Do You Owe US Tax on a Foreign Inheritance?

Inheriting money or property from a relative overseas usually triggers one fear: a big US tax bill. That fear is almost always misplaced. The real exposure in a foreign inheritance US tax situation is not income tax on the inheritance itself, it is the reporting obligation that attaches once the amount crosses a specific dollar threshold, and the penalty for missing that filing has nothing to do with how much tax, if any, was actually owed.

Do You Owe US Income Tax on a Foreign Inheritance?

No. The receipt of an inheritance, whether it comes from a US decedent or a foreign one, is not gross income under the Internal Revenue Code. The United States taxes wealth transfers at death through an estate-tax system, and that tax, when it applies, is owed by the decedent's estate before assets are distributed, not by the person who receives them.

That estate-tax system also has a narrower reach than most people assume when the decedent was not a US person. A nonresident alien decedent's US estate tax exposure is limited to US-situs assets, generally US real property, tangible property physically located in the US, and stock in US corporations. Foreign real estate, foreign bank accounts, and foreign securities owned by a nonresident alien at death fall outside the US estate tax entirely. Our guide to nonresident alien estate tax and Form 706-NA covers what does and does not get pulled into the US system when the decedent was a foreign person. Practically, this means a US person who inherits foreign assets from a foreign relative usually faces no US income tax and no US estate tax on the transfer itself. The obligation that remains is informational.

When Do You Have to File Form 3520 for a Foreign Inheritance?

You must file Form 3520 if you are a US person who received more than $100,000 in a calendar year, in gifts and bequests combined, from a nonresident alien individual or a foreign estate. The filing goes on Part IV of the form, is attached to (but filed separately from) your income tax return, and reports the amount received, not any tax due, because none is owed on the receipt itself.

The $100,000 threshold aggregates related gifts. If you receive $60,000 from your foreign relative's estate and another $50,000 from a sibling you have reason to know is acting on the same decedent's behalf, the IRS treats those as related and requires you to add them together, which pushes you over the threshold even though no single transfer exceeded $100,000. For a broader look at how Form 3520 works for both gifts and foreign trust transactions, see our Form 3520 foreign gifts and trusts guide.

The penalty structure is what makes this worth taking seriously. IRC Section 6039F authorizes a penalty of 5% of the amount received for each month the failure continues, capped at 25% of the total, for failing to timely report a large foreign gift or bequest. That penalty applies regardless of whether you owed a dollar of income tax, because Form 3520 is an information return, not a tax return line item.

Does a Lower Reporting Threshold Apply to Gifts From a Foreign Business?

Yes, and it is much lower. If the source of the money is a foreign corporation or a foreign partnership rather than an individual or an estate, the reporting threshold drops to roughly $20,116 for 2025, a figure the IRS adjusts for inflation each year. That gap exists because Congress and the IRS treat transfers routed through a foreign entity as carrying more compliance risk than a straightforward bequest from a relative's estate, so do not assume the familiar $100,000 number applies just because the payment happens to come from a company account instead of a person.

Practically, this comes up when a family member's estate is administered through a foreign holding company or family investment vehicle rather than distributed directly. The character of the payer, not the character of the underlying money, determines which threshold applies, so it is worth confirming exactly whose name is on the transfer before assuming you are under the reporting line.

Can You Credit Foreign Inheritance Tax Against Your US Taxes?

Generally, no. Many countries impose their own estate, inheritance, or succession tax on transfers at death, and US taxpayers often assume that tax can offset a US tax bill the way the foreign tax credit offsets foreign income tax. It cannot, because a foreign inheritance or estate tax is not an income tax, and the foreign tax credit on Form 1116 is built specifically around foreign income taxes under IRC Sections 901 and 904.

There is a separate, much smaller safety net: the United States has estate-tax treaties, distinct from its income-tax treaty network, with a limited number of countries. These treaties can address double taxation of the same transfer under two countries' estate or inheritance tax systems, allocate taxing rights, or provide a credit mechanism, but they do so under their own terms and only for the specific countries covered. Since receiving an inheritance is not US taxable income in the first place, most US recipients never need this relief. Where it matters is the decedent's estate itself, if the estate also had US-situs assets or US tax exposure, which is a separate analysis from the recipient's reporting obligation covered here.

What Is Your Tax Basis in Inherited Foreign Property?

Your basis in most inherited property, foreign or domestic, is its fair market value on the date of the decedent's death. IRC Section 1014 provides this step-up (or step-down, if the asset had declined in value) regardless of what the decedent originally paid for it, and the rule applies to foreign real estate, foreign brokerage holdings, and other foreign property the same way it applies to US assets.

