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The email from your attorney in London arrives with life-changing news. Your aunt passed away and left you her estate: £450,000 consisting of her home (£320,000), savings accounts (£95,000), and investments (£35,000). After UK foreign inheritance tax and legal fees, you'll receive approximately £380,000. You're grateful but overwhelmed. You assume foreign inheritances are taxable and start calculating how much you'll owe the IRS. You estimate $50,000 in U.S. taxes and consider this the price of the windfall. Wrong on both counts.
Six months later, the IRS notice arrives. You didn't report the foreign inheritance on Form 3520 foreign inheritance reporting as required. Penalty: $171,000—35% of the unreported inheritance amount. You're shocked. The inheritance wasn't taxable—you owed zero U.S. income tax on it. But Form 3520 foreign inheritance was required to report receiving it, and you never filed the form. The penalty exceeds what you thought you'd owe in taxes.
Understanding how to report foreign inheritances can help you accurately file Form 3520 foreign inheritance reporting to report receiving the inheritance (even though it's not taxable). It determines how to properly report income generated by inherited foreign assets after you receive them, which other forms (FBAR, Form 8938, Form 5471) inherit foreign assets trigger, and how to avoid penalties.
In this guide you'll learn why foreign inheritances aren't subject to U.S. income tax but still require reporting, when you must file to report receiving a foreign inheritance, and how to report income generated by inherited foreign assets.
Are Foreign inheritances considered as taxable income in the U.S?
This is the most important point: inheritances—whether from U.S. persons or foreign persons—are not subject to U.S. income tax when considering taxes and inheritance money.
Under U.S. tax law, property received by gift, bequest, devise, or inheritance is excluded from gross income. When you inherit assets, you don't owe income tax on the value received. This applies equally to domestic and foreign inheritances for taxes and inheritance money purposes.
Example: You inherit $500,000 from your grandmother in Canada. You owe zero U.S. income tax on the $500,000 inheritance. It's not taxable income.
Estate tax vs income tax
There's often confusion between inheritance tax in the US estate tax system and income tax:
Estate tax: Tax on the transfer of assets from a deceased person's estate. In the U.S., federal estate tax applies only to estates exceeding $13.61 million (2024) or $13.99 million (2025). Foreign countries may impose their own estate/inheritance taxes on the estate before distribution.
Income tax: Tax on income you earn. Inheritances are not income, so they're not subject to income tax.
Who pays what: The estate (not the beneficiary) pays estate tax under inheritance tax in the US rules. The beneficiary doesn't pay income tax on inheritance received. However, the beneficiary DOES pay income tax on income generated by inherited assets after receiving them (rental income, dividends, interest, capital gains when sold).
Foreign inheritance taxes don't create U.S. tax liability
If the foreign country imposed foreign inheritance tax or estate tax on the assets before you received them, this doesn't create U.S. income tax liability. The foreign estate tax is a separate matter from U.S. income taxation for taxes and inheritance money.
Example: You inherit €400,000 from your uncle in Germany. Germany imposed 30% foreign inheritance tax, reducing your receipt to €280,000. The €280,000 you receive is not taxable income in the U.S. You cannot deduct the €120,000 German foreign inheritance tax as a loss, but you also don't owe U.S. income tax on the €280,000 received.
When you must file Form 3520 for foreign inheritances
Even though foreign inheritances aren't taxable, they must be reported on Form 3520 foreign inheritance if they exceed the $100,000 threshold.
The $100,000 Form 3520 threshold for inheritances
If you receive a bequest or inheritance from a foreign estate (the estate of a nonresident alien or foreign entity), you must file Form 3520 foreign inheritance when the aggregate amount received during the tax year exceeds $100,000.
This $100,000 threshold is the same threshold that applies to gifts from foreign individuals.
What qualifies as a "foreign estate"
A foreign estate is the estate of a decedent who was a nonresident alien at the time of death. The key is the decedent's citizenship and residency status—not where the assets are located or what foreign inheritance tax was paid.
Foreign estate requiring Form 3520: Your grandmother was a German citizen living in Germany. She never had a U.S. green card. Her estate is a foreign estate. If you inherit more than $100,000, file Form 3520 foreign inheritance.
NOT a foreign estate: Your grandmother was a U.S. citizen who retired to Italy. Even though she lived in Italy and her assets are in Italy, her estate is a U.S. estate (because she was a U.S. citizen). No Form 3520 foreign inheritance required regardless of inheritance amount.
Valuation date for the $100,000 threshold
Use the fair market value of assets on the date you receive them (or date of death if earlier) converted to U.S. dollars when calculating taxes and inheritance money reporting requirements. If you inherit property, use the property's fair market value, not the purchase price or basis.
