Wednesday, March 21, 2012

Form 8938 and Real Estate (And Other Foreign Assets) (3/21/12)

An issue that has been discussed via comments to various blogs is whether foreign real estate must be reported on Form 8938.  The Form 8938 is here, and the Form 8938 instructions are here.  The IRS has answered this question in a recently posted "Basic Questions and Answers on Form 8938 (posted 2-29-12)," here.

Question 3 addresses the issue as follows:
3. Does foreign real estate need to be reported on Form 8938? 
Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938.  For example, a personal residence or a rental property does not have to be reported. 
If the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.  The value of the real estate held by the entity is taken into account in determining the value of the interest in the entity to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.  
The IRS web site addresses other issues related to the Form 8938, so I refer readers to it.

I think that is the right answer.  However, I just today read a report of a webcast sponsored by the AICPA on March 20 on Code Section 6038D and Form 8938 .  Marie Spairie, Officials Discuss Goals of Proposed Foreign Asset Reporting Regulations, 2012 TNT 55-2 (3/21/12).  In that report, is the following comment:
A lease of foreign real estate would be an asset held for investment by the lessor and thus a specified foreign financial asset, unless the lessor has a business and the leasing activity is part of that business, Gilbert said.
Henderson said the IRS would view a take-back mortgage arrangement in which a taxpayer sells foreign real estate but finances the sale as a contract held for investment that would be reportable. However, if the taxpayer is in the real estate financing business, that may change the result, he said.
 Hopefully readers with more specific information can weigh in with comments about this issue.  In the meantime, I would think that the IRS web site is the more authoritative pronouncement, pending further developments.

The article has some other information potentially useful to readers of this blog.  I have requested permission from Tax Analysts to post a link to the article on this page.  I should caution that, when Tax Analysts gives permission, the permission is not effective until two weeks after Tax Analysts publication date.

21 comments:

  1. I am confused about the requirement to report an interest in a foreign estate on 8938. I am a permanent resident currently in US. My parent, a non-US person resident in my native country.
    1. Parent has assets (bank accounts, investments) which make up her estate.
    2. Parent also has two trusts one of which I am a beneficiary (with a non-US sibling), and the other my children are beneficiaries (along with other non-US grandchildren).
    Is all this to be included in 8938? It would seem crazy that I should go and ask my parent to provide me with such detailed financial information.
    Thankyou for this blog, it is very helpful.

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    Replies
    1. I think you should engage a tax professional so that he or she can peel back the layers on this one and give you a good answer.

      I think I can clarify one thing for you. Apparently you are concerned about your mother's assets which make up her estate. She is apparently still alive.

      The estate that is referred to is the entity created at death for orderly transfer of a decedent's assets and payment of liabilities. An estate is not the assets of a living person, even though that person may colloquially think of what they own as his or her estate.

      Jack Townsend

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    2. OMA -

      Yes, you should go ask your parent for this type of info, especially for FBAR purposes, this may have to be reportable. Fines for failing to do so are draconic.

      Delete
  2. My uncle is a permanent resident in the US. He owns real estate in his name which is a rental property now. Does he have to report it IRS on 8938 or something else?

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  3. In Part 1 of 8938, there are only two types of accounts: deposit or custodial. For my own saving account, security account, life insurance account (with cash value), are they 'deposit' accounts?

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  4. My own view is to disclose all accounts - not wait for IRS interpretation of what is and what is not a financial asset. In a worst case you would have disclosed more than required but avoided a $10k in penalties.

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  5. Question about reporting a bank a/c having several CDs in rupees, US dollars, Euros, and BRitish pounds. Is it ok to simply convert all currencies into US dollars and report them on One single 8938? I am going to report the correct max value and accrued interest so it is truthful. So irs is going to get the proper max value and proper tax. Otherwise, I will have about 9 sheets instead of 4, one for each individual bank. will IRS penalize with $10000 for doing that? what are folks doing with their multi currency accounts? thanks.

