 Nonresident alien inherits U.S. property
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 Dear
Tax Talk,
I am a nonresident alien (Philippine) who has
inherited mutual funds, Roth IRA and real estate from a U.S. citizen.
Will I be subject to an inheritance tax? Do I have to pay taxes
on the capital gains, interest/dividends on the above items? If
so, how much? Also do I get the capital gain exclusion of $250,000
when I sell the house?
-- Betty
 Dear
Betty,
You may have heard that the only two sure things are death and taxes, but fortunately death forgives a lot of taxes. There is no federal inheritance tax, which means that you won't be taxed by the IRS on the property you receive. You have to check the rules in the state where the decedent lived to determine if the state imposes an inheritance tax.
Depending on when the decedent died and how much property is involved, there may be a federal estate tax that is imposed on the assets of the estate prior to passing to the beneficiaries. In 2005, if someone dies with less than $1,500,000 in assets, there is no federal estate tax. If the estate was larger than this, the executor of the will would be responsible for completing the tax reporting to the IRS.
Your cost basis for determining future gain or loss
on the sale of the inherited assets is their value at the time of
death. In the case of the home, you are not entitled to the $250,000
exclusion, since it is not your residence and you are not a U.S.
resident. However, since the cost basis is equal to its fair market
value at the time of death, if you sell it shortly thereafter you
won't have any gain to pay tax on.
While a regular IRA may cause you some income tax
issues, a Roth IRA is tax-free. A nonresident alien does not pay
capital gains taxes on the sale of mutual funds or stocks, but would
in the case of a REIT, or real estate investment trust. Interest
on bank account deposits is tax-free to an NRA. Dividends are usually
subject to 30 percent tax withholding. The U.S.-Philippines treaty
provides that dividends are taxed at 25 percent.
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