Transfer money from "inherited" land sold outside US to the US without income tax?

Question

After my parents' death in my originating country, my family was made aware that their co-owned piece of land was always in our names, not out parents'. We recently sold this piece of land as a group in one transaction and are splitting up the money. I would like to wire my portion back to the USA as I reside there and am a US citizen.

As I visit only every decade or so, I was not aware of all these details until called home to complete the sale. It appears I'm not yet on the hook for FBAR penalties as the land produced no money for me before its sale. (FAQ #37/#20)

Will the money I bring home have to be classified as income and hit the 33% bracket or will it be a capital gain? It was put in our names some 50 years ago when it was virtually worthless, so a profit on the sale will be nearly 100% of its value, a very large amount. I'm hoping to also get ahold of papers showing the 4% tax taken from the purchase price to claim a foreign tax credit. I previously thought it was inheritance until we examined the deeds, which would've been much better from a tax perspective.

My understanding so far of the total taxes and credits are (assume highest bracket for everything):

• +20% capital gains
• -4% foreign tax credit on sales tax paid on land sale here
• +3.8% NIIT

Putting me back at about 20% on the whole sale. Is this correct?

Any and all suggestions on how the money should be classified and transferred are welcome, even outlandish ideas.

Answer 1

The money you will be bringing to the US will be classified as your own money, and will not be taxable.

The proceeds from the sale are taxable to you, probably as capital gains. The fact that you kept the proceeds out of the US is irrelevant for that purpose (it is relevant for FBAR/FATCA etc). Since you had no basis in the property, all the proceeds are taxable to you at the time of the sale and should be reported on your tax return.

Answer 2

AS PER IRS PUBLICATION:

Question: Is money received from the sale of inherited property considered taxable income?

Answer:
To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

• The fair market value (FMV) of the property on the date of the decedent's death.
• The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation. See the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

For information on the FMV of inherited property on the date of the decedent’s death, contact the executor of the decedent’s estate. Also, note that in 2015, Congress passed a new law that, under certain circumstances, requires an executor to provide a statement identifying the FMV of certain inherited property to the individual receiving that property. Check IRS.gov for updates on final rules being promulgated to implement the new law.

If you or your spouse gave the property to the decedent within one year before the decedent's death, see Publication 551, Basis of Assets.

Report the sale on Schedule D (Form 1040), Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets:

• If you sell the property for more than your basis, you have a taxable gain.
• For information on how to report the sale on Schedule D, see Publication 550, Investment Income and Expenses.

Under the new law passed by Congress in 2015, an accuracy-related penalty may apply if an individual reporting the sale of certain inherited property uses a basis in excess of that property’s final value for federal estate tax purposes. Again, check IRS.gov for updates on final rules being promulgated to implement the new law.

For estates of decedents who died in 2010, basis is generally determined as described above. However, the executor of a decedent who died in 2010 may elect out of the estate tax rules for 2010 and use the modified carryover of basis rules.

Under this special election, the basis of property inherited from a decedent who died during 2010 is generally the lesser of:

• The adjusted basis of the decedent, or
• The FMV of the property at the date of the decedent’s death.

Under this special election for estates of decedents who died in 2010, the executor of the decedent’s estate may increase the basis of certain property that beneficiaries acquire from a decedent by up to $1.3 million (plus certain unused built-in losses and loss carryovers, if applicable), but the increased basis cannot exceed the FMV of the property at the date of the decedent’s death. The executor may also increase the basis of certain property that the surviving spouse acquires from a decedent by up to an additional $3 million, but the increased basis cannot exceed the FMV of the property at the date of the decedent’s death. The executor of the decedent’s estate is required to provide a statement to all heirs listing the decedent’s basis in the property, the FMV of the property on the date of the decedent’s death, and the additional basis allocated to the property. Contact the executor to determine what the basis of the asset is.

Report the sale on Schedule D (Form 1040) and on Form 8949, as described above.

Additional Information:

• Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010
• Tax Topic 703 - Basis of Assets