What Is the Tax for Selling Inherited Property Overseas? + FAQs

According to a 2022 Taxpayer Advocate Service report, the IRS abated over $179 million in foreign inheritance reporting penalties from 2018–2021, highlighting how complex U.S. tax rules are for Americans selling inherited property overseas. The short answer is that a U.S. citizen selling inherited property abroad typically owes U.S. capital gains tax on any profit from the sale. This capital gains tax applies because the United States taxes its citizens on worldwide income, including gains from foreign real estate sales. Fortunately, inherited property generally receives a stepped-up basis (its fair market value at the time of the decedent’s death), which often greatly reduces any taxable gain.

Beyond capital gains, it’s important to consider other tax aspects: the U.S. doesn’t have a federal inheritance tax on what you inherit, but the estate of the person who left you the property might have owed estate tax if they were a U.S. resident with a very large estate. Some states also impose inheritance or estate taxes that could come into play. Additionally, if the country where the property is located taxes the sale, you may be able to use a foreign tax credit to avoid double taxation. Finally, selling foreign property can trigger IRS reporting requirements under FATCA and FBAR rules if you hold the sale proceeds overseas or if the inheritance meets certain thresholds.

What you’ll learn in this comprehensive guide:

💰 How U.S. capital gains tax applies when you sell an inherited home, land, or commercial property overseas (and how the stepped-up basis saves you money).
🌎 Ways to avoid double taxation through foreign tax credits and tax treaties when another country taxes your property sale.
⚠️ Common mistakes and tax traps to avoid, from misreporting foreign currency gains to missing IRS forms that carry heavy penalties.
🏠 Differences for various property types – residential vs. rental vs. land – and special breaks like the primary home sale exclusion.
📋 Key terms and entities (IRS, FATCA, FBAR, etc.) you need to know, plus real examples, court cases, and FAQs to help you navigate selling inherited property overseas.

Quick Answer: Taxes on Selling Inherited Overseas Property

When you sell an inherited property outside the U.S., the main tax obligation is the U.S. federal capital gains tax on any increase in the property’s value since you inherited it. If the property’s value didn’t rise (or even fell) since the time of inheritance, you might have little or no capital gains tax due thanks to the stepped-up basis rule. Aside from capital gains tax, you generally do not owe U.S. tax just for inheriting the property. The inheritance itself is not treated as income, and the U.S. has no federal inheritance tax on beneficiaries. However, if the person who left you the property was a U.S. person with a large estate, their estate might have owed federal estate tax (which could indirectly affect the net value you inherit). Some states also have their own estate or inheritance taxes that could apply depending on where the decedent lived or where you (the beneficiary) live.

If the country where the property is located charges tax on the sale or on inheritances, you’ll have to deal with those foreign taxes too. To prevent double taxation, U.S. tax law allows a foreign tax credit for taxes paid to a foreign government on the sale. This means any foreign capital gains tax you pay can typically offset your U.S. capital gains tax due on the same sale. If foreign tax rates are higher than U.S. rates, you might not owe the IRS anything beyond reporting the sale (you won’t get a refund for the difference, but you can often carry over unused foreign tax credits). Conversely, if the foreign country doesn’t tax the sale or taxes it at a lower rate, you’ll be responsible for paying U.S. taxes on most or all of the gain.

Additionally, selling inherited property overseas can trigger some paperwork. U.S. citizens are required to report large foreign inheritances (over $100,000) on IRS Form 3520. You’ll also need to report the sale itself on your income tax return (Schedule D and Form 8949 for capital gains). If you hold the sale proceeds in a foreign bank account and the total of your foreign accounts exceeds $10,000 at any point, you must file an FBAR report. And if your foreign financial assets (including accounts and investments) are above certain thresholds (e.g. $50,000 for a U.S. resident taxpayer), you must file FATCA Form 8938 with your tax return.

In short: you pay U.S. capital gains tax on the sale’s profit, possibly state taxes on that profit, and you must handle any foreign taxes (using credits to avoid double taxation). You also need to comply with IRS reporting rules (like FBAR, FATCA, Form 3520) when selling inherited property overseas.

Capital Gains Tax – The Primary Tax You’ll Pay

Stepped-Up Basis: Your Tax-Saving Inheritance Advantage

Barring a few exceptions, inherited assets receive a stepped-up basis for U.S. tax purposes. This means your cost basis in the property is reset to its fair market value at the date of the decedent’s death (or an alternate valuation date if the estate elected one). For you, the benefit is that any appreciation that occurred during the original owner’s lifetime is not taxed. You only pay tax on the growth in value after you inherited. For example, if your father bought a foreign property for $100,000 and it was worth $300,000 when you inherited it, your basis becomes $300,000. If you sell it for $320,000 a year later, your taxable gain is only $20,000, not $220,000. This step-up in basis often significantly reduces or even eliminates capital gains when the inherited property is sold, especially if sold soon after inheritance.

Inherited Property Sales Are Long-Term Gains

For U.S. taxes, inherited property is automatically considered a long-term asset, regardless of how long you actually held it. This special rule grants long-term capital gains treatment (which has lower tax rates) even if you sell the inherited property within a few months. Long-term capital gains tax rates are much lower than ordinary income tax rates (which would apply to short-term gains). So even a quick sale of inherited real estate benefits from the more favorable long-term rates.

Federal Capital Gains Tax Rates (and the 3.8% NIIT)

Federal capital gains tax rates depend on your overall taxable income. For long-term gains, the rate is 0%, 15%, or 20%. Most taxpayers fall into the 15% bracket for long-term gains. For example, in 2025 joint filers with taxable income up to around $96,000 pay 0% on long-term gains; up to about $600,000 pay 15%; above that pay 20%. High-income taxpayers should also remember the Net Investment Income Tax (NIIT) of 3.8% that can apply on top of these rates if your modified AGI is above $250,000 (married) or $200,000 (single). The NIIT can effectively raise the top capital gains rate to 23.8%. If you sell an inherited property for a substantial gain, it could push your income into a higher bracket for that year – so planning the timing or considering installment sales might be wise to manage the tax hit.

