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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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After parents death in India, inherited the property and then

Customer Question

After parents death in India, inherited the property and then sold the inherited property.
Filed Capital gain Tax in India based on the Indian Tax code.
Being a citizen os USA living in the state of Illinois, what steps need to be taken to file corresponding Taxes in USA
Submitted: 8 years ago.
Category: Tax
Expert:  Merlo replied 8 years ago.

Were your parents also US citizens?

Customer: replied 8 years ago.
No, they were Indian citizens leaviing their estate to me and my sister (50/50)
Expert:  Merlo replied 8 years ago.
Hello againCustomer

Thank you for the additional information.

There is no inheritance tax at the federal level in the United States. Instead, the IRS imposes an estate tax on estates which exceed a certain value, but since your parents were not US citizens, this would not apply in their case. There are some states which still impose some form of inheritance tax, but not in the state of IL.

What this means is that you will actually owe no taxes on the value of the inheritance itself. You would, however, have to report any gain you may have had from the sale.

When you inherit property, you automatically receive a "stepped up" basis, which means your new allowed basis is whatever the fair market value of the property was on the day you inherited it. Your gain is then figured by taking your selling price less that basis. As you can imagine, if you sell the property shortly after inheriting, then it is likely you will have little or no gain, because your selling price should be the same or close to your new basis.

If you did have any gain it would be reported as a long term capital gain which is subject to a maximum tax rate of 15%. At the same time, you would also be allowed to claim a credit for any tax you paid to India on that same sale. So chances are you will end up owing no federal or state tax at all on this transaction.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank youCustomer and let me know if you have more questions.

Customer: replied 8 years ago.

Here is a twist. In India I have paid Capital gain Tax which is assessed at the time of the sale. In India the current rule is to determine the estimated value for 1981 (since house was built in 1971) use a multiplier provided by the goverment between 1981 and 2009 and come up with the proposed current value. This number gets subtracted from the sale value and a capital tax is computed for the profit during sale.

If I understand you correctly, In USA the value of the property for calculating profit/gain is from the time of inheritance to the time of sale. Please confirm.

Lastly who makes the determination of value at the time of inheritance for the purposes of Tax filing in USA


Expert:  Merlo replied 8 years ago.
Hello againCustomer

1. Yes, it is correct that in the USA, the gain is calculated by taking the sale price of the property less the value of the property at the time the property was inherited.

2. As far as who makes the determination of the value, in the US that is fairly easy to do. First, in the US you can use property tax records to determine the current assessed value of the home. You can also simply get an appraisal on the property.

Since the property you inherited is in India, those choices may not be as readily available. But it would be reasonable to assume that if you sold this property within a short time period after you inherited, then the property itself could not possibly have appreciated much, if at all, by the time you sold it. And I believe that based on that fact, the IRS would accept your selling price to be the same as your basis.

On the other hand if you held this property for one or two or three years after you inherited it before you put it up for sale, then the property could have conceivably increased in value from the time you received it as an inheritance. If that would be the case, you would need to try to get an estimate from someone who works in India with real estate assessments who could give you an estimate of what the value would have been when you inherited the property.

But if the sale was within a year of you inheriting the property, I would say you are safe to claim the selling price and the basis as being the same.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank youCustomer

Merlo and other Tax Specialists are ready to help you
Customer: replied 8 years ago.

I am not only accepting your response but want to thank you for giving me something to work on. The capital gain in India was very substantial as per the calculated figures. We inherited the property in 2003 after my mothers death but it took us till 2006 to get it registered in our name and become official owners. The property got sold in 2009 and hence the question.

Again thanks for guidance as I will start my extended research now

Expert:  Merlo replied 8 years ago.
Thank youCustomer and let me know if you have more questions.