Foreign Inheritance Tax: What Expats Need to Know

Receiving an inheritance from abroad can be both a gift and a logistical challenge, especially for American taxpayers. Understanding the tax implications of a foreign inheritance is crucial for avoiding penalties and ensuring IRS compliance.

Below, we break down everything you need to know about receiving a foreign inheritance in 2025, including how to file IRS Form 3520, key considerations if you sell inherited foreign property, and how to report inheritance from overseas.

Let’s dive in!

Is foreign inheritance taxable in the U.S.?

Good news: In most cases, the U.S. does not tax inheritances received by Americans from abroad. However, there are important considerations to keep in mind:

• Capital gains tax: If you inherit foreign property and later sell it, U.S. capital gains tax may apply.
• Foreign trusts: Distributions from a foreign trust to a U.S. taxpayer may be subject to U.S. income tax, depending on the nature of the distribution.
• Gift reporting thresholds: While inheritances are not considered gifts, large foreign inheritances must be reported to the IRS. If you receive an inheritance or gift valued at over $100,000 from a non-U.S. person, you are required to file Form 3520.

For a more detailed breakdown of the filing requirements for US persons receiving gifts or bequests, refer to IRS Form 3520 instructions.

How to claim inheritance from overseas

Claiming an inheritance from overseas can involve multiple legal and tax-related hurdles. Here are the key steps U.S. taxpayers should follow:

1. Understand the legal process: Each country has its own inheritance laws. Understanding your inheritance locally may
2. Document the transfer: Maintain proper documentation, such as a will, probate court records, and bank statements, to substantiate the inheritance.
3. File Form 3520: Report the inheritance value and details to the IRS on Form 3520. File at the same time as your individual income tax return (by June 15th for expats) if the inheritance exceeds $100,000.

If you receive a foreign inheritance or gift valued at over $100,000 from a non-U.S. person, you must file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). This informational form is crucial for IRS compliance, as failing to file can result in significant penalties.

Understanding Form 3520: Key deadlines & thresholds

The Form 3520 filing deadline aligns with your U.S. income tax return deadline—April 15 for taxpayers residing in the U.S. and June 15 for expats living abroad. Filing an income tax return extension extends the deadline for Form 3520 to October 15. Non-compliance can result in penalties of up to 35% of the unreported value of foreign gifts or inheritances.

To ensure smooth filing, maintain detailed records of the inheritance’s value, source, and relevant documentation. Proper compliance with Form 3520 safeguards against penalties and ensures accurate reporting of foreign inheritances to the IRS.

Tax considerations for selling inherited foreign property

Selling foreign property often triggers U.S. tax obligations, such as:

• Capital gains tax: Based on the property’s selling price and the fair market value at the time of inheritance.
• Currency exchange considerations: Currency fluctuations may affect the taxable gain when converting the property’s value into U.S. dollars.
• Foreign tax credit: If you paid taxes on the sale in the foreign country, the Foreign Tax Credit may help reduce your U.S. tax liability.

Tax treaties and how they can help

Tax treaties, such as the US-UK estate tax treaty, exist to prevent double taxation on inherited assets.
These treaties clarify which country can tax an inheritance and allow U.S. taxpayers to claim credits for foreign taxes paid. The goal of these treaties is to reduce the burden of double taxation.

Important IRS forms to know

Aside from Form 3520, expats managing foreign inheritance should also be aware these essential forms, which are key to IRS compliance:

• Form 8938 (Statement of Specified Foreign Financial Assets): Required if the total value of your foreign financial assets, including inherited accounts or properties, exceeds the reporting thresholds (e.g., $200,000 for individuals living abroad).
• FBAR (Form 114): Mandatory if inherited funds result in foreign bank account balances exceeding $10,000 at any point during the year.
• Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company): Necessary if your inheritance includes shares in a Passive Foreign Investment Company (PFIC), such as foreign mutual funds or trusts.

Staying informed about these forms is vital to avoid penalties and ensure proper reporting of foreign inheritance-related financial assets. Consulting a tax expert is highly recommended to navigate these complex requirements.

Avoiding estate tax on foreign inheritance

While a foreign inheritance as a U.S. taxpayer is not typically taxable, foreigners who hold a U.S. estate can be subject to U.S. estate tax. Nonresident aliens are taxed on U.S.-based assets, which include:

• Real estate: Property located in the US
• Tangible personal property: Items physically located in the U.S., such as artwork, jewelry, or vehicles.
• US Securities: Stocks, bonds, or other investments issued by U.S. corporations or the government.
• Cash in US accounts:

The estate tax exemption for nonresident aliens is much lower than for U.S. citizens or residents. It is generally $60,000 for nonresident aliens, compared to $12.92 million (in 2023) for U.S. citizens. Estate tax rates for nonresidents range from 18% to 40%, depending on the value of the taxable estate.

Foreign nationals may face U.S. estate taxes on U.S.-based assets, but proper planning, use of tax treaties, and legal structuring can mitigate the tax burden. It’s essential to consult with a tax professional specializing in international estate planning for tailored advice.

Why choose Bright!Tax?

Managing foreign inheritance taxes can be daunting, but Bright!Tax is here to simplify the process. Our team of expert CPAs specializes in guiding expats through their U.S. tax obligations, ensuring accuracy and compliance every step of the way. Start today and experience personalized support tailored to your unique needs.