Originally Posted by mky_oasis
My wife has inherited property that came down the generations with no prior history of sale. The said property was condemned/acquired by the government to build public infrastructure. We received a settlement check after taxes were deducted in the foreign country.
1) Does this income need to be reported?
2) If I have to pay taxes on this settlement, how do we determine the basis price?
3) If we purchase replacement properties, does that offset/defer any tax liability? Can the replacement properties be purchased in US, in the foreign country and a combination of both?
1) UNLESS you are a non resdient alien, yes; you muist report not only your US source but world wide income on your US/state returns. if youpay taxes on long term capital gain( wwhen condemned valu of the pty exceeds its basis, fmv) to foreign taxing authorities, then you can claim those taxes on your US return by itemizing them on Sch A of 1040 or claiming foreign tax credit on 1040 line 47. however, if there is no gain on the saleo f the pty, then you do not need to pay any tax to the US/state as you inherited it from her ancestor/family member.In this situation you still dedcut taxes paid to foreign country on your US returns.it is not your primary home asd it is ina foreign country, so you can not make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.
2) your basis is always FMV when she inherited it;The basis for determining gain or loss on the sale of inherited property is its fair market value on the date of death of the decedent.This is true no matter where the property is located. If after the date of death the value changes up or down, you will have a gain or loss, respectively.In addition, the selling expenses will reduce the amount of gain or increase the amount of loss. Fluctuations in currency values between the date of death and the selling date can also lead to additional gain or loss.You may also be required to disclose the inheritance to the IRS based on its value regardless of potential gain or loss. Form 3520 is used to report foreign inheritances valued in excess of $100k. Form 3520 is due by the due date of your individual return for the year of inheritance, but it is mailed separately from your return to the IRS
3) as mnetioned abvoe, sh einherited it so unless there is capital gain on the sale of the pty overseas, then she needs to ay tax on the gain unless she buys another pty in US/oerseas.your gain , in inherited property is always considered to have a long-term holding period, so you would qualify for the preferential tax rate of 15 percent if your marginal tax rate is 25% or higher or 0% if it is lower than 25%.unless it is investment pty, it is not subject to sec 1031 excahnge