax relief in Austria. The application must be filed with the Austrian ministry of finance, which may grant tax relief, either by a tax credit with respect to the foreign tax or by deducting the foreign tax from the taxable amount. The decision also depends on the way in which such a case would be treated in the other country.




3 Code §§ 2501(a)(1) and (2) and 2511(a).


NPVAdvisor :

What is situs property?

Customer:

california

Customer:

single residence home

Customer:

it's not rented out

NPVAdvisor :

U.S. situs property includes the following: (i) Real property located in the U.S.;1 (ii) tangible personal property located in the U.S.2 (including cash,3 U.S. Treasury Bills,4 cars, furniture, jewelry, artwork, etc.); (iii) shares of stock issued by a U.S. corporation;5

NPVAdvisor :

The exemption equivalent will apply AND there is now what is called portability ... so between the two of you it now sits at 10,500

Customer:

i'm sorry

Customer:

i dont understand

Customer:

can you explain this in my specific situation?

NPVAdvisor :

sprry 10,500,000

NPVAdvisor :

OK you mentioned retaining your estate tax exemption for the children

NPVAdvisor :

since 2011 (as long as an election is made on the first spouse to doe's estate tax form) whatever estate tax exemption is not used is portable... transfers to the other spouse . so at the second spouse to die (it that were to be this year... again it is now indexed to go up every year) the total estate tax exemption equivalent is %10,500,000

NPVAdvisor :

$10,000,000

NPVAdvisor :

sorry get it tight in a minute $10,500,000

Customer:

oh i see what you mean

Customer:

ok this sounds good

NPVAdvisor :

so, to recap, you CAN file jointly in the year you sell, same tax brackets and rates apply

NPVAdvisor :

his 1/2 of the exemption 250000 will be disallowed

NPVAdvisor :

And you MAY want to consider doing annual lifetime gifts your self NOW 14,000 per person per year without having to file a gift tx form IF you think that you'll be abpve that $10,500,000 number (which again is slated to go up as well, however)

Customer:

got it

NPVAdvisor :

ONe more thing... So sorry, just seeing now that there may be exceptions for those covered under the expatriate rules as well

Customer:

thank you for your detailed research

NPVAdvisor :

My apololgies ... not that good planning may not alleviate some of this, but see this: http://www.irs.gov/Individuals/International-Taxpayers/Some-Nonresidents-with-U.S.-Assets-Must-File-Estate-Tax-Returns

NPVAdvisor :

Again, wanted to give you fact (not necessarily all good news)

NPVAdvisor :

The links I'm providing here will stay active so if you bookmark, or come back here http://www.justanswer.com/tax/7vu4o-hi-husband-moved-u-s-bought-house.html you can go to the sites/pages I've linked for future reference

Customer:

then he wouldn't need to file an estate tax return

Customer:

if he transfers the property under my name

Customer:

and thus, he would own nothing in the U.S.

Customer:

am i correct?

NPVAdvisor :

Yes, that's where we've ended up because (did you see this?)


In addition, covered expatriates under IRC 877A are not considered U.S. expatriates for purposes of Form 706NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States (PDF).


 

NPVAdvisor :

and the 706NA, just like the 706 form has the unified credit

NPVAdvisor :

sory for the vascillation

NPVAdvisor :

but were are really back where we were when I re-capped

Customer:

please recap again

NPVAdvisor :

THe esate and gift tax is a unified system

NPVAdvisor :

OK

NPVAdvisor :

no exclusion of gain on sale of the residence (that's an INCOME TAX issue) because of the expatriate tax rules

NPVAdvisor :

Now, let me check that the credit is te same on the 706NA as the 706 (same for non-residents as Citizens)

Customer:

ok

NPVAdvisor :

FO non-use citizens Only a unified credit of $13,000 equivalent to a taxable estate of $60,000 is allowed. Although not confirmed by the IRS, the unused exemption or unused unified credits attributable to the first spouse to die (as outlined earlier) may be available to the surviving spouse.

NPVAdvisor :

yep:


The US subjects US citizen and US resident decedents (“US Decedents”) to estate tax
on their worldwide assets. 3 In 2013, US Decedents are entitled to an estate tax
exemption of $5,250,000 (as indexed for inflation) to reduce their taxable estates on
which tax is imposed at graduated rates with a top tax rate of 40%. 4 However, the US
only exposes non-US resident and non-US citizen decedents (“Non-US Decedents”) to
estate tax on their US situs property to the extent the combined value exceeds the
applicable $60,000 exemption equivalent (equal to a $13,000 unified credit), which is
not annually adjusted for inflation. 5 The estate tax exemption available to a Non-US
decedent may be increased through application of an estate tax treaty in force. That
said, the total value of a decedent’s assets exceeding such applicable exemption
amount is subject to the same graduated rates as US Decedents.

