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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience:  15years with H & R Block. Divisional leader, Instructor
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My wife inherited a 12.2% share in a foreign partnership (this

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My wife inherited a 12.2% share in a foreign partnership (this is the correct designation for US tax purposes) in France (Societe Civile Immobiliere or SCI) whose sole business is a to own and manage a commercial rental property, from which the partners derive an income. The partners in the SCI remain liable for its debts and expenses. My wife inherited the 12.2% bare (or naked) shares in 2000 and obtained the usufruct rights to her shares after her grandmother died in 2011.

Two questions:
1. For US tax purposes, when would my wife have needed to report the inheritance in 2000 or 2011 (and consequently, in what year would her cost basis be calculated)?
2. Can my wife deduct depreciation for this rental property? If so, would the placed-in-service date for her start in 2000 or 2011 and where would we report the depreciation deduction on our 2012 return (i.e., no form 4562 needed since the placed-in-service date was in a prior year)? If she cannot depreciate the value of the rental property, can she depreciate the value of her shares (754 election)?

Note: For French tax purposes, the SCI has most likely already depreciated the cost of the rental property since it has been in business since around 1960.
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
French law would be needed to dictate if the 2000 date or the 2011 date is used.


If under French law, the cessation of the usufructory’s interest, the full rights in the property will be reunited in the hands of the naked title owner then the 2011 date is the reporting date. If the naked owner had no current right to vote the stock then 2011 would be a clear date of true ownership.
IRC Section(NNN) NNN-NNNN4(a) provides that, in general, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in


a joint enterprise for the conduct of business for profit.
As far as depreciation, she would report the income form the percentage of her ownership but she would not directly report depreciation on Schedule E. Your wife assumes her Grandmother's pro rata share of the partnership’s adjusted basis in its property.
Your wife could not make the 754 election only the partnership could do that and as a foreign partnership they are not under the IRS jurisdiction. Her basis in the shares are going to be the value on the date she inherited them and that can be assumed at this time to be 2011.
In closing I would advise that you speak with a US local adviser that has international experience in reporting the income form the partnership.




Robin D. :

My goal is to give you excellent service. If you are satisfied, please rate me. If you have follow-up questions on this same topic, use the reply box below. To start a new conversation with me on a new topic request me again.

Customer:

Hi Robin,

Customer:

Thanks for your reply. I have some questions:

Customer:

My wife had the right to vote on the conduct of the SCI while she was a naked shares holder. Also, as far as we know under French law she had the right to sell her shares if she wanted to.

Customer:

My question is more about whether the partners in a partnership can depreciate the value of the property (minus the land) individually or if it is the partnership that depreciates the property. If it is the partnership, then does that mean that once the building is depreciated a new partner has no way to depreciate it?

Robin D. :

The partnership depreciates then passes the results to the partners. The new partner would not depreciate on their own.

Customer:

So, it's not like a privately-owned rental property where you can start depreciating on the placed-in-service date even if the property is older than 40 years?

Robin D. :

That is correct. Her ownership is in the partnership not the property on it's own.

Robin D. :

Had she inherited the property instead of a share of the partnership which owns the property then she would have different reporting.

Customer:

Ok, so that means that she cannot claim any deduction for depreciation of the property. And as far as reporting the inheritance, would it be 2000 in this case?

Robin D. :

That is correct and if by France law she was in ownership of the property with all the meaning for same, then 2000 would be the year.

Customer:

Would you still recommend that we consult with a US-based internal tax law advisor regarding partnerships for this issue or are you pretty confident in the reply above?

Robin D. :

I am confident as far as my explanations based on the information supplied. I normally always advise individuals to work with local experts though. Not because I am unsure but so their total situation can be seen. Here we answer specific questions but can not look at a person's complete tax picture.

Customer:

Sure, I understand. Ok, thanks for the help.

Robin D. :

You are most welcome.
Your positive rating is always thanks enough

Robin D. :

I really enjoyed working with you – please feel free to request me again when you come back to ask another question.
You will find the request feature when you come back under your MY QUESTIONS section.


 

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7742
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D.
Robin D.
Tax Professional
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15years with H & R Block. Divisional leader, Instructor