State Taxes on Capital Gains

State taxes: If you live in a state with income tax, that state will typically tax your capital gain from the sale of foreign property as part of your income. Unlike federal tax, states generally do not give special low rates for capital gains – the gain is usually taxed at your regular state income tax rate. A few states (like California or New York) could take a noticeable bite, often 5–13% depending on the state and your income level. On the other hand, if you are in a state with no income tax (e.g., Florida, Texas, Nevada), you won’t owe state tax on the gain at all. Keep in mind state residency rules: you’ll owe tax to your state of residence (and possibly a credit if another state somehow taxed the sale, though with foreign property, no U.S. state directly taxes it). The key point is not to forget state taxes in your calculations – they can add to your total liability.

Primary Residence Exclusion (Section 121) – Rare but Possible

One potential tax benefit to be aware of is the primary residence exclusion under IRC Section 121. If you move into the inherited home and use it as your principal residence for at least two out of five years before selling, you could exclude up to $250,000 of gain from U.S. tax ($500,000 if married filing jointly). This exclusion applies even if the home is overseas – the tax law doesn’t require the home to be in the United States, only that it’s your main home for the required period. In practice, few heirs make an inherited foreign property their own home long enough to qualify, but it’s worth noting if circumstances allow. This exclusion won’t apply to commercial property or land – only to a home you actually live in. Also note, if you do qualify, you cannot exclude gain attributable to any depreciation you took (if it was rented out). But if you meet the criteria, the Section 121 exclusion can significantly reduce or eliminate your U.S. capital gains tax on the sale.

Foreign Taxes and Credits: Avoiding Double Taxation

Foreign Capital Gains or Transfer Taxes

When selling property in a foreign country, consider that country’s tax laws. Most countries tax the sale of real estate located in their jurisdiction, even if the seller (you) is not a resident. This could be a capital gains tax on the profit or a transfer tax on the sale price. The exact tax rate and rules vary widely: some countries have a flat withholding tax for foreign sellers, others tax the gain at normal rates, and a few provide exemptions (for example, some may exempt a primary residence or have no capital gains tax at all). As a U.S. citizen, you must comply with the foreign country’s tax requirements as well as U.S. tax. Check if there are any withholding requirements – some countries mandate that the buyer or notary withhold a percentage of the sale proceeds until your foreign tax is paid. Be prepared to obtain local tax ID numbers or file foreign tax returns to report the sale. The bottom line: expect to pay any required foreign tax on the sale before you can freely transfer the sale proceeds out of that country.

Foreign Tax Credit: Claiming Credit for Foreign Taxes Paid

To avoid being taxed twice on the same income, U.S. tax law provides the Foreign Tax Credit (FTC). If you paid a capital gains tax (or similar tax) to a foreign government on the sale of your inherited property, you can usually claim a dollar-for-dollar credit against your U.S. income tax for that foreign tax. Practically, this means if the foreign country taxed your gain at, say, 20% and the U.S. would tax it at 15%, you could use the foreign tax credit to wipe out your entire U.S. tax on that gain (you’d end up paying the higher 20% to the foreign country, but not an additional 15% to the U.S.). To claim the credit, you’ll file IRS Form 1116 with your tax return, detailing the foreign tax paid (converted to USD). If the foreign tax is higher than the U.S. tax, you won’t get a refund for the difference, but you might carry forward the excess credit to future years. If the foreign tax is lower, you’ll use the credit for what you paid and still owe the U.S. the difference up to the U.S. tax amount. (Alternatively, you can deduct foreign taxes on Schedule A, but the credit is usually more beneficial since it directly reduces tax.)

Tax Treaties and Special Rules

The United States has tax treaties with many countries, but these treaties often do not eliminate U.S. tax on U.S. citizens’ foreign income – they typically preserve the U.S. right to tax its citizens. However, treaties have provisions to prevent double taxation. For real estate sales, a treaty usually confirms that the country where the property is located can tax the gain. The U.S. then allows a foreign tax credit. Some treaties might provide specific mechanisms (for example, how to treat a gain if the property was a personal residence, or limits on foreign withholding). There are also estate tax treaties with a few countries that coordinate estate/inheritance taxes. For the sale of property, though, no treaty will exempt a U.S. citizen from U.S. tax; at best it can reduce foreign taxation or provide clarity. Always check if a U.S. tax treaty exists with the country and see a professional if so, to utilize any treaty benefits (like reduced withholding or an agreed method for avoiding double tax).

Currency Exchange and Gain Calculation

One often overlooked factor is currency exchange rates. The IRS requires you to calculate your capital gain and any foreign tax credit in U.S. dollars. This means you must convert the property’s value at inheritance and the sale price from the foreign currency to USD, using exchange rates applicable on those dates (often the date of sale for proceeds, and date of death for basis). Currency fluctuations can create a taxable gain or loss for U.S. purposes even if none existed in the foreign currency. For instance, if the property’s value in the local currency remained the same, but the U.S. dollar weakened relative to that currency, you could face a U.S. taxable gain purely from exchange rate movement. Conversely, a stronger dollar could reduce or eliminate a gain in USD terms. The same currency issue affects foreign taxes paid: when you claim a foreign tax credit, you convert the tax paid (say, €50,000) into USD at the exchange rate on the payment date. Keep records of exchange rates on the date of death, date of sale, and date of any foreign tax payments. A seemingly straightforward sale can have unexpected results on your U.S. tax return due to currency swings, so pay attention to the FX math.

Estate and Inheritance Tax Implications

U.S. Federal Estate Tax (When Does It Apply?)

The federal estate tax is a tax on the transfer of a deceased person’s assets at death. It’s not a tax on the heir, but on the estate of the decedent. As of 2025, the federal estate tax exemption is about $12.92 million. If the combined value of the decedent’s worldwide assets (including any foreign real estate) was below that amount, no federal estate tax is due. If it exceeded that, the estate (through the executor) must file an estate tax return and pay any tax (at rates up to 40%) out of the estate’s assets. When you inherit property, any estate tax would have been handled by the executor before you got the property (or cash from its sale). You, as the beneficiary, typically don’t have to pay the estate tax yourself. Note that U.S. citizens and domiciled residents are subject to estate tax on their worldwide assets, so a U.S. person owning foreign real estate can trigger U.S. estate tax if very wealthy. By contrast, if you inherited from a non-U.S. person (nonresident alien) who owned property outside the U.S., there’s no U.S. estate tax on that property – the U.S. doesn’t tax foreign assets of nonresidents.

