The U.S. tax system often reaches beyond U.S. borders—even when money was earned or inherited overseas. For foreign nationals who are U.S. tax residents (such as green card holders or individuals who meet the Substantial Presence Test), receiving an inheritance from their home country is usually not taxable as income when received.
However, it frequently triggers significant international reporting requirements and can create future U.S. tax exposure once the inherited assets begin producing income.
Understanding these rules requires familiarity with both the income tax provisions of the Internal Revenue Code (IRC) and the international reporting regimes administered by the IRS and FinCEN. For immigrants, expats, and their advisors, this framework is critical.
Receiving a Foreign Inheritance: Core Tax Rules
Under U.S. federal income tax law, inheritances are generally excluded from the recipient’s gross income.
Key authorities include:
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- IRC §102(a) – Excludes property received by gift, bequest, devise, or inheritance from income
- Treas. Reg. §1.102-1 – Confirms the exclusion applies to the inherited principal, not to income produced by the property
- IRC §7701(b) – Defines who qualifies as a U.S. tax resident (a “U.S. person”) for worldwide tax and reporting purposes
The value of the inheritance itself is not taxable when received. However, any income generated after inheritance—such as interest, dividends, rental income, or capital gains—is fully taxable in the U.S. to a U.S. tax resident.
Reporting a Large Foreign Inheritance: Form 3520
Even when no income tax is due, large foreign inheritances often must be reported to the IRS.
Relevant authority:
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- IRC §6039F – Requires U.S. persons to report certain foreign gifts and inheritances
- Form 3520 – Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
General threshold rule: If a U.S. person receives more than $100,000 in total gifts or inheritances from a non-U.S. individual or foreign estate during the year, Form 3520 is required.
It is important to note that Form 3520 is an information return, not a tax return. Still, penalties for failing to file can be severe even if no tax is owed.
Inheritances Received Through Foreign Trusts
If the inheritance is paid through a foreign trust, additional and more complex rules apply.
Key filings include:
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- Form 3520 – Required for distributions from foreign trusts
- Form 3520-A – Annual filing by certain foreign trusts with U.S. owners or beneficiaries
A trust distribution may include both non-taxable principal and taxable accumulated income or gains, which may be subject to special “throwback” rules and higher effective tax rates.
Inherited Foreign Accounts and Investments: FBAR and FATCA
Many foreign inheritances include bank accounts, brokerage accounts, or other financial assets located outside the United States. Once the beneficiary has ownership or control, U.S. reporting obligations often apply.
FBAR (FinCEN Form 114)
Authority: Bank Secrecy Act rules under 31 C.F.R. §1010.350
Filing threshold: Required if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the year.
FATCA (Form 8938)
Authority: IRC §6038D and related regulations
Practical rule: An inherited foreign account may trigger FBAR, Form 8938, or both, depending on the account value and the taxpayer’s filing status.
Basis Step-Up and Future U.S. Tax Exposure
Although the inheritance itself is usually tax-free, future U.S. tax consequences still matter.
Points to remember:
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- Inherited property generally receives a step-up in basis to its fair market value at the decedent’s date of death
- Proper foreign valuation documentation is essential to support the stepped-up basis if audited
- Income generated after inheritance is fully taxable in the U.S.
- Foreign taxes paid may be offset using the Foreign Tax Credit, if properly documented
Foreign Inheritance Taxes vs. U.S. Tax Rules
The U.S. generally does not impose a federal inheritance tax on the recipient.
Instead:
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- The decedent’s home country may impose inheritance or estate taxes
- The U.S. focuses on information reporting and taxation of future income earned by U.S. tax residents
Penalties: Why Reporting Is Critical
In foreign inheritance cases, the biggest risk is often non-reporting, not immediate income tax.
Common penalties include:
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- Form 3520 penalties that can equal a significant percentage of the unreported inheritance
- FBAR penalties, which can be extremely high if the failure is deemed willful
- Form 8938 (FATCA) penalties for failing to disclose foreign financial assets
Key Takeaways for Foreign Nationals Living in the U.S.
If you are a U.S. tax resident who inherits property or assets abroad, your compliance checklist should include:
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- Determining whether Form 3520 is required (often yes if the amount exceeds $100,000)
- Identifying whether the inheritance involves a foreign trust
- Reviewing inherited foreign accounts for FBAR and Form 8938 filing
- Securing reliable date-of-death valuations to support tax basis
- Planning for U.S. tax on future income from inherited assets
Conclusion
For foreign nationals who are U.S. tax residents, a foreign inheritance is usually not taxable upon receipt, but it often creates substantial U.S. reporting obligations and future tax exposure. Timely and accurate filings—especially Form 3520, FBAR, and FATCA Form 8938—are essential to avoid penalties and preserve the tax benefits of inherited property.
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