Inherited Indian Property — US Tax Treatment

What happens when NRI inherits Indian property?

Three layers:

1. India: No inheritance tax. Property mutation, succession certificate, name change required.
2. US: No income tax on inheritance itself. Form 3520 disclosure if > $100K from foreign individual/estate.
3. Going forward: Rental income, future sale gain, FBAR disclosure of any Indian bank accounts.

US disclosure — Form 3520

If inheritance from foreign person/estate > $100,000 during tax year, file Form 3520 by April 15 (extension Oct 15).

Penalty for non-filing: 5% per month, capped 25%.

Inherit from parents in India who are non-US persons = foreign-person inheritance. File Form 3520.

Step-up in basis

For US tax: Your basis in inherited property = Fair Market Value (FMV) at date of death.

Hugely beneficial. Parent bought for ₹5 lakh in 1980, at death worth ₹2 crore → you inherit at ₹2 crore basis — not original ₹5 lakh.

Later sale at ₹2.5 crore: US capital gain only ₹50 lakh, not ₹2.45 crore.

What FMV to use?

For Indian property:

• Get registered valuer's report with FMV at date of death
• This becomes USD basis using death-date exchange rate
• Document for IRS audit defense — IRS questions step-up valuations frequently

Indian succession process

1. Death certificate
2. Legal heir certificate or Succession certificate (court-issued for movable property)
3. Mutation of property at local revenue office
4. Society membership update (if apartment)
5. Transfer of utility bills, society maintenance
6. If deceased was US person — different US estate tax procedure (Form 706 may apply)

Rental income from inherited property

If rented:

• Indian rental taxable in India (NRO account, TDS by tenant)
• Schedule E reportable in US, USD basis with depreciation
• FTC for Indian tax

Depreciation runs from inheritance date (not original purchase). Useful life: 27.5 years residential.

Selling inherited property

When you sell:

• US capital gain = sale price (USD) - step-up basis (USD)
• US LTCG 15-20% (held >1 year)
• India LTCG @ 12.5% on gain over indexed cost (Section 49: holding period of previous owner included)
• FTC on Form 1116

Combination of step-up + Indian indexation often produces low net tax.

Common inherited-property mistakes

• Not filing Form 3520 (huge penalty)
• Not getting registered valuer's report at death
• Using parent's original basis instead of step-up FMV
• Missing mutation step on Indian side (creates title issues)
• Forgetting rental income reporting going forward

Estate tax complications

If parent was US person at death, US estate tax may apply (Form 706). Threshold ~$13.61M lifetime, so most below it. State estate taxes (NJ, MA) lower thresholds.

If parent was non-US person, no US estate tax. Only Form 3520 disclosure.

Practical advice

1. Get registered valuer's report immediately at time of death
2. File Form 3520 in year of inheritance if > $100K
3. Open NRO account for rental income
4. Complete Indian succession steps to avoid title disputes
5. Document FX rate at date of death
6. Maintain records 7+ years for IRS examination

Joint inheritance scenarios

Inheriting jointly with siblings:

• Your basis = fractional FMV at death
• File Form 3520 with fractional value
• Coordinate sale (avoid one sibling selling without others' consent)
• US tax on your share only
  
  Explore our complete US Tax Return Guide to understand refunds, filing rules, and IRS procedures for NRIs.