State Estate and Inheritance Taxes

Several U.S. states impose their own estate or inheritance taxes, which can affect an inheritance. Estate taxes in states (like Illinois, New York, Massachusetts, Washington, etc.) work similarly to the federal estate tax – they tax the overall estate above a certain exemption (often much lower than the federal exemption, e.g. $1 million in Massachusetts). Inheritance taxes, on the other hand, are levied on the recipient of an inheritance in a few states (currently Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania – with Iowa phasing out its inheritance tax by 2025). Inheritance tax rates depend on your relationship to the decedent (spouses and close relatives often pay little to nothing, distant relatives or unrelated inheritors pay more).

If the decedent was a resident of one of those states or owned property there, the inheritance might be subject to state tax. However, states generally can’t tax real estate located outside their borders, so an overseas property itself likely wouldn’t be directly taxed by a state. But if the decedent was a resident of, say, Pennsylvania, that state might still impose inheritance tax on their intangible assets or out-of-state property value passing to you (state laws vary on this point). In any case, if a state inheritance tax applied, the responsibility to pay it falls on the beneficiary (you), whereas a state estate tax would be paid out of the estate by the executor. It’s important to check state laws if either the decedent or the heir is in a state with these taxes. Many states, of course, have no death taxes at all.

Foreign Estate or Inheritance Taxes

When inheriting property from someone overseas, you may encounter foreign inheritance or estate taxes. Many countries impose a tax when property passes upon death (for example, the UK has an inheritance tax on the estate, and countries like France, Japan, etc., have inheritance taxes on beneficiaries). If you, as a U.S. heir, paid any foreign inheritance tax, note that the U.S. does not give you an income tax credit or deduction for that, since an inheritance is not income.

However, if the decedent was a U.S. citizen or resident and the foreign country’s death tax and the U.S. estate tax both applied, the U.S. estate tax provides a mechanism for a foreign tax credit on the estate tax return (to prevent double estate taxation on the same asset). That’s handled by the estate’s executor via Form 706. For the sale of the property, foreign inheritance tax is largely irrelevant – it’s a separate event. The key point is, foreign death taxes might reduce the value of what you inherited (or require you to pay something upon inheriting), but they do not reduce the U.S. capital gains or income tax on a later sale.

Gifts vs. Inheritance (Carryover vs. Step-Up Basis)

It’s worth noting the big advantage inheritance has over gifts for tax purposes: the step-up in basis. If instead of inheriting, you had been gifted the property by the person during their lifetime, you would receive a carryover basis (the giver’s original basis becomes your basis). In that case, if the property had appreciated significantly, you would be facing a much larger capital gain upon sale because you’d essentially step into the original purchase price. By inheriting at death, tax law wipes out that unrealized gain through the step-up.

This is why, generally, from a tax perspective, inheriting property is better than being gifted it, if the goal is to minimize capital gains. (Of course, from an estate planning perspective, gifts may serve other purposes.) Also, large gifts by a U.S. person can trigger gift tax or use up part of their lifetime estate/gift exemption, whereas inheritances to you don’t use up your exemption — it was the decedent’s estate that might have faced tax. The bottom line: inherited property gets preferential tax treatment on sale, compared to property that was received as a gift.

IRS Reporting and Compliance (FATCA, FBAR & More)

Form 3520 – Reporting Foreign Inheritances

If you received an inheritance from a foreign person (for example, a relative who was not a U.S. citizen or resident), you may need to file IRS Form 3520 to report that inheritance. Specifically, if you received money or property valued over $100,000 from a non-U.S. person (including from their foreign estate), you must report it as a large foreign gift/inheritance on Form 3520 (Part IV). This is an informational form (not a tax form) but it’s mandatory to disclose such large foreign inheritances. The form asks for the source, date, and amount of the inheritance. Even though there’s no tax on receiving the inheritance, failure to report it can trigger extremely steep penalties – starting at $10,000, and up to 25% of the amount received in some cases.

(The IRS had been automatically assessing these penalties, though they recently scaled back automatic enforcement after many unwitting taxpayers were caught by surprise.) Still, it’s crucial to file Form 3520 by the tax deadline (including any extensions) for the year you received the inheritance. If your inheritance came from a U.S. person or estate, you generally do not file Form 3520 – that form is just for foreign gifts/inheritances.

FATCA Form 8938 – Declaring Foreign Financial Assets

The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers to report specified foreign financial assets if the total value exceeds certain thresholds. This is done on Form 8938, filed with your tax return. Real estate itself is not considered a specified foreign financial asset if you own it directly. So you do not report the property itself on Form 8938. However, the money you get from selling that property could end up in a foreign bank account, or perhaps you hold the property through a foreign corporation or trust – those situations do trigger FATCA reporting. The thresholds for filing Form 8938 are $50,000 in foreign financial assets on the last day of the year (or $75,000 at any time during the year) for single taxpayers living in the U.S. (higher thresholds for joint filers or those living abroad, e.g., $200k/$300k if you reside abroad). If, after the sale, you have say $200,000 sitting in a foreign bank, you’ll definitely need to file Form 8938. The form requires details of each foreign asset (bank accounts, foreign investment accounts, foreign securities, or ownership interests in foreign entities). Penalties for failing to file 8938 start at $10,000, with additional fines if you continue to not file after IRS notification, plus potential 40% penalties on underreported income related to unreported foreign assets. In short: while the property itself isn’t reported, the proceeds or the ownership via entities must be considered under FATCA rules.