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  6. i have a similar situation and plan on converting USD,Rupees and AUD to USD and report that as a single account in 8938

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    1. I don't know if you are using a specialized CPA. My CPA has advised me that I need a separate disclosure of each specified financial asset i.e. each certificate of deposit, each mutual fund holding etc. The instructions to Form 8938 are also clear on this front.

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    2. but my concdern is that if we combine the different currencies, then what do we say about "did you use an exchange rate", you have to answer yes or no?

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    3. My CPA had never seen an 8938 until I showed up, but its just another form to him. He's been filling out US tax forms for thirty years.

      He looked at my assets which in one institution amounted to two term deposits and a sort of checking account all identified under one account number and we agreed this is one account. I added them up and reported on the FBAR and 8938 the maximum value.

      I was spooked with the delinquent FBARs just because they meant I was in violation just for not filing. So I agonized over every last detail to make sure my filings were perfect.

      But with the 8938 its brand new, no one has filled one out before, and no one is delinquent yet. Even I could view it as just another form. If in doubt I threw in assets - eg. my tiny Mastercard credit balance. They aren't going to assess $10,000 penalties for forms filled in on time that contain "the mistakes of an honest man" as the President of the United States pioneered for us when he came up with this phrase to defend our Secretary of the Treasury in the US Senate, as long as we don't look as guilty as that particular "honest man". (caution: this is just the guess of a layman)

      All values on either the FBAR or the 8938 need to be expressed in US dollars, so if you had assets denominated in any other currency you would have used an exchange rate to convert them to dollars.

      The exchange rate question seems clearer on the 8938 than it is with the FBAR, although maybe not. The FBAR and the 8938 forms, as I recall, direct people to use the posted exchange rates at fms.treas.gov.

      But, this IRS FBAR FAQ says this: "Though the FBAR instructions direct filers to use the official exchange rate, the Internal Revenue Service has no official exchange rate and generally accepts any posted exchange rate that is used consistently".

      When I was wondering if IRS was going to assess a penalty based on the value of the assets listed on the FBAR I wondering what rate to use. Otherwise it seems just use a rate that can be verified by IRS.

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  7. I talked to my CPA and he seems to fine with treating all the CD's as sub accounts under one master account. So i am listing only one account.

    Where does the instruction state that each CD should be reported as a financial asset? The banks in each country
    have different banking software and the reporting may differ.

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    Replies
    1. Anonymous - confused about FATCA! will the Indian banks provide 1099 yearly statements to the IRS and the customer from 2014? I have no problem with that in fact that is what I want them to do even for 2011! Also, will these foreign banks withhold 30 percent from the interest every year?

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  8. Form 8938 is asking for "maximum value of account during tax year". Is this the highest balance I have ever had in the account or the actual account balance at the end of the year? If it is the highest balance I have ever had, then I would be over-reporting my assets. For example - I wire dollars overseas into my dollar account. I transfer some to a local currency account, then I withdraw and take to another bank to open CD's. So, reporting max value becomes waayyyy more money than I ever had! What to do?

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  9. Say if a taxpayer had a full tax year for 2010, is this form required to be filed for tax year 2010 as well along with the 2011 tax returns?

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  10. Anyone given an thoughts about how community property needs to be reported if only held in the name of the NRA spouse? The fact that property is titled one way is not determinative of who owns the property.

    Merely because community property (CP) is not titled jointly doesn't mean that it is not jointly owned.

    But is such separately titled CP property held in name of NRA spouse then reported on form 8938?

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    Replies
    1. The statute (Section 6038D) says that it applies to anyone who "holds any interest in a specified foreign financial asset." That is about as broad as it gets and would, barring some express indication to the contrary (of which I am not aware), include property owned via community property rules regardless of titling.

      The purpose of the 8938 is to identify property that has potential tax implications. Beneficially owned property, however titled, has tax implications. So, I would be surprised if the IRS in interpreting the statute were to relieve taxpayers in this situation from reporting.

      Jack Townsend

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  11. As i know
    that a deduction of 30 % is allowed from total rent which is charged to tax.
    Thus which scheme government has announced about the property taxes, it would
    be much beneficial for Realtor.

    ReplyDelete
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