Example: You inherit a London flat. On the date of inheritance, the property is worth £280,000 (approximately $364,000 at 1.30 exchange rate). You must file Form 3520 foreign inheritance reporting $364,000 inheritance—even though the property is illiquid and you haven't sold it.
Multiple inheritances from same estate
If you receive the inheritance in installments over multiple years (estate settles slowly), apply the $100,000 threshold separately each year. However, if you receive multiple distributions from the same estate in the same year, aggregate them.
Example: You inherit from your grandfather's French estate. You receive €60,000 in 2025 and €55,000 in 2026 as the estate settles. Each year separately is under $100,000, so no Form 3520 foreign inheritance required either year.
Contrast: You receive €60,000 in March 2025 and €55,000 in October 2025 from the same estate. Aggregate: €115,000 in 2025. You must file Form 3520 foreign inheritance for 2025.
Inherited foreign trusts require different reporting
If you inherit a beneficial interest in a foreign trust (rather than receiving assets directly from an estate), different rules apply for taxes and inheritance money. You must report distributions from the foreign trust on Form 3520 Part III, and if you're treated as the owner under grantor trust rules, additional Form 3520 and Form 3520-A reporting applies.
How to complete Form 3520 for foreign inheritances
Form 3520 Part I is used to report foreign inheritances and gifts.
Required information
For each foreign estate from which you received an aggregate inheritance exceeding $100,000, report:
- Name and address of the decedent
- Decedent's country of residence at time of death
- Date of death
- Your relationship to the decedent
- Description of each item of property inherited (if valued over $5,000 each)
- Date you received each asset
- Fair market value in U.S. dollars on date received
- Certification that the inheritance is not taxable compensation
Detailed listing for items over $5,000
You must specifically describe each inherited asset valued over $5,000 when preparing Form 3520 foreign inheritance. Assets under $5,000 can be aggregated as "various small items."
Example: You inherit £280,000 from your uncle in the UK consisting of:
- Primary residence: £195,000
- Bank account: £52,000
- Investment account: £28,000
- Personal property (furniture, jewelry): £5,000
On Form 3520 foreign inheritance, list separately: the residence ($253,500), bank account ($67,600), and investment account ($36,400). Aggregate the personal property as "various personal items under $5,000."
Currency conversion
Convert all foreign currency amounts to U.S. dollars using the exchange rate on the date you received the inheritance (or date of death if you received it at death). Use rates from banks, currency exchanges, or the U.S. Treasury Bureau of Fiscal Service.
Form 3520 filing deadline
Form 3520 is due by the due date of your income tax return including extensions. For most individuals, this is April 15, 2026 for inheritances received in 2025 (June 15 for expats, October 15 with extension).
Form 3520 files with your tax return
Attach Form 3520 to your Form 1040 when you file. Even though the inheritance isn't taxable income and doesn't appear on your Form 1040 for taxes and inheritance money purposes, Form 3520 must be filed as an attachment.
Reporting income from inherited foreign assets
While the inheritance itself isn't taxable, any income generated by inherited assets after you receive them IS fully taxable under inheritance tax in the US rules.
Rental income from inherited foreign property
If you inherit foreign real estate that generates rental income, you must report the rental income annually on Schedule E (Supplemental Income and Loss).
The rental income is taxable at your ordinary income tax rates. You can deduct ordinary and necessary expenses (property taxes, insurance, maintenance, depreciation) against rental income.
Example: You inherit a Paris apartment worth €350,000. You rent it for €2,500/month (€30,000 annually). After expenses of €8,000, your net rental income is €22,000 (approximately $24,000). You must report $24,000 on Schedule E and pay U.S. income tax on it annually.
Interest and dividends from inherited foreign accounts
Interest earned on inherited foreign bank accounts and dividends from inherited foreign securities are taxable income reported on Schedule B (Interest and Ordinary Dividends) for taxes and inheritance money treatment.
Example: You inherit £150,000 in a UK bank account. The account earns 3% interest (£4,500 annually = $5,850). You must report $5,850 interest income on Schedule B annually.
Capital gains when selling inherited foreign assets
When you sell inherited foreign assets, you may owe U.S. capital gains tax under inheritance tax in the US system. Your basis in inherited assets is generally the fair market value at the date of death (stepped-up basis).
Example: Your aunt purchased shares in a French company for €50,000 in 2010. They were worth €180,000 when she died and you inherited them in 2024. You sell them in 2025 for €200,000. Your basis is €180,000 (value at death). Your capital gain is €20,000 (approximately $22,000), which you report on Schedule D.
Foreign tax credits for taxes paid on income
If the foreign country taxes the rental income, interest, or dividends from inherited foreign assets, you may claim a foreign tax credit on Form 1116 to offset U.S. taxes on the same income.
The foreign tax credit prevents double taxation on income (not on the inheritance itself or foreign inheritance tax paid by the estate).