FBAR – Reporting Foreign Bank Accounts

The FBAR (Foreign Bank Account Report) is a separate requirement (not an IRS form, but a FinCEN form – FinCEN Form 114) that U.S. persons must file if they have over $10,000 in aggregate across foreign financial accounts at any point during the year. If you sold a property overseas, it’s likely that the proceeds went into a foreign bank or escrow account, even if temporarily. The moment your foreign accounts (combined) exceed $10,000, you must file an FBAR by April 15 of the next year (with an automatic extension to Oct 15). On the FBAR, you list each foreign account (account number, institution, country, max value during the year). Even if after the sale you quickly transferred the money to the U.S., as long as the foreign account held over $10k, it triggers the requirement. The penalties for not filing FBAR are extremely high – non-willful failures can incur a $10,000 penalty per violation, and willful failures can result in penalties up to 50% of the account balance per year (and potential criminal charges). So do not overlook the FBAR if your property sale involved foreign accounts. Note that FBAR reporting is separate from Form 8938; even if you file one, you might need to file the other – they cover similar info but one goes to FinCEN and one to IRS, and thresholds differ.

Reporting the Sale on Your Tax Return (Schedule D & Form 8949)

Aside from informational forms, the sale itself must be reported on your U.S. income tax return. You’ll use Schedule D (Capital Gains and Losses) and the associated Form 8949 to report the sale of the property. On Form 8949, list the details of the transaction: a description of the asset (“Inherited villa in Italy,” for example), the date you acquired it (use the date of death of the decedent), the date you sold it, the sales price (in USD), the basis (stepped-up value in USD), and your gain or loss. If you qualify for any exclusion (like the home sale exclusion), you would mark an adjustment code and exclude that portion on the form. After completing Form 8949, the totals flow to Schedule D, which calculates your net capital gain or loss for the year and the tax on it. If you paid foreign tax on the sale, you will also complete Form 1116 to claim the foreign tax credit. Keep documentation for everything: how you determined the inherited value (e.g., an appraisal or the estate’s valuation), records of improvements you made (which add to basis), records of the sale (settlement statements), and proof of any foreign taxes paid (receipts from the foreign tax authority). Proper reporting ensures you get all eligible tax benefits and shields you in case of an IRS audit.

Other Reporting Considerations

If your situation involves additional complexities, be aware of other forms. For instance, if you inherited the property via a foreign trust or estate, or the property was held in a foreign business entity and you now own shares of that entity, there may be other filings like Form 3520-A (annual report of foreign trust), Form 5471 (if you now own a significant stake in a foreign corporation), or Form 8621 (for certain foreign investment companies). These scenarios go beyond a simple sale, but they illustrate the breadth of U.S. reporting. Also, if you received rental income from the property before selling, remember that you should have been reporting that on Schedule E each year, and any depreciation claimed will adjust your basis for the sale. One more note: if you physically transport or send the sale proceeds to the U.S. and it’s over $10,000 in cash, you must declare it (FinCEN Form 105 at customs). That’s not a tax, but a reporting rule for moving money. Overall, dealing with foreign assets means juggling multiple reporting requirements – it’s better to over-report (with guidance) than to miss something and face a penalty later.

Does Property Type Matter? (Homes vs. Land vs. Rentals)

Residential Homes

Inherited houses or condos overseas are typically treated as capital assets, just like any other real estate. If the home was the decedent’s primary residence, that doesn’t give you any special break on the U.S. side (the home sale exclusion is only if you meet the ownership and use test). If you don’t occupy it and simply sell it, it’s a straightforward capital gain or loss calculation using the stepped-up basis. One thing to consider: if you decide to use the home yourself for a while and later sell, you might then qualify for the principal residence exclusion as discussed. But in many cases, heirs sell relatively quickly. So for a typical inherited home sale, you report the sale, pay capital gains tax on any appreciation after the date of death, and that’s it. If the home was sold by the estate before it was transferred to you, the estate would handle the tax (and you’d receive cash, which itself isn’t taxable). Sometimes an inherited home might be in a foreign country that imposes no tax on personal homes – that can be a nice break abroad, but you still deal with U.S. tax on any gain. In summary, an inherited personal-use home is taxed on sale like any other investment property (unless you take the step to make it your personal residence for a time).

Rental or Commercial Property

If the inherited property was a rental or commercial property, whether you continue to rent it out or not affects the tax picture. At the moment of inheritance, you get a stepped-up basis, wiping out any depreciation the decedent took. If you keep the property and rent it, you’ll start depreciating it anew from the stepped-up value (for foreign residential rental property, the depreciation period is 30 years; for nonresidential, 40 years, unless new rules changed it to 30 as well). When you eventually sell, any depreciation you took after inheriting must be recaptured, meaning it’s taxed up to 25% (the special rate for unrecaptured Section 1250 gain). If you sell without ever renting it out (no depreciation taken by you), then you don’t have to worry about recapture at all. In essence, selling an inherited rental or business property is the same capital gains process, but you have an extra step to account for depreciation if it was in service during your ownership. Also, if the property had tenants, sometimes local laws might require certain notices or even give tenants some rights in a sale – tangential to tax, but something to be mindful of when selling a foreign rental property. From a pure tax view, property type doesn’t change the capital gains tax rate; it mostly affects what expenses or prior depreciation you need to consider in the gain calculation.

Land and Unique Property Types

Inherited raw land is one of the simpler scenarios. Land is not depreciable, so there’s no depreciation to recapture. You get a basis step-up in the land value at the date of death, and when you sell, you compare the sale price to that basis (after deducting any selling costs). Any difference is a capital gain or loss. If the land value hasn’t changed much, you might have little to no tax. Some countries might impose transfer taxes or stamp duties on land sales; those would be part of your selling expenses or reduce your proceeds, and they might be creditable if considered a tax on income (often they’re not, they’re transaction taxes). Another angle: if the land was used for farming or another business by the decedent, the estate might have taken advantage of special U.S. estate tax valuations (for example, valuing a farm at its farm use value, which is lower). If so, and if you sell the farm land within 10 years or change its use, the IRS can recapture the estate tax savings – essentially you’d have to pay additional estate tax. This is a niche farm provision (Section 2032A), but it’s a trap if applicable. Other property types like inherited interests in a partnership or trust that holds property might introduce complexity, but the tax outcome when that underlying property is sold is passed through to you similarly. In broad strokes: whether it’s a house, an office, or a plot of land, selling inherited real estate abroad triggers the same type of U.S. tax (capital gains) – just be mindful of specific wrinkles like depreciation for rentals or special estate tax provisions for farms.

