By Anthony Diosdi
Any individual who is a non-U.S. citizen/non-U.S. domiciliary is subject to special transfer tax rules. A non-U.S. citizen/non-U.S. domiciliary is subject to a U.S. federal estate tax only with regard to the decedent’s assets which were situated within the United States upon his or her death (i.e., real estate located in the United States, or stock in a domestic corporation). Unlike U.S. citizens and U.S. domiciliaries, the estate of a person who is neither a U.S. citizen nor a U.S. domiciliary is only allowed a $13,000 estate tax credit, which results in an estate tax exemption of only $60,000 of United States situs assets. A person who is a non-U.S. citizen/non-U.S. domiciliary is also subject to U.S. gift tax with regard to inter vivos transfers of real estate and tangible personal property (including cash) which is situated within the United States. U.S. federal gift tax is not imposed with regard to inter vivos transfers of intangible property, such as shares of stock. There are no gift tax exemptions available for a non-domiciliary making a taxable gift of a U.S. situs asset. However, a non-domiciliary may potentially utilize a current annual gift tax exclusion of $15,000 per donee to mitigate any gift tax consequences.
Below, please see an example which demonstrates a situation where a non-U.S./non-U.S. domiciliary could be subject to a U.S. gift tax.
Sandeep is a citizen of India and is a non-U.S. citizen/non-U.S. domiciliary. Sandeep owns a single family home in San Francisco, California worth $3 million. Sandeep gifts the San Francisco home to his daughter a U.S. citizen. Sandeep would be subject to a U.S. gift tax on the value of transferred home to his daughter.
What if Sandeep sold the San Francisco home for $3 million and gave his daughter a gift of $3 million? Would Sandeep still be liable for a U.S. gift tax on the transfer to his daughter? Although not entirely free from doubt, guidance from the IRS and case law indicates that the $3 million that Sandeep transferred to his daughter is U.S. source tangible property. Based upon the fact that the $3 million that Sandeep gifted to his daughter is tangible property, the transfer of money by Sandeep (a foreign donor) would be subject to U.S. federal gift tax. This is because the money transferred was situated within the United States. Sandeep could potentially avoid U.S. gift tax by wire transferring money to his daughter from a personal account located outside the United States.
Anthony Diosdi concentrates his practice on tax controversies and tax planning. Diosdi Ching & Liu, LLP represents clients in federal tax disputes and provides tax advice throughout the United States. Anthony Diosdi may be reached at 415.318.3990 or by email: Anthony Diosdi – adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.