# How are capital gains calculated on property inherited from deceased spouse? For US exit tax or on my death.



## Bob from Buckinghamshire (Jan 30, 2021)

Hello, I am a dual US/UK citizen and I have lived in the UK for many years, with my UK-only wife. I have no US-based assets or income. I am considering whether to renounce US citizenship, to avoid US capital gains taxes when I die. I am aware of the various scenarios, depending on which of us dies first. But I have one question:

If my wife dies before me, I will inherit her property. If later I renounce citizenship or die, how will the US calculate my capital gains on the property I inherited from my wife? The capital gains should be current value minus original purchase value; but I did not purchase the property - my wife did. Do they use the original purchase value she paid, or the value when I inherited, or is it not liable to capital gains at all?

Thanks for your help.


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## Bevdeforges (Nov 16, 2007)

I could be wrong, but my understanding is that, first of all, there is no taxing of inheritances passing directly from one spouse to the other (except maybe in the case where a US citizen is inheriting from an NRA spouse). But in general what usually happens is that the value of the assets in the estate is determined based on the "Fair Market Value" at the date of death of the decedent. Once the inheritance tax is settled based on that basis, the heir then takes over the FMV amount as their basis for the asset.

However, there is always the little matter of inheriting things from a "foreigner" that can mess things up. As a US citizen you're "always" subject to US taxes no matter where the assets are located. An issue you avoid if you renounce. Plus, I believe the threshold for having to pay inheritance taxes is considerably lower for a US citizen who inherits from a NRA spouse. (Or at least it used to be - it has been a while since I looked into this.)

Hoping to flag down someone with more current knowledge or experience in these matters.


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## Nononymous (Jul 12, 2011)

Two thoughts:

If you renounce your US citizenship while your wife is alive, then there is no US tax issue with inheritance. It's generally good advice to renounce *before* a taxable event - advice that Boris Johnson did not receive, to his great cost.

Since you are a UK citizen and have no US assets, you can also decide to ignore any US tax consequences of future inheritance, and instruct your executor to not bring your estate into US tax compliance. You are also free to stop filing US tax returns tomorrow, or to renounce without bothering with the exit tax procedure.


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## 255 (Sep 8, 2018)

Bob from Buckinghamshir -- There is no tax in the U.S on inheritances, including from abroad. Your basis in the property will be the "fair market value" at the date of death, and will now be yours alone. Any future gains, whether they be passive income like dividends, or capital gains will be taxed in the U.S. Of course depending on your income, long term capital gains taxes can have really favorable tax rates. Remember, that depending on the type of property, you may incur an annual reporting requirement in the form of the FBAR and IRS form 8938. If the inheritance is over $100K, you'll also need to file IRS form 3520 2020 Form 3520 (irs.gov) with your tax return (Part IV, line 54.) This is an information return, but doesn't generate a tax liability. I have no knowledge of the UK tax system. You may want to have a look at the US-UK Tax Treaty: United Kingdom (UK) - Tax Treaty Documents | Internal Revenue Service (irs.gov) Cheers, 255


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## 255 (Sep 8, 2018)

Bob from Buckinghamshir -- Rereading your question, I think I didn't answer what you asked -- sorry. Unless you are a "covered expatriate," there is no tax liability on the property, if you renounced after you inherited the property. If you are a covered expatriate -- the calculations will be based on your basis (again, the FMV of the property at time of death.) Remember to check the rules for being considered a covered expatriate -- any of the following: a. Average income over $171K (2020, this is adjusted annually,) b. net worth over $2 million, or c. failure to file IRS form 8854. Any one of the three qualify you to be a covered expatriate. Cheers, 255


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## Nononymous (Jul 12, 2011)

255 said:


> Remember to check the rules for being considered a covered expatriate -- any of the following: a. Average income over $171K (2020, this is adjusted annually,) b. net worth over $2 million, or c. failure to file IRS form 8854.


Condition (a) is actually $171k annual tax liability, not annual income - a considerably higher bar. Note also that covered expatriate status is largely meaningless unless one is leaving an estate to a particularly law-abiding US heir.

As a dual citizen with US assets Bob can largely ignore all this, provided there isn't a plan to bequeath an inheritance upon someone in the US.


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