On September 23, 2015, we posted “Some Nonresidents with U.S. Assets Must File Estate Tax Returns” where we discussed that deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.
Many foreigners owning property or assets in the United States are in violation of 706-NA filing requirements because of a number of misunderstandings. The basic rule is pretty clear-if a foreign decedent has assets in the United States with a gross value in excess of $60,000, the estate is supposed to file a tax return with the Internal Revenue Service.
Many people think of numerous reasons not to file. The main one relates to mortgages or liens against the US property. Assume that a property in Florida is worth $150,000 and there is a $100,000 mortgage held by Bank of X. The owner of the property dies. Is a 706-NA required? Yes-you are not permitted to net the mortgage against the fair market value of the property. The only way you can do this is if the person who owns the property is a German domiciliary in which case the value can be netted on the tax return. This is a peculiarity of the German- United States estate tax convention. Cyst The deceased German domiciliary must still file the tax return because the gross value of the property, the criteria for filing a tax return, is still met.
Other people look to tax treaties to avoid filing the tax returns even when the assets exceed $60,000. What most people do not realize is that in order to take advantage of a tax treaty, one needs to file a federal estate tax return and include a form 8833 with the return explaining the application of the treaty to this particular estate. If you fail to file the 706-NA, you would still technically owe tax on any US situs asset with a gross value in excess of $60,000.
Let’s make it very simple for everyone- if you represent a foreign client with assets in the United States with a gross value exceeding $60,000, you are required to file a federal estate tax.
Without the filing of the tax return, you are unable to take advantage of deductions, credits, and treaties benefits which might aid you in reducing the gross federal tax to a point of zero. Additionally, I might add, your client’s estate is not in compliance with federal estate tax laws if no 706-NA is filed