A foreign inheritance is not taxable in California, and it is not taxable as income under federal law either. California has no inheritance tax, no estate tax, and no gift tax, and the IRS does not treat money or property you inherit as gross income, no matter where in the world it came from.1Internal Revenue Service. Gifts and Inheritances2State Controller’s Office. California Estate Tax What makes foreign inheritances complicated is not the tax bill. It is the federal reporting paperwork, and the penalties for missing it can be enormous.
What You Actually Owe
Nothing on the transfer itself. The IRS treats inheritances differently from wages or investment returns: as the recipient, you owe no income tax on the inherited cash, real estate, securities, or other property, regardless of amount.1Internal Revenue Service. Gifts and Inheritances
California takes the same position. The Franchise Tax Board confirms that gifts and inheritances should not be included in your state income.3Franchise Tax Board. Gifts and Inheritance California eliminated its inheritance tax in 1982 and its estate tax in 2005.2State Controller’s Office. California Estate Tax There is no state-level equivalent of the federal foreign-gift reporting forms.
What is taxable is what the inherited assets do after they are yours. Dividends from inherited stocks, interest from inherited accounts, and rental income from inherited property all count as ordinary income on both your federal and California returns in the year you receive them.3Franchise Tax Board. Gifts and Inheritance And if you sell, you may owe capital gains tax — more on that below.
When the Foreign Estate Itself May Owe U.S. Tax
You as the heir owe no income tax on the inheritance. But the deceased person’s estate can owe U.S. estate tax before anything reaches you, and the rule for foreign decedents catches families off guard.
If the person who died was neither a U.S. citizen nor a U.S. resident, their estate still owes federal estate tax on any U.S.-situated assets — American real estate, shares in U.S. companies, tangible personal property located in the United States. The filing threshold is just $60,000.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes for Nonresidents Not Citizens of the United States Above that, the estate must file Form 706-NA, and the tax rate can reach 40%.
A foreign parent who happened to own a U.S. vacation home or a U.S. brokerage account can trigger this. Some U.S. estate tax treaties — with roughly a dozen countries including Canada, the United Kingdom, Germany, and Japan — allow the nonresident’s estate to claim a prorated version of the full U.S. unified credit based on the ratio of U.S. assets to the worldwide estate, which can substantially raise the effective exemption.5Internal Revenue Service. 4.25.4 International Estate and Gift Tax Examinations Whether a treaty helps depends on the decedent’s country of residence.
Form 3520: The $100,000 Reporting Trigger
This is where most people get into trouble. The inheritance is not taxable, but the IRS wants to know about it. If you receive more than $100,000 in a single tax year from a nonresident alien individual or a foreign estate, you must report it on Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.”6Internal Revenue Service. Gifts from Foreign Person
A much lower threshold applies to amounts received from foreign corporations or foreign partnerships. That figure adjusts annually for inflation and was $19,570 for 2024.6Internal Revenue Service. Gifts from Foreign Person Form 3520 is an informational return. Filing it does not create any tax liability. It just tells the IRS the transfer happened.
The form is due April 15 for calendar-year filers. An income tax extension pushes it to October 15, and U.S. citizens and residents living abroad get an automatic extension to June 15.7Internal Revenue Service. Instructions for Form 3520
The Penalty for Missing It
For unreported foreign gifts and bequests from individuals or estates, the penalty is 5% of the unreported amount for each month the form is late, capped at 25%.6Internal Revenue Service. Gifts from Foreign Person On a $500,000 inheritance, that is up to $125,000 for a paperwork failure, not a tax debt. Distributions from foreign trusts that go unreported carry a steeper penalty: 35% of the gross distribution.7Internal Revenue Service. Instructions for Form 3520
A reasonable cause exception exists, but the IRS applies it narrowly. The safer move is to file on time with your best estimate of the value and amend later if needed.
Foreign Accounts: FBAR and FATCA
Inheriting a foreign bank account, investment account, or similar financial asset triggers two more disclosure regimes that run alongside your tax return. Many heirs end up subject to both.
FBAR (FinCEN Form 114)
Once the combined value of all your foreign financial accounts tops $10,000 at any point in the year, you must file a Report of Foreign Bank and Financial Accounts with the Financial Crimes Enforcement Network. The duty kicks in the moment you inherit a foreign account or gain signatory authority over one, even if nothing has moved. The FBAR is filed electronically through the BSA E-Filing System, separate from your tax return, and is due April 15 with an automatic extension to October 15.
Non-willful violations can draw penalties exceeding $16,000 per account per year. Willful violations can reach $100,000 or 50% of the account balance, whichever is greater. Penalties apply per account and per year, so they stack quickly across multiple accounts or multiple missed filings.
FATCA (Form 8938)
The Foreign Account Tax Compliance Act requires a separate disclosure of specified foreign financial assets on Form 8938, filed with your income tax return. For unmarried taxpayers living in the United States, the requirement starts when foreign assets exceed $50,000 on the last day of the tax year or $75,000 at any point during the year. For married couples filing jointly, those thresholds double to $100,000 and $150,000.8Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets
FATCA reaches beyond bank accounts to foreign stocks, partnership interests, and financial instruments held outside of accounts. The penalty for not filing starts at $10,000, with another $10,000 for every 30 days of continued non-compliance after the IRS notifies you, up to $50,000.9Internal Revenue Service. Instructions for Form 8938 A substantial foreign inheritance can easily trigger FBAR and FATCA at the same time.
If the Inheritance Comes Through a Foreign Trust
Inheritances that pass through a foreign trust are a different animal, and the consequences go beyond reporting. Current-year income the trust distributes to you is taxable at your ordinary rates. Accumulated income the trust held back from prior years is worse: under the “throwback rules” it loses its original character — capital gains, dividends, and interest all get reclassified as ordinary income — and the IRS adds an interest charge calculated as though you should have received and paid tax on that income in the earlier years. On old accumulations, the combined tax and interest can in some cases exceed the distribution itself.
You report trust distributions on Part III of Form 3520. If the foreign trust was required to file Form 3520-A and did not, you as the U.S. beneficiary may need to submit a substitute Form 3520-A to avoid penalties.7Internal Revenue Service. Instructions for Form 3520 This is one area where professional help is close to essential.
Selling Inherited Foreign Property
Sell inherited property for more than it was worth when the person died, and you owe capital gains tax on the difference. Inherited property gets a “stepped-up basis”: your starting value is the fair market value on the date of death, not what the deceased person originally paid.1Internal Revenue Service. Gifts and Inheritances A home a parent bought abroad for $50,000 thirty years ago but worth $300,000 at death gives you a $300,000 basis. Sell for $310,000, and only the $10,000 gain is taxed.
The step-up applies to assets inherited from a nonresident alien decedent too, even when the asset was never part of a U.S. gross estate. The practical hurdle is proving the number. You will typically need an appraisal from a qualified professional in the country where the property sits, converted to U.S. dollars at the date-of-death exchange rate. Get it done promptly; the value is harder to establish years later.
If you pay foreign income tax on rental income or on a capital gain from inherited property abroad, you can generally claim a foreign tax credit on your federal return to avoid being taxed twice. California allows a similar credit on your state return for taxes paid to foreign countries, though the mechanics differ. Keep records of every foreign tax payment: they come straight off what you owe the IRS and the Franchise Tax Board.