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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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An elderly relative gave my sister his multimillion dollar

Customer Question

An elderly relative gave my sister his multimillion dollar home by giving her joint tenancy 8 mos before he died. The house is in Canada. He was Canadian; she is U.S. Citizen. Are there U.S. tax implications?
Submitted: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 years ago.



There are no U.S. tax issues with this. She apparently inherits his half of the property. The U.S. does not have inheritance tax.


However, she will have to pay capital gains tax on the inheritance in Canada. Canada did away with inheritanced tax and substituted capital gains tax.


She can take a foreign tax credit on her tax return when she files for the capital gains paid to Canada.


IF she sells the property, as a U.S. citizen she would have to pay capital gains on this property. The cost basis for the capital gains would be the FMV as of the date of death. So is she sells it soon, there will be little if any capital gains tax to pay.

Customer: replied 8 years ago.
This is not an inheritance issue. In Canada, property held in joint tenancy does not pass through an estate -- this was a gift before he died and upon his death she got 100% ownership through the joint tenancy. Are you saying, then, that somebody can give you millions of dollars of property and there are no tax implications in your country of residence (USA)? Because this is not an inheritance, but a property ownership through a gift of joint tenancy, does the capital gains tax in Canada still apply?
Expert:  Ed Johnson replied 8 years ago.



I disagree with you that this is not an inheritance issue. I am sure you are an expert equal to me about estate and inheritance laws. BUT, this is an inheritance issue. ALL inheritance issues do not have to pass through probate or an estate. Canada and the U.S. are the same in this respect. Joint tenancy allows property to be passed between people in order to avoid probate, in the absence or presence of a will or not. It also reduces the estate taxes in countries where they have estate taxes.


It is true that deed types are part of real-estate law, but deed types and how they are treated as part of an estate and for estate tax and inheritances are also part of the body of law referred to in canada, the united states, the UK and Australia, as gift and inheritance.


A joint tenancy executed by quit claim for example, as apposted to warranty, is a way of granting joint tenancy to someone. Joint tenency however, grants eqaual access and shares to the property and unless it is a tenency in the entirety, the each person owns equal shares of the property. At death the surviving person "inherits the entire property" (the decedentes share) withouit probate or being added to the estate (right of survivorship); however for tax purposes, it still attracts tax, in canada. This is because Canada has a capital gains tax on inheritance. Even though this did not get added to estate, even though it did not go through probate, someone died, and the property passed to the person with right of survivorship, it was an inheritance. AND CAnada assesses the capital gains tax.


REFERENCE this easy to read example:


With regard to the United states. The U.S. terminated its inheritance tax. SO yes, a person can give heirs millions of dollars in property and cash, and there is no inheritance tax assessed on the beneficiary. BUT if they then sell the property they will be exposed to potential capital gains tax.


So as long as the property is never sold, there would be no tax.


Again, this is an inheritance. The gift occurred befdore the death. Before the gentleman died, he gifted her half of his property by making her a joint tenency. In the U.S. this particular gift would have been valued at 50% of the donor's adjusted fair market value of the property. Had he and the property been resident in the United states, the DONOR, not the recipient would have had to file a gift tax return. in the United States the donor has a 1 million dollar life time exclusion of such gifts, and would pay 46% gift tax on the amount that exceeded 1 million dollars. In the united states, the recipient of a gift or inheritance pays no tax. If the inheritance, in this case, 50% of the joint tenancy, is later sold, they pay capital gains. The capital gains formula is:


Capital gains formula (inherited 1/2 of joint tenancy that is sold)= 1/2 sell price - (1/2 FMV as of the date of death + 1/2 improvements and additions, +1/2 major repairs) - 1/2 cost of selling.


As you can see the FMV as of the date of death can be quite substantial. If she sells the property closed to the date of death, there will be very little if any capital gain, and hence very little or no capital gains tax when sold. If she is smart, she will sellit at the FMV or less and attract zero tax.


If the property is not sell there is no tax.


If she wouod have inherited 10 million dollars in cash for example, there would not be any inheritance tax....NO INHERITANCE TAX in the united states.


But earned income and capital gains from sold or held investments will attract income tax and capital gains tax. So if someone inherits a mutual fund for example, there is no inheritance tax on the inherited mutual fund; but the mutual fund is earning interest and dividents. The interest and dividends are taxed. The portion of the fund that represents earnings is taxed at regular income tax rates.


Nows the U.S. has estate tax, but that is paid by the estate assets of the decedent, not the heirs. AND for non-residents, there is no estate tax on property not situs in the U.S. So in your scenario, the decedent has no estate tax requirements and the heir (joint tentent) does not have an inheritance tax.


Further when she was gifted her share of the property, the cost basis if she sells that half, is the adjusted cost basis as of the date of the joint tenenacy. If he had been in the U.S. he would have had to file the gift tax return on the half that he gifted through the joint tenency.


BUT since he was not resident in the U.S. and he was not a U.S. citizen or permanent resident, then she could receive as much gift as he wanted to give, tax free. AND it did not even get reported.


Under U.S. law if this property is sold, she has two capital gains formula.


she would apportion the final sell price of the property and apply the formula I already gave you for the inherited portion of the joint tenancy. AND for her poriton it would be;


Capital gains for gifted portion = half the sale price - (adjusted cost basis as of half hte properyt as of date of joint tenancy gift, + 1/2 the improvements, + 1/2 the major repairs)- 1/2 the cost of selling.


Just for clarity:


when he quit/quick claim deeded her to a joint tenancy, that was a gift, while he was still alive.


when he died, she inherited his half of the joint tenancy through right of survival associated with the joint tenancy avoiding probate, wills and incluision in the estate. Capital gains tax in Canada is still required on his half of the property.