Is a Foreign Inheritance Taxable in the US?

If your parent, grandparent, or other relative dies abroad and leaves you money or property, your first question is usually: "Do I owe US tax on this?" Section 102 generally excludes a genuine bequest or inheritance from gross income, but income in respect of a decedent, estate or trust income, covered-expatriate bequests under section 2801, and later income from the property require separate analysis.

This post explains when a foreign inheritance triggers US tax, when it does not, and how to file the required paperwork.

The General Rule: Generally Excluded from Gross Income

Under IRC Section 102, gifts, bequests, devises, and inheritances are generally excluded from gross income. The exclusion is not, however, the end of the analysis. Income in respect of a decedent (section 691), estate or trust income, covered-expatriate bequests under section 2801 and Form 708, and later income from the inherited property are separate questions. The transfer at death is not automatically a taxable event for the recipient under the income tax, but other provisions may apply.

What Is Taxable: Post-Inheritance Income

A genuine inheritance is generally not income to the recipient under section 102, but reporting, estate/trust, income-in-respect-of-a-decedent, section 2801, and later-income questions remain separate. Once the assets are yours, they are treated the same as any other assets you own. That means:

• Dividends and interest from inherited stocks or bonds are taxable when received.
• Rental income from inherited real estate is taxable.
• Capital gains when you sell inherited property are taxable (though the basis is generally determined under section 1014 using date-of-death or another applicable statutory value, subject to exceptions).
• Business income from an inherited company or partnership interest is taxable.

Example: You inherit €300,000 in cash and a rental apartment in Lisbon from your Portuguese father. The €300,000 and the apartment are not taxable income when you receive them. But if the apartment generates €12,000 in annual rent, that €12,000 is taxable on your US return. If you later sell the apartment for a gain above the inherited basis, the capital gain is taxable.

The Reporting Requirement: Form 3520

Even though the inheritance is generally excluded under section 102, you may have to report it once the applicable Part IV threshold and related-party aggregation are met for the relevant donor category. Form 3520 is an information return and is filed separately from Form 1040 — it is not attached to your income-tax return.

Who Must File

A U.S. person (citizen, resident alien, domestic trust, domestic estate, or domestic partnership) who receives more than the applicable Part IV threshold from a nonresident alien individual or foreign estate, aggregated with persons known or reasonably known to be related to the donor under the current instructions.

The Part IV Threshold

The threshold applies to receipts from a single donor and related persons. Gifts from unrelated foreign individuals are not automatically pooled into one universal aggregate.

When to File

Form 3520 is filed separately from your income-tax return. The general due date is the 15th day of the fourth month after year-end, subject to current Form 3520 instructions. A properly obtained income-tax-return extension also extends Form 3520, within the outer limits described in the current instructions.

The Penalty

For Part IV gifts and bequests under section 6039F, the penalty is 5% of the unreported gift or bequest for each month the failure continues, capped at 25%, subject to reasonable cause. The $10,000 minimum and 35% rate sometimes summarized for Form 3520 belong to the foreign-trust provisions under section 6048, not Part IV.

Inheritance vs. Gift: Does It Matter?

For Form 3520 Part IV purposes, both inheritances from foreign estates and living gifts from nonresident alien individuals or foreign estates can be reportable. The form has separate sections for gifts and bequests; both are evaluated against the same donor-category threshold and related-party aggregation rules.

The distinction matters more for estate tax and for section 2801:

• The foreign estate may owe estate tax to its home country.
• The U.S. recipient does not owe U.S. estate tax unless the estate includes U.S.-situated assets above the applicable threshold.
• If the decedent was a U.S. citizen or domiciliary, U.S. estate tax applies to the worldwide estate, but that is the estate's obligation, not the beneficiary's.
• If the decedent was a covered expatriate, a covered-bequest obligation under section 2801 and Form 708 may apply for bequests received on or after January 1, 2025.

