US Citizen Receiving Inheritance In New Zealand – The US Tax Viewpoint

One of our main service areas at The US Tax Team, is US tax advice and consulting. In almost every appointment, the question usually arises of what tax implications exist during the difficult time of losing a loved one, and receiving inheritance in New Zealand.

This question has both a short, and a long answer, and its important to find out exactly what the US citizen client stands to inherit. But, fortunately in most cases, the inheritance is tax free.

Does the US tax New Zealand inheritance?

Here comes the short answer: No, the US generally taxes an estate, with distributions to beneficiaries made tax free.

In the case of a foreign (ie New Zealand) estate, then the estate of course wouldn’t be subject to US tax (except on US situs assets), meaning that the distributions made to beneficiaries are free from US tax.

Inheritance received in excess of $100,000 USD does require reporting on Form 3520, but this is informational reporting only.

But, that was the short answer, and now this is where (during a US tax advice appointment), we’ll begin to explore what is to be received.

US Tax On Types of Assets Received as Inheritance

So, whilst the actual transfer of assets from a New Zealand estate to a US person is not taxable in the US, it is possible that the assets themselves may be income producing and therefore can create a future tax liability.

Of course, estates come in all shapes and sizes. We see some which have minimal cash or just a family home, along with others which contain large investment portfolios or companies.

Its important to keep in mind that many different assets can go on to create a US tax implication, for example:

• Rental income from inherited property – whilst taking title on the property is tax free, future rent received may create US taxable income

• Dividends, interest, or capital gains from inherited investments are subject to U.S. income tax.

  
  

Another example with property:

• Home received as part of inheritance – value as of date of passing of the decedent - $700,000 – this property transfer is tax free in the US

• Home sold one year later and it is now worth $750,000 – we have $50,000 of taxable gain in this instance

US Citizen Inheriting a New Zealand Investment Portfolio

This is one area where, depending on the assets received as an inheritance, US tax filing can be costly and complex.

As discussed in many prior articles, the US has a tax regime named PFIC (passive foreign investment company), which requires time consuming and complex US tax reporting on foreign ETFs, index funds, managed funds and mutual funds.

In the case a US citizen were to inherit a portfolio with a large number of these types of NZ investments, then immediately after inheriting, the US citizen themselves now is the owner of large number of PFIC investments (and the associated filing requirements).

For each PFIC investment that a US citizen holds, Form 8621 must be prepared, which can cost hundreds of dollars. In the case of receiving 10 or 20 of these types of stocks, the filing costs can run into the many thousands.

It is for this reason it is important to ensure that, where we have a US beneficiary of a Kiwi estate, tax advice is sought early, to prevent a significant filing burden on the US citizen beneficiary.

Summary

As you can see above, there is both a short and a long answer to the question of US taxation on New Zealand inheritance.

It can be a simple affair, however it can also create a highly complex filing burden. Dealing with the passing of a loved one is difficult enough, without an undue tax complication.

At The US Tax Team, we provide expert US tax advice and US tax consulting. Reach out to us today – info@usatax.nz