Many foreign nationals own U.S. real estate and hold title in their individual names. They are often surprised to learn that if they still own the property at the time of their death, U.S. estate tax could be payable.
The tax laws with respect to U.S. estate taxation of U.S. citizens and domiciliaries differ significantly from the U.S. estate tax laws of nondomiciliaries of the U.S.
For 2019, the estate of a U.S. citizen or domiciliary decedent is allowed an exemption of $11,400,000 before the imposition of estate tax. The U.S. citizen or domiciliary is subject to U.S. estate tax on the fair market value of all assets owned, wherever situated, at date of death. This amount is reduced by the fair market value of worldwide mortgages, debts and administrative expenses of the decedent. In addition, an unlimited marital deduction is allowed to the estate for property passing to the U.S. citizen surviving spouse.
In contrast, a nondomiciliary of the U.S. is only subject to U.S. estate tax on certain U.S. situs assets. However, instead of receiving an exemption of $11,400,000, the exemption for nondomiciliaries is $60,000. In addition, the deduction for mortgages, debts and administrative expenses is limited based on the value of U.S. assets to worldwide assets. For example, if U.S. assets were valued at $500,000 and worldwide assets were valued at $5,000,000, 10% of the value of worldwide mortgages, debts and administrative expenses would be allowable as a deduction against the value of the U.S. estate. In this example, even if the mortgage was secured by the U.S. real estate, only 10% of the value would be deductible against the U.S. estate. An exception to this is if the debt on the U.S. real estate is nonrecourse. Under this scenario, the full amount of the debt would be deductible. In most cases, the debt on the U.S. property is recourse debt and the deduction is therefore limited to the ratio of U.S. to worldwide assets.
While U.S. real estate is the most common asset subject to U.S. estate tax for nondomiciliary decedents, other U.S. situs assets could also be subject to the estate tax. These assets could include tangible personal property and shares in publicly-traded or closely-held domestic corporations held in the personal name of the decedent.
U.S. estate tax returns are required to be filed no later than nine months after date of death, at which time any estate tax due is payable. The filing of the return may be extended for a maximum of six months, but the extension of the filing of the return does not extend the time to pay the estate tax.
The U.S. currently has estate tax treaties with 14 countries. In addition, the income tax treaty between the U.S. and Canada contains provisions dealing with the U.S. estate tax. The provisions of each country treaty are varied, but a significant reduction or elimination of the U.S. estate tax could result from the proper application of the provisions of the treaties.
A comparison of the estate tax laws between U.S. citizens and domiciliaries versus nondomiciliaries is included, along with a list of treaty countries.
While every circumstance is unique, with advice of a U.S. tax professional and proper planning, many foreign nationals could eliminate or reduce their exposure to the U.S. estate tax.
Death tax treaties are in effect with the following countries:
- South Africa
- United Kingdom
*Article XXIX B of the United States/Canada Income Tax Treaty