Common Mistakes to Avoid

Assuming the inheritance is taxable income: Many people mistakenly think inheriting a foreign property means immediate U.S. tax. In reality, the act of inheriting isn’t taxed as income in the U.S. – tax only arises when you sell or if the estate itself was taxable.
Using the wrong cost basis: A big error is forgetting the step-up in basis. Some heirs mistakenly use the decedent’s original purchase price as their basis, which grossly overstates the gain and leads to overpaying tax. Always use the fair market value at the date of death as your basis for an inherited asset.
Failing to report the inheritance or sale: This includes forgetting Form 3520 for a large foreign inheritance, not filing an FBAR or Form 8938 for foreign accounts, or not reporting the sale on your 1040. Such omissions can trigger hefty IRS penalties even if the underlying transaction owed no tax. Always double-check what filings are required when dealing with foreign assets.
Ignoring foreign tax obligations: Another mistake is not accounting for foreign taxes – either neglecting to pay the required tax in the property’s country or not claiming the foreign tax credit on your U.S. return. This can result in paying tax twice or running afoul of foreign law. Understand the foreign tax situation and utilize credits or deductions on your U.S. return accordingly.
Mishandling currency conversion: Using rough guesses or outdated exchange rates when converting the inherited value and sale price to U.S. dollars can lead to incorrect gain calculations. You need to use official exchange rates (e.g., yearly average or date-of-sale rate as appropriate). Misreporting due to currency errors could draw IRS attention or penalties.
Overlooking state tax responsibilities: If you live in a state with income tax, remember that state will tax your worldwide income, including gains from selling foreign property. Also, if the decedent or you are in a state with inheritance or estate taxes, ensure those were addressed. It’s easy to focus on federal and foreign taxes and forget the state level.
Procrastinating on seeking advice: Cross-border tax rules are complex. Waiting until after the sale (or until a problem arises) to get professional advice is a mistake. By planning ahead – for instance, understanding potential treaty benefits, timing of sale, or gathering needed documents – you can often save money and avoid compliance headaches. Don’t be afraid to consult a tax advisor experienced in international issues early in the process.

Tax Traps and Pitfalls

Basis mismatches leading to double tax: If the foreign country calculates your gain using the original purchase price (no step-up), but the U.S. uses a stepped-up basis, you might pay a large foreign tax on a gain that the U.S. doesn’t see. You won’t get a U.S. credit for foreign tax that corresponds to “pre-inheritance” appreciation. This trap can leave you effectively paying tax on the decedent’s gain overseas, while the U.S. step-up saves you only on the U.S. side.
Depreciation recapture surprises: If you or the decedent used the property as a rental or business and claimed depreciation, that affects your taxes. The decedent’s past depreciation is wiped out at inheritance, but any depreciation you claim after inheriting will be recaptured and taxed (at up to 25%) when you sell. Many sellers are caught off guard by how much this lowers their expected tax-free gain.
Not adjusting for improvements or selling costs: It’s a trap to forget that your basis can be increased by capital improvements you made, and your taxable gain can be reduced by subtracting selling expenses. If you put money into renovating the inherited property before sale, add those costs to your basis. If you paid realtor commissions, legal fees, or transfer taxes to sell, deduct them from the sale price when computing gain. Neglecting these adjustments means paying more tax than required.
Non-resident seller rules abroad: Some countries require foreign sellers to jump through extra hoops – like obtaining a tax clearance certificate or having the buyer withhold part of the price until taxes are settled. If you’re unaware, you might face delayed or reduced proceeds. This isn’t a U.S. tax issue per se, but it can indirectly affect you (e.g., you might not get the full sale money until you prove to the foreign tax authority that you paid their tax).
Expatriation and exit tax: A niche but noteworthy trap – if you’re a U.S. citizen who inherited significant foreign assets and you later renounce citizenship (or a long-term green card holder who gives up residency), the U.S. may impose an exit tax as if you sold all your assets at that time. The inherited property’s appreciation could be counted in that hypothetical sale. There are exclusions (a certain amount of gain is exempt), but high-net-worth individuals considering expatriation should be mindful of this.
Underestimating enforcement: Don’t assume that because the property and proceeds are overseas, the IRS won’t find out. Between FATCA reporting, information exchange treaties, and data analytics, the IRS has many ways to detect unreported foreign transactions. Many taxpayers have learned the hard way that penalties for offshore noncompliance can far exceed the would-be tax. It’s a trap to think you can keep the sale “off the books.” Compliance is always the safer path.

Real-Life Examples

Let’s illustrate how these rules play out with a few hypothetical examples.

Example 1: Quick Sale with Minimal Gain – Jane, a U.S. taxpayer, inherits a condominium in Canada from her aunt in 2024. At the time of her aunt’s death, the condo was appraised at $400,000 USD (equivalent). Jane sells it six months later for $405,000. Because of the stepped-up basis, her taxable gain is only $5,000. She reports this on her U.S. taxes as a long-term capital gain (inherited property is automatically long-term). Canada did not tax the sale (assume it qualified as her aunt’s principal residence, so no Canadian tax). Jane owes U.S. capital gains tax on the $5,000 – at a 15% rate that’s $750. She also files an FBAR because the proceeds sat in a Canadian bank account for a short time and exceeded $10,000. No Form 3520 was required since her aunt was a U.S. person, not a foreign person. Thanks to the step-up and no foreign tax, Jane’s tax burden is minimal and compliance is straightforward.