Documentation Requirements

Good documentation protects you if the IRS questions the transaction. You should keep:

1. The will or intestacy decree — the legal document showing who inherited what.
2. Estate inventory or distribution statement — a list of assets and their values at death.
3. Wire records or bank receipts — proof of the transfer to your account.
4. Appraisals — for real estate, business interests, or valuable personal property.
5. Foreign estate tax returns — if the estate filed any local tax returns.
6. Legal opinion letter — in complex cases, a letter from the foreign attorney confirming the character of the distribution.

The IRS is particularly interested in distinguishing inheritances from disguised income. If you receive $500,000 from a foreign corporation shortly after performing services for that corporation, the IRS may argue it is compensation, not inheritance. Documentation is your defense.

Special Situations

Inherited Foreign Real Estate

If you inherit real estate outside the US, you do not owe US income tax on the inheritance, but reporting may apply once the Part IV threshold and related-party aggregation are met for the foreign-estate donor category. Directly held foreign real estate is not itself a Form 8938 asset or an FBAR account, although an entity or financial account holding it can change the analysis. You should obtain a local appraisal to support a section 1014 basis analysis, subject to the statutory exceptions and the actual asset.

If the property generates rental income, you must report it on Schedule E. If you sell the property, the capital gain is calculated using the inherited basis under section 1014, subject to exceptions, minus selling expenses.

Inherited Foreign Stock

Foreign stock inherited from a nonresident alien is generally not taxable on receipt. The basis is determined under section 1014 using the date-of-death or another applicable statutory value, subject to exceptions. Future dividends are taxable. Future capital gains on sale are taxable.

If the stock is held in a foreign brokerage account, you may also have FBAR and Form 8938 reporting requirements.

Inherited Foreign Retirement Accounts

If you inherit a foreign pension or retirement account, the US tax treatment depends on the account type, governing arrangement, current Form 3520 exceptions, and any applicable tax treaty. Some foreign pensions are treated as foreign trusts; others may qualify for treaty treatment or current Form 3520 exceptions. The analysis is fact-specific and requires professional review.

Inheritance from a Foreign Trust

If the decedent's assets were held in a foreign trust at death, the distribution to you may be treated as a foreign-trust distribution rather than an estate bequest. Foreign-trust distributions have their own reporting rules under Form 3520 Part III. Use the foreign trust consultation when the trust is the transferor; use the foreign inheritance consultation for a direct foreign-estate bequest.

The Estate Tax Angle (For the Estate, Not You)

As the recipient, you generally do not pay US estate tax. But the estate itself may have tax obligations:

• If the decedent was a U.S. citizen or domiciliary, the estate files Form 706 and estate tax applies to worldwide assets above the applicable exemption. The current statutory figure is not frozen in this article; verify the filing-year exemption with the IRS or estate counsel.
• If the decedent was a nonresident alien, U.S. estate tax applies only to U.S.-situated assets (real estate, tangible personal property, stock of U.S. corporations) above the applicable Form 706-NA threshold; treaties and other rules can change the result.
• Most foreign countries have their own estate or inheritance taxes. You should coordinate with the foreign executor to understand what was paid abroad.

How FileAbroad Helps

FileAbroad handles foreign inheritance work within a separately accepted written scope:

• Threshold analysis: We determine whether your bequests trigger Part IV reporting under the current instructions and filing-year donor-category rules.
• Form preparation: We prepare Form 3520 when the engagement is accepted. Form 3520 is filed separately from Form 1040.
• Documentation review: We advise on what records to keep and how to support the inherited-basis analysis.
• Penalty review: If you missed prior filings, we review whether reasonable cause or a separate procedure is appropriate.

For an inheritance-specific review, start with the foreign inheritance consultation and describe the decedent's country of residence, the assets involved, and the approximate value. FileAbroad does not promise that the consultation will result in accepted preparation or a particular filing outcome.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or investment advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.

Official IRS sources

• About Form 3520
• Instructions for Form 3520