This matters the moment you sell. If you inherit a foreign apartment your grandparent bought decades ago for a fraction of its current value, your gain on a later sale is measured from the date-of-death value, not your grandparent's original cost, which can eliminate most of the built-in appreciation from your US tax calculation. Getting a credible, documented valuation as of the date of death is the single most useful thing you can do at the time of inheritance, because it is difficult to reconstruct years later when you actually sell. Our guide to selling foreign property walks through the reporting and foreign tax credit mechanics once you do sell.

One narrow exception: income the decedent had already earned but not yet received before death, known as income in respect of a decedent under IRC Section 691, does not get a fresh basis. A final foreign paycheck or an already-accrued foreign pension payment collected after death is taxed to you the same way it would have been taxed to the decedent, without a step-up.

Do You Have to Report the Foreign Account You Inherited?

Yes, in most cases, starting from when you acquire the interest. Once you inherit a foreign bank or investment account, you have a financial interest in a foreign financial account, and the ordinary reporting rules apply going forward exactly as they would if you had opened the account yourself.

These are ongoing obligations, not one-time filings tied to the inheritance itself. Missing an FBAR or Form 8938 filing in a later year because you forgot the account exists is a common and entirely avoidable mistake among people who inherited foreign accounts years ago.

Is Income From Your Inheritance Taxable After You Receive It?

Yes. The inheritance itself is not taxed, but everything it earns after you own it is taxed like any other income. Interest on an inherited foreign bank account, dividends from inherited foreign securities, and rent from an inherited foreign property are all ordinary taxable income to you starting on the date you acquired the asset, reportable on your US return regardless of whether the income was ever sent to the US or left in the foreign account.

If the inherited assets sit inside a foreign trust rather than being distributed to you outright, or if a foreign account holds pooled foreign investment funds, the analysis gets more complex. Foreign trust interests raise Form 3520/3520-A ownership and distribution questions, and non-US pooled funds are frequently passive foreign investment companies, a separate and punitive regime with its own Form 8621 filing requirement. Both are worth flagging to a preparer at the time you inherit, not years later once distributions or fund switches have already happened.

Can Inheriting From a Covered Expatriate Trigger a Different Tax?

It can, in a narrow but important situation. If the person who left you the money or property had given up US citizenship or long-term resident status and met the net worth, tax liability, or certification tests that make them a covered expatriate under IRC Section 877A, a gift or bequest from that person to you can trigger a separate tax under IRC Section 2801.

Unlike the Form 3520 threshold, this is an actual tax, not just a report, and it is imposed on you, the US recipient, at the highest gift and estate tax rate then in effect, currently 40%. It applies on top of, not instead of, any Form 3520 reporting the transfer independently requires. The IRS finalized the Section 2801 regulations in T.D. 10027, published January 14, 2025, generally applying to covered gifts and bequests received on or after January 1, 2025. The tax is reported and paid on Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates. If you know or suspect the person who left you an inheritance expatriated from the US at some point, that fact needs to be confirmed and addressed specifically rather than assumed away, since it changes the analysis entirely from an information filing to an actual tax liability.

If the person who left you the inheritance was your noncitizen spouse rather than an unrelated relative, a different set of transfer-tax rules governs what they could leave you and how, which is a giver-side planning question covered in our guide to gifts to a noncitizen spouse and estate tax.

Bottom Line

A foreign inheritance is not a US income tax event. It is a reporting event once it crosses $100,000 from an individual or estate, or roughly $20,100 for 2025 from a foreign entity, and the penalty for missing that report is completely disconnected from whether any tax was ever due. Get a defensible date-of-death valuation for basis purposes, confirm whether the source was a person, an estate, or an entity, check whether the decedent might have been a covered expatriate, and put any inherited foreign account or trust interest into your ongoing FBAR, Form 8938, and Form 3520-A routine going forward.

Have questions about foreign inheritance US tax reporting? Contact TS CPA for a free consultation. We respond within the same day.

Official IRS and Government Sources

• IRS, About Form 3520
• IRS, Instructions for Form 3520
• IRC Section 6039F, Notice of Large Gifts Received from Foreign Persons
• IRC Section 1014, Basis of Property Acquired from a Decedent
• IRC Section 2801, Imposition of Tax on Gifts and Bequests from Covered Expatriates
• IRS, Estate Tax for Nonresidents not Citizens of the United States
• FinCEN, Report of Foreign Bank and Financial Accounts (FBAR)
• IRS, Summary of FATCA Reporting for U.S. Taxpayers