Example 2: Foreign Tax Credit in Action – Raj, a U.S. citizen, inherited a rental property in India from his father (who was an Indian citizen) in 2018. The property’s value at inheritance was $100,000. Raj held onto it for a few years while renting it out (reporting the rental income on his U.S. returns and claiming foreign tax credits for Indian taxes on that income). By 2025, the property’s value had risen and he sold it for the equivalent of $150,000. Raj’s U.S. taxable gain, after the stepped-up basis, is $50,000. India imposes a capital gains tax on the sale (assume ~20% for non-resident sellers). He pays about $10,000 to India in tax. On his U.S. return, Raj calculates that at a 15% long-term capital gains rate, the U.S. tax on $50,000 would be $7,500. However, by claiming a foreign tax credit for the $10,000 Indian tax on Form 1116, he reduces his U.S. tax on this gain to $0. (He can’t use the extra $2,500 foreign tax as a refund, but it can carry forward.) He still reports the sale on Form 8949/Schedule D, showing the $50,000 gain. He also files Form 3520 (because the inheritance from his foreign father exceeded $100k) and the required FBAR and Form 8938, since after the sale he briefly had over $150,000 in foreign accounts before bringing the money to the U.S. In the end, Raj paid tax only to India on the sale, and through careful reporting he avoided any double tax.

Example 3: Using the Home Sale Exclusion – Sarah inherits her parents’ vacation cottage in Spain. Instead of selling immediately, she decides to move there and make it her primary residence. She lives in the home for three years, then sells it. At inheritance the cottage was worth $300,000; it sells for $380,000. Spain charges a 3% transfer tax on the sale price (about $11,400), but no capital gains tax because of certain exemptions. For U.S. taxes, Sarah qualifies for the principal residence exclusion (she owned and lived in it for 3 out of the last 5 years). She can exclude up to $250,000 of gain – her $80,000 gain is fully tax-free in the U.S. She still reports the sale on her tax return (with an explanation of the exclusion). She also files an FBAR because her foreign bank account went over $10,000 with the sale proceeds. By turning the property into her home, she eliminated U.S. capital gains tax. She effectively only paid the Spanish transfer tax and some closing costs, keeping the rest of the profit.

The table below summarizes three common scenarios and their tax outcomes:

Scenario	Tax Outcome
Selling immediately after inheritance (minimal change in value)	Little or no U.S. capital gains tax due because the stepped-up basis is nearly equal to the sale price. Possibly no foreign tax if sold at the inherited value. Compliance involves reporting the sale and any foreign accounts (FBAR), but overall tax impact is low.
Large gain and foreign tax paid on sale	U.S. capital gains tax applies on the appreciation, but you can use the foreign tax credit if you paid a foreign capital gains tax. In practice, you end up paying roughly the higher of the two countries’ tax rates, not double. (E.g., if foreign tax > U.S. tax, it wipes out U.S. tax; if foreign tax < U.S. tax, you pay the foreign tax plus the difference to the IRS.) Proper filing of Form 1116 is key.
Inherited home used as your primary residence (then sold)	If you occupy the home for 2+ years and meet the ownership/use tests, you can exclude up to $250k (single) or $500k (married) of gain from U.S. tax. This can potentially eliminate all U.S. capital gains tax on the sale. Foreign taxes may still apply (e.g., local property transfer taxes or capital gains tax), but any foreign income tax can be credited. You still need to report the sale and file FBAR/FATCA for the proceeds, but the U.S. tax liability can be zero under this scenario.

Pros and Cons of Selling an Inherited Overseas Property

Pros	Cons
Stepped-up basis minimizes taxable gain, often meaning little or no U.S. capital gains tax if sold promptly after inheritance.	Capital gains tax will apply on any post-inheritance appreciation (federal and possibly state), which could be significant if the property’s value grew a lot over time.
No U.S. tax on inheriting the property itself, so you only face tax if and when you sell (gives flexibility on timing).	Possible foreign taxes due on the sale (e.g. local capital gains or transfer tax), which reduce your net proceeds and require dealing with another country’s tax system.
Foreign tax credits prevent double taxation, ensuring you don’t pay tax twice on the same gain if a foreign country also taxes the sale.	Complex reporting requirements – selling triggers paperwork like Form 3520, FBAR, FATCA Form 8938, etc. Missing any required form can lead to penalties, adding stress and cost to the process.
Option to use the primary home exclusion if you choose to live in the property and make it your residence for 2+ years, potentially letting you sell tax-free up to $250k/$500k of gain.	Loss of future appreciation – once you sell, you give up any further increase in the property’s value (and you’ve potentially crystallized a tax bill now, rather than deferring gain).
Simplifies your assets – converting a foreign property into cash can streamline your financial situation. You avoid the hassle of managing or maintaining property abroad and ongoing cross-border tax complications (like annual foreign rental income, property taxes, etc.).	Intangible drawbacks – selling means parting with a family asset or a home that might have sentimental value or strategic benefit (like a place to stay overseas). While not a tax cost, it’s a consideration that sometimes leads people to hold onto property despite the taxes.

Comparisons and Special Cases

Keeping the Property vs. Selling It

A key decision is whether to keep the inherited property or sell it. Holding onto the property means you defer any capital gains tax – possibly indefinitely. As long as you don’t sell, any appreciation isn’t taxed (and if you never sell in your lifetime, no capital gains tax is realized at all – plus your heirs would then get a new step-up at your death, potentially avoiding tax on that appreciation entirely). While you own it, you will have to handle any foreign obligations, like property taxes or upkeep, and report any income it generates (for example, rent) on your U.S. tax returns. You’ll also likely have ongoing FBAR/FATCA filings if you maintain foreign accounts for the property’s expenses or income. Some people keep inherited property as an investment or vacation home, or because selling at the moment isn’t favorable.

Selling the property converts it into liquid assets that you can use or invest elsewhere (perhaps in assets closer to home). It also largely “closes the chapter” on the cross-border complexity after you handle the sale’s tax and reporting. There’s no one right answer – it depends on whether you want to be a foreign property owner or would rather have the cash. From a pure tax perspective, keeping the property defers the U.S. capital gain tax, whereas selling realizes it now (but might let you diversify or use the funds). Just remember, keeping it doesn’t eliminate tax; it just postpones it (except for the scenario of passing it to your heirs, who then get another step-up).

