Business MattersInherited Irish property raises a taxing question

By Pat Duffy

Question: I live in New York, in my own house, on which I am paying a mortgage. I am about to inherit a house in Ireland from my mother. The house is valued at _65,000. What are the tax implications here in the U.S.

– S.A., the Bronx

Answer: First of all, since you are the child of the deceased and the value of the house is below the threshold allowed to children, there will be no Capital Acquisitions Tax to be paid in Ireland. However, the estate may have a Probate Tax of 2 percent to be paid. If so, your property will be released to you when this tax, if required, is paid.

You are now in possession of a new asset, a house valued at _65,000. Since you received it as part of a bequest, the value to you now for tax purposes is the present value of _65,000. This is now the new tax basis of the property. In other words, this is the “cost price” to you. When and if you ever sell it, this fact will be very important.

Equally important is the fact that there is no tax implication for you in the U.S. in receiving the property.

Once you receive it, you have two basic choices as to what you wish to do with it. On the assumption that your present home in New York is your primary residence, you cannot consider the house in Ireland as your primary residence. You can only have one primary residence. However, you could consider it a vacation home. This will probably have no effect on your taxes, since it is likely there is no mortgage on the home. If there is a mortgage, however, you could claim a deduction for the interest paid on your Schedule A as an itemized deduction each year.

And with foresight, you could turn it into a cash bonanza in the future, since the new U.S. tax laws allow you make a profit of $250,000 (single) and $500,000 (married) on a personal residence and pay no tax on it. Be careful, however, if you travel this route, as there is a two-year living requirement in the house before you qualify for that.

Your other option is to rent out the house. Assuming you are either a green-card holder or U.S. citizen, you are liable for tax on world wide income. Thus, the income obtained and the expenses incurred in operating a rental property are expected to be included on Schedule E of your tax return.

One advantage of this approach is that you could write off as an expense the cost of visiting the property to inspect it and see that it is kept in repair.

Be aware, however, that from an Irish tax point of view, the profit obtained from renting the property in Ireland is also subject to Irish taxes. However, the reality is that in all probability you will owe no taxes in Ireland, since the expenses and depreciation incurred in operating the rental property is usually greater than the income. If perchance you did have to pay taxes on the rental profit in Ireland, you would obtain a tax credit on your U.S. tax return for those taxes paid since the intent of the U.S.-Ireland Tax Treaty is that we do not pay tax twice on the same income.

Patrick J. Duffy, MS, CFP is a certified financial planner practicing in New York City. He specializes in business and personal financial planning with the overall aim of enhancing an individual’s or family’s quality of life. His office is at 767 Lexington Ave., New York, NY 10021 and he can be reached by telephone at (212) 755-7736.