If your close family member lives in another country, you may become that person’s legal beneficiary under foreign law. Understanding your rights and legal obligations when you inherit foreign real estate can eliminate costly liabilities.
Transfer Requirements
Most countries have specific inheritance laws governing real estate. The decedent’s country of domicile determines beneficiary rights and sometimes imposes a residency requirement before transferring ownership.
Tax obligations
Although you may not be subject to United States estate taxes on the property you inherit, a foreign country may obligate you to pay an inheritance tax, which can be substantial in some countries. In addition, the government of the country where the property exists will likely impose property taxes that you must pay.
The sale of a property you inherit in a foreign country results in capital gains which you must report as taxable income on your IRS federal income tax returns. However, the taxation rate is lower than standard income tax rates and may qualify for deferment if you swap the property for one with a similar value. A lower tax rate may also apply if the property becomes your home.
It is notable that capital gains taxes also apply in the country where you sell a property. Therefore, you must apply for a tax credit to reduce your U.S. federal taxes by the amount of your foreign tax obligation.
Income-generating requirements
Renting an inherited property can help pay for its ongoing maintenance. However, many foreign governments restrict beneficiaries from operating income-producing businesses if they lack citizenship or live in another country. Therefore you may need to pay expenses out-of-pocket.
Although inheriting real estate abroad can help you fulfill many dreams, it also requires due diligence to reduce and manage accompanying costs.