How are foreign inheritances taxed?

Receiving an inheritance from a foreign person generally has favorable US tax treatment — foreign inheritances are not subject to US income tax. However, there are important reporting requirements and potential tax traps to be aware of.

The core rule is that inheritances (both domestic and foreign) are generally not taxable income to the recipient under US law. This means if you inherit cash, property, or investments from a foreign relative, you do not include the value of the inheritance in your gross income on your tax return.

However, you must report the receipt of large foreign gifts and inheritances on Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). For 2024, you must file Form 3520 if you receive more than $100,000 from a foreign person (individual or estate). The penalty for failing to file Form 3520 is 5% per month of the unreported amount, up to 25%. This is purely an information return — it does not create a tax liability, but the penalties for non-compliance are severe.

While the inheritance itself is not taxable, the income generated by inherited assets becomes taxable once you own them. Interest, dividends, rental income, and capital gains from inherited foreign assets are all reportable on your US tax return. Inherited foreign financial accounts must be included in FBAR and FATCA calculations.

If the inheritance comes through a foreign trust, the rules become significantly more complex. Distributions from foreign trusts may be taxable, and additional reporting on Forms 3520 and 3520-A is required. The interest charge regime for accumulation distributions can result in punitive taxation.

Foreign estate or inheritance taxes paid in the other country may be creditable against US estate tax (if applicable) but generally not against income tax. If the decedent's estate was large enough to trigger US estate tax (above $13.61 million in 2024 for US persons), additional considerations apply.

The cost basis of inherited foreign property is generally stepped up to fair market value at the date of death, which can reduce future capital gains tax when the property is sold.