FBAR reporting for inherited foreign accounts
If you inherit foreign bank accounts, investment accounts, or other foreign financial accounts, you may need to file FBAR (FinCEN Form 114).
FBAR filing requirement
You must file FBAR if you had a financial interest in or signature authority over at least one foreign financial account, and the aggregate maximum value of all such accounts exceeded $10,000 at any time during the calendar year.
Inherited accounts count toward FBAR threshold
Foreign accounts you inherit count toward your FBAR $10,000 aggregate threshold from the moment you inherit them for taxes and inheritance money reporting.
Example: You had no foreign accounts. In June 2025, you inherit your grandmother's UK bank account with £85,000 (approximately $110,000). Your aggregate foreign accounts exceeded $10,000 for 2025, so you must file FBAR by April 15, 2026 (automatically extended to October 15, 2026).
Report full account balance on FBAR
If you inherit a foreign account, report the account's maximum balance during the year on FBAR—not just the balance after you inherited it.
Example: Your grandfather's Swiss account had CHF 200,000 when he died in February 2025. You inherited it, withdrew CHF 150,000, leaving CHF 50,000 by year-end. On your 2025 FBAR, report the maximum balance during 2025: CHF 200,000 (approximately $230,000).
FBAR penalties for inherited accounts
FBAR penalties for non-reporting are severe—up to $10,000 for non-willful violations and up to 50% of account balance for willful violations.
Many people inherit foreign accounts and don't realize FBAR applies to them. "I didn't know" is generally not considered reasonable cause for penalty abatement, though non-willful penalties are less harsh than willful.
Form 8938 (FATCA) reporting for inherited foreign assets
Form 8938 (Statement of Specified Foreign Financial Assets) may also be required if inherited foreign assets exceed reporting thresholds.
Form 8938 thresholds
For U.S. taxpayers living in the U.S.:
- Single: $50,000 on last day of year OR $75,000 at any time during year
- Married filing jointly: $100,000 on last day of year OR $150,000 at any time during year
For U.S. taxpayers living abroad (higher thresholds):
- Single: $200,000 on last day of year OR $300,000 at any time during year
- Married filing jointly: $400,000 on last day of year OR $600,000 at any time during year
What assets to report on Form 8938
Foreign financial accounts (bank, brokerage), foreign stock and securities not held in financial accounts, foreign partnership interests, interests in foreign trusts and estates, and foreign-issued life insurance and annuities all require Form 8938 reporting.
Form 8938 vs FBAR
FBAR covers only foreign financial accounts. Form 8938 covers a broader range of foreign financial assets including accounts, direct stock ownership, and partnership interests.
Many inherited foreign assets require both FBAR and Form 8938 reporting—each form serves a different purpose and filing one doesn't satisfy the other for inheritance tax in the US compliance.
Inherited foreign business interests: Form 5471 and Form 8865
If you inherit ownership in a foreign corporation or foreign partnership, additional reporting may be required.
Form 5471 for foreign corporations
If you inherit shares in a foreign corporation and own 10% or more of the voting stock, you must file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations).
Form 5471 requires detailed reporting of the foreign corporation's financial information, income, and operations. Penalties for non-filing can exceed $10,000 per year.
Form 8865 for foreign partnerships
If you inherit an interest in a foreign partnership and own 10% or more, you must file Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships).
Similar to Form 5471, Form 8865 requires detailed partnership information with penalties for non-filing.
Distributions from inherited foreign businesses
Distributions from inherited foreign corporations may be taxable as dividends under taxes and inheritance money rules. Distributions from inherited foreign partnerships flow through as ordinary income, capital gains, or return of capital depending on the nature of the distribution.
Understanding the character of distributions requires reviewing the foreign entity's financial statements and tax reporting—often requiring professional assistance.
Common mistakes reporting foreign inheritances
Mistake #1: Not filing Form 3520 because "inheritances aren't taxable"
Many people correctly understand inheritances aren't taxable income but incorrectly assume this means no reporting is required for inheritance tax in the US purposes. Wrong—Form 3520 is required for foreign inheritances over $100,000 even though they're not taxable.
Consequence: Penalties of $10,000 minimum or 35% of inheritance value.
Mistake #2: Confusing U.S. citizen abroad with foreign person
Your aunt was a U.S. citizen who retired to Spain. Her estate is a U.S. estate, not a foreign estate. You don't need Form 3520 regardless of inheritance amount. Many people file Form 3520 unnecessarily or, worse, fail to file when they should because they misidentify whether the estate is foreign.
Mistake #3: Not reporting income from inherited assets
You correctly file Form 3520 reporting the inheritance but forget that rental income, interest, and dividends generated by inherited assets are taxable income requiring annual reporting on your Form 1040 for taxes and inheritance money.
