As explained by Roy Berg of Moodys Gartner Tax Law LLP
in his analysis published by Mondaq
, inheriting parties of Canadian decedents with U.S. properties need to make sure that their benefactors are up to date with the required documents.
“If a US estate tax return was not filed as required, the new rules presume the inherited property's basis to be zero, even if no US estate tax is otherwise owed,” Berg wrote.
“[Failure] to file a US estate tax return is especially problematic for beneficiaries who wish to sell inherited US real estate. The result may also be a problem for a beneficiary who inherits income-producing property: having no basis in the property means that he or she cannot deduct tax depreciation until an estate tax return is filed,” he expounded.
Berg emphasized that the provisions outlined in Code section 1014(f) of the United States' Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 limit the revised (as of March 2, 2016) consistency requirements to properties subject to tax if said assets generates liabilities that goes beyond the allowed limit.
“Under section 2102(b)(1), the credit equivalent amount is limited to US$50,000 if the decedent is neither a US citizen nor a US resident for estate tax purposes,” Berg said.
“Section 6114 generally allows for an individual's treaty benefits regardless of whether a timely election has been made. Moreover, new regulation 1.1014-10(c)(3)(ii) provides that if no return has been filed, the value of the property described in regulation 1.1014-10(b) is zero,” he added.
“Thus, until the US estate tax return has been filed, the beneficiaries of an estate have no basis in inherited US-situs property, even if no estate tax is otherwise owing. However, when an estate tax return has been filed, the property's basis is adjusted to the value as of the date of death,” Berg concluded.
The laws covering non-U.S. owners of American real estate compel foreign investors to file a U.S. real estate tax return, and not doing so might cause problems down the line in case of death.