In the 1960's my father bought property in a city in a foreign country with a partner and they formed a company to manage it as it had rental-producing income. They are now planning to dissolve the company and have each of their children get their share in the property, for which the town approved a plan to tear down the existing structure and build a modern residential building. The property is currently valued at around 4 million dollars, I will get one-sixth of it. We will all share in a bank loan to cover the construction costs.
Can this be considered a non-taxable gift?
You pay taxes when you have an accession to wealth. If you receive shares in a new entity that can be structured as a non-taxable event, but there are many variables that need to be accounted for. It sounds like your father is contributing the land value of the property and an interest in this new building project to the new entity. He will of course be "cashing out" his basis and subject to potential tax and capital gains if he dissolves. There are ways to structure this so it is not treated as a gift or taxed multiple times in a non-optimal plan.
There are a lot of issues here. There is the issue of your father's and his partner's tax consequences. There is an issue of your father's estate plan. There are issues surrounding how to set up the entity and divide the 6 equal shares. There are issues about whether to merge the two entities or create a new entity, and whether dissolution is the best strategy. You have United States and International Tax issues.
This is definitely the kind of question where you need to provide counsel with all of the necessary documentation and start to prepare a plan. You will probably have a number of attorneys involved.
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It sounds like you are going to get a real estate gift in a foreign country that is worth about USD 670,000, right?
If so, the main issue that you will face is the tax that you will pay on that gift of real property in the foreign country. In most countries, a transfer of real property is subject to tax in the country where the real estate (aka, "real property") sits. Here, the real property sits in a foreign country, right? In most countries, you can't just gift away that much property and have it be non-taxable.
You may also have some tax burden in your home country, but the primary issue is the tax burden in the foreign country. There may be some forms of real estate transfer that will limit, avoid, or defer this tax burden, which will be a country-specific solution.
For this kind of issue, I think you will need local counsel. If you need help finding local counsel, check out our website and feel free to get in touch for a free consultation on finding the appropriate local counsel.
After you figure out your tax burden, you can then focus on the bank loan.
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International Law Attorney
Your question needs clarification. You said your father bought property in a foreign country and they formed a company. There are several international tax consequences. First of all I assume you may pay property taxes overseas. Secondly you do not clarify in which jurisdiction you formed the company. If you dissolve the company you need to sell the asset (namely the property). The property will be presumably sold in the foreign country. There are tax implications here. Will the money be split at the source? Is the entire amount arriving in the US and then split? I think you need to talk to an international tax attorney. Feel free to visit our website. Best
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