NPVAdvisor :

SO, on the income tax front news is not terrible, you can file jointly in the year you sell, and can exclude 250 of the 500

NPVAdvisor :

But on the estate front, the form that you husband would have to file, if the US situs assets were still owned by him ... severely limits the exemption

NPVAdvisor :

NOw, here's what I'm seeing about GIFTS TO non-resident spouses:

NPVAdvisor :

Federal Gift Tax Rules for Noncitizen Spouses – No Marital Deduction
In contrast to the unlimited gift tax marital deduction available to couples in which both spouses are U.S. citizens, there is no marital deduction for gifts to noncitizen spouses. Instead, Congress addressed the potential for imposition of significant gift tax on transfers to noncitizen spouses by increasing the gift tax annual exclusion amount for gifts to noncitizen spouses to $100,000, indexed for inflation pursuant to 26 U.S.C. Section 2503(b)(2). In 2012, the “super” annual exclusion amount is $139,000. Only a present interest gift, or the portion of a gift consisting of a present interest, qualifies for the exclusion

NPVAdvisor :

Generally, the marital deduction permits the deferral of estate tax at the first
spouse’s death, postponing it until the death of the surviving spouse. The rules
governing the application and method of qualifying for the marital deduction depend on
the citizenship of the surviving spouse, not the decedent.

Customer:

oh

Customer:

so if he gifts me the house

Customer:

there will be gift tax?

Customer:

oh no

Customer:

but in my case

Customer:

the non citizen spouse is gifting it to me (a citizen spouse)

Customer:

so would the marital deduction still apply in this case?

NPVAdvisor :

or GIFTS yes, now we're back to the expatriate tax rules

NPVAdvisor :

different sets of rules apply

Customer:

i would have to look at the records

Customer:

but i would imagine the second

Customer:

maybe the 1st

Customer:

ok

Customer:

it's the first

Customer:

after june 16, 2008

NPVAdvisor :

OK before we delve into the rules for, note how the expstriate is defined:

NPVAdvisor :

The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to US citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes.

Customer:

yes

Customer:

this is the case

NPVAdvisor :

ok, next then

NPVAdvisor :

Expatriation on or after June 16, 2008


If you expatriated after June 16, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.



  • Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, and $155,000 for 2013).

  • Your net worth is $2 million or more on the date of your expatriation or termination of residency.

  • You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.


If any of these rules apply, you are a “covered expatriate.”

NPVAdvisor :

Still falling under the rules? (No personally identifying information please)

Customer:

yes

NPVAdvisor :

ok

Customer:

are you doing more research?

NPVAdvisor :

What I keep beng distracted by is the issue of the expatriate tax itself ... I can't get top the gifting issue, becauae of the huge amont od data out there on the issue of having to pay the exit tac itselfI keep running

NPVAdvisor :

DO you know if he has filed the 8864?

NPVAdvisor :

ON the gift itself, Should an expatriate make gifts or bequests back to U.S. beneficiaries, the IRS will assess the full gift and estate tax at the highest marginal rate and will not allow for any exemption other than the annual $13,000 gift tax exclusion (unless there is a separate treaty-based limitation that applies).

Customer:

i'm pretty sure he didnt

Customer:

so it is not advisable to gift his share of the house to me

Customer:

is that correct?

Customer:

because i may be hit with a gift tax issue since he is a non resident alien

Customer:

??

Expert:  Lane replied 1 year ago.


Hi ....


So sorry, it looks like another expert tried to lock this question.

Yes, that's right, really because he comes under the expatriate regime.

Looks like this has thrown us into Q&A mode, but we ca still continue the dialogue.

But yes, there WILL be gift tax issues ...,. they are actually working on a new form form 708 but it hasn't been issued you and I keep seeing things about there being exceptions...

But at this point I would err on the assumption that even between husband an wife the Expatriation tax regime is disqualifying the gift tax exclusion.

Lane

Let me know if you have more questions
Expert:  Lane replied 1 year ago.


Hi can you not see my responses now?
Expert:  Lane replied 1 year ago.

Hi J,

The questions has now showed back up on my list as if you have responded, but I see no new comments since I tried to respond before.

Maybe this will clarify:

The last thing I see you saying is...
Customer: i'm pretty sure he didnt Customer: so it is not advisable to gift his share of the house to me Customer: is that correct? Customer: because i may be hit with a gift tax issue since he is a non resident alien Customer: ??

That IS correct both because of the way gifts are treated for those falling under the expatriate tax regime AND because of the other issues raised by his not filing the 8864, if that is the case.

Hope this helps

Lane

let me know...
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3911
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Hi J,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
Customer: replied 1 year ago.
Hi lane,

I just want to make sure I got everything correctly.

1. If we sold the home, I would qualify for a $250,000 exemption. My husband would not and our gain would be subject to ordinary income tax; however, I would file under married filing separately which would allow extra standard deduction and personal exemptions.

2. Gifting his share of the house to me would trigger a gift tax liability since he is an expatriate. This is not recommended.

3. If we pass away, the homes can be left to our kids tax free up to $10,500,000. This would be beneficial since we would not pay any taxes on the gain since they would receive stepped up basis.

Please let me know if I have the general idea correct.

Thank you.

JC
Expert:  Lane replied 1 year ago.

1. Yes, except that the gain would be subject to capital gains taxes, which are lower than ordinary income.

2. That is correct, because he falls under the expatriate tax regime.

3. This one is a little different. If he continues his current status, the exemption is much lower. ... However, you will still get the 5,250,000 ( + his smaller exemption due to the portability issue we discussed) AND that number will grow - the 5,250,000 would be if the second (last to die) of you passed away THIS year.


Hope this helps

Lane


Expert:  Lane replied 1 year ago.

As a follow-up see this:(relates to question number 3)

http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States#Exemptions_and_tax_rates

Notice that about 1/2 down the page they talk about the reduced exemption for non-resident aliens.

Thanks for the rating!

Lane

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