Selling Foreign vs. Domestic Inherited Property

Selling an inherited property overseas vs. selling one located in the U.S. are more alike than they are different, with a few key differences in compliance. In both cases, you’d benefit from a stepped-up basis, you’d owe capital gains tax on any appreciation post-inheritance, and you could potentially use the primary residence exclusion if applicable. The sale would be reported on Schedule D for either scenario. The differences come from the “foreign” aspect: with a foreign property, you may owe tax to the foreign country and then use a foreign tax credit; with a U.S. property, you only deal with U.S. tax. Selling a foreign property also introduces currency exchange considerations and triggers the need to possibly file forms like FBAR and FATCA if you handle proceeds in foreign accounts.

By contrast, selling a U.S. property might involve state income tax on the gain (depending on where you live and where the property is), but no second country’s tax. Another difference: if something goes wrong legally or you have a dispute (say, about the property’s title or inheritance), dealing with a foreign legal system can be trickier. Purely on taxes, though, the U.S. treats a gain from foreign real estate the same as from U.S. real estate – there’s no extra U.S. tax surcharge or anything for it being foreign. It’s all the additional foreign side obligations that differentiate the experiences.

Selling vs. Gifting the Property

What if instead of selling the inherited property, you wanted to give it to someone (say, a family member abroad)? It’s important to know the ramifications. If you gift the property to another person, you are not triggering capital gains tax at that moment – U.S. tax on gains is only triggered by sales or other taxable dispositions, not gifts. However, as a U.S. person, making a large gift can have gift tax implications. You’d have to file a gift tax return (Form 709) if the property’s value exceeds the annual exclusion ($17,000 per recipient in 2025). You likely wouldn’t pay actual gift tax unless your cumulative lifetime gifts exceed the lifetime exemption (also around $12 million), but it would reduce that exemption.

The recipient of your gift would get your carryover basis (essentially the same stepped-up basis you had). If that recipient is not in the U.S., they wouldn’t have U.S. tax unless they later have U.S. connections, but they might have their own country’s taxes. In summary, gifting passes on the asset (and its future gain potential) without current U.S. income tax, but it could require gift tax filing. Selling, in contrast, gives you the cash (minus any taxes on gains) and closes out your involvement. From a tax perspective, selling is usually cleaner because you settle the tax then and there, whereas gifting pushes the eventual tax to the future (and onto someone else) and involves transfer tax considerations.

Key Terms and Concepts

Stepped-up basis: The readjustment of an asset’s tax basis to its fair market value at the time of the owner’s death. Inherited property typically gets a stepped-up basis, which minimizes capital gains when the heir sells.
Capital gains tax: Tax on the profit from selling an asset. Long-term capital gains (assets held over a year, or inherited assets by default) are taxed at preferential rates (0%, 15%, 20% federally, depending on income). Short-term gains are taxed as ordinary income.
Foreign Tax Credit (FTC): A credit that U.S. taxpayers can claim for taxes paid to a foreign country on foreign-sourced income. It directly reduces U.S. tax liability dollar-for-dollar, ensuring you don’t pay tax twice on the same income.
Estate tax: A tax on the estate (total assets) of a person who died. The U.S. federal estate tax applies to estates above a high exemption (~$12 million+). It’s paid by the estate, not by beneficiaries. Some states have their own estate taxes with lower thresholds.
Inheritance tax: A tax some states (not the federal government) impose on individuals who inherit property. The tax rate can depend on the relationship (e.g., children might pay 0% or a reduced rate, while unrelated heirs pay more). The beneficiary is responsible for paying it.
FATCA (Foreign Account Tax Compliance Act): A U.S. law aimed at preventing tax evasion, effective since 2010. It requires U.S. taxpayers to report foreign financial assets over a certain threshold (Form 8938) and compels foreign financial institutions to disclose accounts held by U.S. persons to the IRS.
FBAR (Foreign Bank Account Report): An annual report (FinCEN Form 114) required if aggregate balances in foreign accounts exceed $10,000 at any time in the year. Even though it’s not a tax form, failing to file can result in severe financial penalties.
Form 3520: An IRS information form used to report certain transactions with foreign trusts and also to report receipts of large gifts or bequests from foreign persons. If you inherit over $100,000 from a foreign individual, you must report it here (no tax due, just disclosure).
Basis: The starting value used for tax calculations when an asset is sold. For inherited property, the basis is generally the fair market value at the date of death (stepped-up basis). Gain or loss = sale price minus basis (minus selling expenses, plus any improvements).
Depreciation recapture: When you sell a depreciable asset (like rental real estate), the IRS “recaptures” the benefit of depreciation deductions by taxing the part of the gain that was due to depreciation at a higher rate (up to 25%). Inherited property resets prior depreciation, but any depreciation you claim post-inheritance can trigger recapture upon sale.
Double taxation: Being taxed by two jurisdictions on the same income. With foreign property sales, this refers to being taxed by the foreign country and the U.S. on the gain. Mechanisms like the foreign tax credit, and tax treaties, exist to avoid paying tax twice.
IRS and FinCEN: The Internal Revenue Service (IRS) is the U.S. government agency that administers federal tax laws and collects taxes. FinCEN (Financial Crimes Enforcement Network) is a bureau of the Treasury that oversees anti-money laundering efforts and receives FBAR filings. They collaborate when it comes to enforcement of foreign financial reporting.
Carryover vs. step-up basis: These terms describe how basis is determined in transfers. A carryover basis means the recipient’s basis is the same as the donor’s (as in gifts). A stepped-up basis means the basis is reset to market value (as in inheritances). The latter usually results in less capital gains tax on a future sale.