Consequence: Unreported income triggers IRS notices, back taxes, and penalties.
Mistake #4: Not filing FBAR for inherited accounts
You inherit foreign bank accounts but don't realize FBAR applies to inherited accounts. FBAR requires reporting all foreign financial accounts where you have financial interest or signature authority if aggregate balances exceed $10,000.
Consequence: FBAR penalties of $10,000+ per year even when you owe zero tax on the inheritance.
Mistake #5: Using wrong exchange rate for valuation
You inherit assets in 2025 but use December 31, 2025 exchange rates (or 2026 rates when filing your return) instead of the exchange rate on the date of inheritance. Use the rate on the date you received the inheritance.
Foreign Inheritance Reporting Requirements at a Glance
|
Asset Type |
Taxable? |
Form 3520 Required? |
FBAR Required? |
Form 8938 Required? |
Other Forms? |
|
Cash inheritance under $100K |
No |
No (under threshold) |
Yes (if account exceeds $10K) |
Maybe (depends on total assets) |
None |
|
Cash inheritance over $100K |
No |
Yes |
Yes |
Yes (if exceeds thresholds) |
None |
|
Foreign property (rental) |
No (inheritance); Yes (rental income) |
Yes (if value over $100K) |
N/A (property not FBAR-reportable) |
Yes (if exceeds thresholds) |
Schedule E for rental income |
|
Foreign bank account |
No (inheritance); Yes (interest income) |
Yes (if over $100K) |
Yes (if over $10K aggregate) |
Yes (if exceeds thresholds) |
Schedule B for interest |
|
Foreign corporation shares (10%+) |
No (inheritance); Yes (dividends) |
Yes (if over $100K) |
Maybe (if held in account) |
Yes (if exceeds thresholds) |
Form 5471 annually |
|
Foreign partnership interest (10%+) |
No (inheritance); Yes (income flow-through) |
Yes (if over $100K) |
Maybe (if held in account) |
Yes (if exceeds thresholds) |
Form 8865 annually |
Step-by-step checklist for reporting foreign inheritances
Step 1: Determine if the estate is foreign
Is the decedent a nonresident alien (foreign citizen without green card, not meeting substantial presence test)? If yes, it's a foreign estate. If no (U.S. citizen or resident alien), it's a U.S. estate and Form 3520 is not required.
Step 2: Calculate total inheritance value in USD
Convert all inherited assets to U.S. dollars using exchange rates on the date of inheritance. Sum all assets received from the foreign estate during the tax year.
Step 3: Determine if Form 3520 is required
If total inheritance exceeds $100,000, Form 3520 is required. File by your tax return due date including extensions.
Step 4: Identify inherited financial accounts for FBAR
List all inherited foreign bank accounts, brokerage accounts, and other financial accounts. Calculate aggregate maximum balance during the year. If aggregate exceeds $10,000, file FBAR.
Step 5: Determine if Form 8938 is required
Calculate total specified foreign financial assets (including inherited assets). Compare to Form 8938 thresholds based on your residency and filing status. File Form 8938 if thresholds are met.
Step 6: Identify business interests requiring Form 5471 or 8865
Did you inherit 10%+ ownership in a foreign corporation (Form 5471) or foreign partnership (Form 8865)? If yes, these forms are required annually for inheritance tax in the US compliance.
Step 7: Report income from inherited assets
Set up annual reporting for rental income (Schedule E), interest/dividends (Schedule B), and distributions from foreign businesses. This is ongoing reporting—not one-time like Form 3520.
Step 8: Maintain documentation
Keep all estate documents, appraisals, inheritance statements, foreign inheritance tax documents, and proof of basis for at least 6 years (longer for real property).
How NSKT Global can help with foreign inheritance reporting
NSKT Global specializes in complex international tax compliance for U.S. persons receiving foreign inheritances, ensuring accurate reporting across all required forms while minimizing tax liability on income from inherited assets.
We offer comprehensive foreign inheritance tax services include Form 3520 preparation for inheritances over $100,000 with proper valuation and currency conversion, estate characterization analysis determining whether the estate is foreign or domestic for reporting purposes, asset valuation and basis determination establishing fair market value at death for future capital gains calculations, multi-form coordination ensuring consistent reporting across Form 3520, FBAR, Form 8938, Form 5471, and Form 8865, and income reporting setup for ongoing rental income, dividends, and interest from inherited foreign assets.
Whether you recently inherited assets from a foreign family member and need to understand your reporting obligations, our expertise ensures you properly distinguish between non-taxable inheritance (Form 3520) and taxable income from inherited assets (Form 1040), file all required international information returns with accurate valuations. We minimize U.S. tax on income from inherited foreign assets using foreign tax credits, and maintain full compliance with FBAR, FATCA, and foreign business reporting for all inherited foreign assets.
