The direct answer
From a U.S. recipient's point of view, a gift from a nonresident alien and an inheritance (bequest) from a nonresident alien or foreign estate are handled the same way at the moment you receive them:
- Generally not taxable income to you.
- Reported together on Form 3520 Part IV when your total from related foreign persons is more than $100,000 for the year.
The differences show up later: in your basis when you sell, in what the inheritance actually contains, and in who else (the estate) may have filing obligations.
| Lifetime gift from a nonresident alien | Inheritance from a nonresident alien or foreign estate | |
|---|---|---|
| Income to you when received? | Generally no | Generally no — but some inherited items can include taxable amounts |
| Form 3520 Part IV? | If related total for the year > $100,000 | Same test, counted together with gifts |
| Year it counts | The year you receive it | The year you receive it (estates can take time) |
| Basis for a later sale | Generally the giver's adjusted basis | Generally fair market value at date of death |
| Income the asset earns afterward | Taxable to you | Taxable to you |
Reporting: one Part IV, one threshold
Line 54 of Form 3520 asks whether you received more than $100,000 that you treated as gifts or bequests from a nonresident alien or a foreign estate. Gifts from your father during his lifetime and the bequest from his estate after he dies are counted together if received in the same year, along with gifts from other related foreign persons. Each item over $5,000 is listed with its date, a description, and its fair market value.
A gift or inheritance from a U.S. citizen or resident is not a foreign gift or foreign bequest, even if that person lived abroad.
"Not income" has limits
IRS Publication 525 says that in most cases, property you receive as a gift, bequest, or inheritance isn't included in your income. It also gives the limits:
- If the property later produces income — interest, dividends, rent — that income is taxable to you.
- If the gift or inheritance is itself income from property (for example, income the property earned), that income is taxable to you.
- If you inherited a pension or an IRA, you may have to include part of it in your income.
So "inheritances are tax-free" is too simple. Look at what you actually received — cash, real estate, shares, an account, a retirement plan — and how it will produce income.
Basis: the big later difference
IRS Publication 551 sets out the general basis rules:
- Inherited property: generally the fair market value at the date of death (or on the alternate valuation date, if chosen for the estate).
- Gifted property: generally the giver's adjusted basis. If the value at the time of the gift was below the giver's basis, a different basis is used for figuring a loss.
Example
Lily's mother bought an apartment in Kaohsiung for the equivalent of US$100,000. It is worth US$400,000 today.
- If her mother gives Lily the apartment now, Lily's basis is generally her mother's adjusted basis — about US$100,000. A later sale at US$400,000 means a large U.S. gain.
- If Lily inherits it when it is worth US$400,000, her basis is generally US$400,000. A sale soon after at that price means little or no U.S. gain.
Either way, if her mother is a nonresident alien and the value plus other related gifts that year is over $100,000, Lily reports the apartment on Form 3520 Part IV for the year she receives it, at fair market value. (Simplified, in U.S. dollars; exchange rates and foreign taxes add detail.)
Whether family assets should be given now or left as an inheritance depends on far more than U.S. basis — including the other country's gift, estate, and transfer taxes and the family's circumstances. Get cross-border advice before restructuring anything.
Other differences worth knowing
- Timing. A gift is received when it is transferred. An inheritance may be received a year or more after the death, when the estate is settled. Report it for the year you receive it.
- Documentation. For a gift, keep evidence it was a gift. For an inheritance, keep the death certificate, estate or probate documents, and a date-of-death valuation.
- Trusts. If the inheritance passes through a foreign trust, it is a trust distribution, not a Part IV bequest. See Foreign gift vs. foreign trust distribution.
- Covered expatriates. If the giver or decedent was a former U.S. citizen or long-term green card holder treated as a covered expatriate, a special tax can apply to the U.S. recipient.
When professional review makes sense
For most inheritances from abroad. Especially if it includes real estate, shares, retirement or pension accounts, or a business; if it came through a trust; if the estate took years to settle; or if you are deciding what to keep, sell, or move. Selling inherited property? See I sold property overseas and moved the money to the U.S.