Key Entities Involved (and How They Interrelate)

Several entities and laws play a role when selling inherited property overseas:

The IRS (Internal Revenue Service) is the authority that will tax your capital gain and enforce U.S. reporting requirements. You’ll interact with the IRS through filing your 1040 return, and forms like 8949, 3520, 8938, and 1116.
FinCEN (Financial Crimes Enforcement Network) is the agency to which you report foreign bank accounts via the FBAR. While separate from the IRS, non-compliance can lead to penalties that the IRS may help enforce. Both IRS and FinCEN are parts of the U.S. Treasury Department.
The foreign tax authority in the country where the property is located will impose any local taxes on the sale. For example, if the property is in Italy, the Italian tax office handles any capital gains or transfer taxes due there.
Foreign financial institutions (banks, etc.) may be indirectly involved because of FATCA. Under FATCA, foreign banks report account information of U.S. account holders to the IRS. If you deposit large sale proceeds in a foreign bank, that bank is likely reporting the account existence (and maybe interest earned) to the IRS. This information sharing means it’s risky to try to hide overseas funds.
Tax treaties and international agreements connect the IRS and foreign tax bodies. They often allow sharing of information and ensure that certain income is only taxed once (or if taxed by both, that credits are available). For example, the IRS could be aware of your property sale if the foreign country’s tax authority exchanges data, or vice versa.
If something goes awry (like willful tax evasion), the Department of Justice and even foreign law enforcement can become involved, but that’s hopefully never on the table for an honest taxpayer.

In practical terms, you as the taxpayer are in the middle, responsible for satisfying both U.S. and foreign tax obligations. You pay the foreign country’s tax, then report to the IRS and claim credit. You report your accounts to FinCEN, and the foreign bank might separately confirm those to the IRS. By being transparent and compliant at each step, these entities effectively “agree” that you’ve met your obligations. If you fail to report something, one of these entities can catch it (the foreign country might inform the IRS of a sale, or the IRS might notice missing forms, etc.). It’s a system of checks and balances to ensure global income doesn’t slip through the cracks.

Notable Court Cases and Rulings

United States v. Estate of Edward Hendler (2023): In this case, a U.S. district court held that penalties for a decedent’s failure to file FBARs did not die with the individual. The IRS assessed over $100,000 in FBAR penalties for Mr. Hendler’s unreported foreign accounts. After he passed away, his beneficiaries argued that they shouldn’t be on the hook. The court ruled that the government could collect those penalties from the estate (and even from distributed assets that went to heirs). The takeaway: foreign account reporting obligations are taken very seriously, and even death doesn’t nullify the debt. If you’re handling an estate that included foreign assets, it’s important to address any compliance issues, because the IRS can pursue the estate (and indirectly, the heirs) for unpaid international penalties.

Cook v. Tait (1924): This landmark Supreme Court case established that the U.S. government has the right to tax its citizens on income earned anywhere in the world. Mr. Cook was an American living in Mexico who tried to argue it was unconstitutional for the IRS to tax his foreign income. The Court disagreed, effectively cementing the principle of citizenship-based taxation. Why does this matter for our topic? It’s the legal backbone for why a U.S. citizen must pay U.S. tax on that French villa they sold or that Brazilian condo they inherited and disposed of. In other words, no matter where your inherited property is, Uncle Sam’s claim to tax your gain is, in the Court’s view, valid and lawful.

Farhy v. Commissioner (2023): A more technical Tax Court case, Farhy dealt with the IRS’s ability to assess certain penalties related to foreign information forms. The taxpayer failed to file Form 5471 (required for interests in foreign corporations), and the IRS assessed large penalties. The Tax Court found that the IRS lacked statutory authority to assess those particular penalties like a tax. This case caused the IRS to change how it pursues such penalties (they now may need to go to court to collect, or Congress might amend the law). While Farhy was about a specific form not directly tied to our property scenario, it’s relevant as part of a broader pushback on the IRS’s international penalty regime. It shows that courts are paying attention to fairness and legal authority in enforcement. For someone selling inherited property overseas, the direct impact is minimal (it doesn’t change any tax on a sale), but it’s comforting to know that not every aggressive penalty automatically sticks if the IRS oversteps its authority. Still, it’s best not to test the waters – compliance remains the safer bet than hoping a court will bail you out.

FAQs

Q: Do I pay U.S. tax on property I inherited from overseas?
A: You don’t pay tax when you inherit. But if you sell the property, any profit (capital gain) is subject to U.S. tax (after applying the stepped-up basis to reduce the gain).

Q: Is money from selling inherited foreign property considered income?
A: Yes. The profit from the sale is taxable income (capital gain) on your U.S. tax return. The principal value you inherited isn’t taxed, only the gain realized when you sell.

Q: What if I already paid tax abroad on the sale?
A: You can claim a foreign tax credit on your U.S. return for the foreign tax paid. This credit will offset the U.S. tax on the same gain, preventing double taxation.

Q: How do I report a foreign property sale to the IRS?
A: Report it on Form 8949 and Schedule D of your 1040. Also report any large foreign inheritance on Form 3520 and any foreign accounts (sale proceeds) on FBAR/FATCA forms if thresholds are met.

Q: Are inherited properties taxed by the IRS?
A: The inheritance itself is not taxed by the IRS. Only when you sell the inherited property (or if it produces income like rent) do U.S. income taxes come into play.

Q: Do I owe state taxes on a foreign property sale?
A: Usually yes, if your state has an income tax. States tax your worldwide income like the feds do. The gain from an overseas property sale would be included in your state taxable income.

Q: Do I need to inform the IRS about receiving an inheritance from abroad?
A: If the inheritance is over $100,000 in value, you must file Form 3520 to report it. There’s no tax on it, but the IRS requires notification of large foreign gifts/inheritances.

Q: Will I get taxed twice on selling an overseas property?
A: Not if you use the foreign tax credit. You’ll pay tax to the foreign country first, then use that credit to offset U.S. tax. You’ll effectively pay the higher of the two countries’ tax rates, not both.

Q: Can I avoid U.S. tax by keeping the sale money abroad?
A: No. U.S. citizens owe tax on worldwide income regardless of where the money is kept. Leaving the money in a foreign bank doesn’t exempt your capital gains from U.S. tax.

Q: Does the $250,000 home sale exclusion apply to foreign homes?
A: Yes, if the home was your principal residence for 2 of the last 5 years. The tax code doesn’t restrict the exclusion to U.S. properties – it hinges on your use and ownership of the home.