If you're a U.S. citizen or resident and have inherited assets—whether property, money, or investments—from a family member in India, it's important to understand how the IRS treats foreign inheritances and how you must report them. This guide breaks down the key U.S. tax rules and reporting requirements to help you stay compliant while preserving your wealth.

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1. Is Foreign Inheritance Taxable in the U.S.?

No, foreign inheritance is not taxable in the U.S., either as income or under U.S. estate tax laws. However, there are important reporting requirements.

If you inherit more than $100,000 from a foreign person (e.g., a parent in India), you must file IRS Form 3520.

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2. IRS Form 3520 – Mandatory Informational Reporting

If you receive assets worth over $100,000 from a non-U.S. person in a calendar year, you're required to report it using Form 3520. This includes:

• Real estate

• Cash

• Investments

• Other personal property

Even if the amounts are received in multiple tranches throughout the year, the reporting is still required.

 No tax is owed on the inheritance.
 But failing to file Form 3520 can result in penalties up to 25% of the value of the inheritance.

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3. FBAR & FATCA Reporting: Foreign Financial Accounts

If your inheritance includes bank accounts, investment accounts, or you receive funds from India, you may also be required to file:

FBAR (FinCEN Form 114)

• File if total foreign account balances exceed $10,000 at any time during the year.

Form 8938 (FATCA)

• File if your total foreign financial assets exceed:

  • $200,000 on the last day of the year (single filers)

  • $300,000 at any time (single filers)

  • Limits are doubled for joint filers

🚫 Owning property like a house or land does not trigger FBAR or FATCA reporting, unless you inherit financial accounts or income-generating assets.

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4. Transferring Inherited Funds to Purchase Property

If you use inherited funds to purchase property in India and hold the money in foreign bank accounts, you're still subject to FBAR/Form 8938 if thresholds are met.

The focus is on foreign financial accounts, not the property itself.

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5. Step-Up in Basis for Inherited Foreign Property

U.S. tax law provides a step-up in basis for inherited assets. This applies to foreign real estate too.

Your cost basis becomes the fair market value of the property on the date of the decedent’s death. If you sell the property later:

• You only pay capital gains tax on the appreciation after the date of inheritance.

• This rule is a significant tax advantage.

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6. State-Level Inheritance or Estate Tax

While the federal government does not tax inheritances:

• Some U.S. states impose estate or inheritance tax.

• Generally, states do not tax inheritance from foreign sources.

• But if you inherit U.S.-based assets from a foreign person (e.g., U.S. real estate), state tax rules may apply.

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7. Inherited Property as a Personal Residence (Not Rental)

If you keep the inherited property in India as a second home (personal use only):

• You may deduct mortgage interest and discount points just like for a U.S. second home.

• Deduction limits (for both primary and second homes combined):

  • Up to $750,000 of mortgage debt (married filing jointly)

  • Up to $1 million for loans before Dec 16, 2017

  • These limits are valid through 2025

You cannot deduct expenses like utilities, maintenance, or insurance unless you qualify for a home office deduction.

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8. Reporting Foreign Rental Income in the U.S.

If the inherited property is rented out, it is taxable in the U.S. as foreign rental income:

How to Report Indian Rental Income:

• Schedule E (Form 1040) – under “Supplemental Income”

• Convert income and expenses to USD using IRS average exchange rates

• Depreciate foreign residential property over 30 years (unlike 27.5 years for U.S. property)

• File Form 4562 for depreciation

• Report eligible expenses such as:

  • Mortgage interest

  • Property taxes

  • Repairs & maintenance

  • Management fees

  • Insurance

  • Utilities

  • Legal and travel expenses

  • Advertising costs

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9. Foreign Tax Credit (FTC)

Since India also taxes rental income, you may claim a Foreign Tax Credit (FTC) on your U.S. return to avoid double taxation.

• Alternatively, you can deduct foreign taxes paid as an itemized deduction.

• Choosing between the credit and deduction depends on your overall U.S. tax situation.

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10. Use & Classification Rules for Rental Property

How the IRS classifies the property depends on usage:

If the property is not rented and used as a personal residence, it is not subject to FBAR/8938 unless there are related foreign accounts.

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11. Owning Property Through a Foreign Entity

If you inherited property through a foreign trust, company, or partnership, you may be required to file:

• Form 5471 – for foreign corporations

• Form 8865 – for partnerships

• Form 8858 – for disregarded foreign entities

These forms are complex and carry heavy penalties for non-compliance. Consult a tax advisor familiar with international tax laws.

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Conclusion: Plan, Report, and Protect

While U.S. laws don’t tax your foreign inheritance, they do require disclosure. Reporting forms like Form 3520, FBAR, and Form 8938 are crucial.

If you rent the inherited property, ensure proper reporting on Schedule E and use foreign tax credits to avoid double taxation.

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Need Help with Reporting or Tax Planning?

At India for NRI, we help U.S.-based NRIs with:

• Filing Form 3520, FBAR & FATCA
   U.S. tax filing for Indian rental income
  Foreign tax credit optimisation
   Inheritance planning and compliance
   Legal documentation for inherited property in India
• Visit www.indiafornri.com or get in touch with our cross-border experts today.