Originally posted this on a Canadian forum and someone suggested I try here. Everyone involved is Canadian. The only US connections are a property and some US-based investments my parents had.
Here’s a quick rundown, hoping to get some advice while we work with accountants and lawyers:
Parents owned a US home together. Bought it for $600K, and after Mom passed, Dad sold it for $800K ($200K gain).
Dad has already set money aside with help from a US accountant to cover his capital gains taxes.
Parents’ combined worldwide assets are under $5 million.
Other US assets (not including the property) range between $50K and $200K.
We just received an IRS letter about my mother’s estate, saying we owe $120K.
Just a guess, but I’ve seen similar things happen before.
If your mom’s name was listed first on the deed, the sale might have been reported under her name and tax ID. The IRS could be calculating taxes based on the whole sale price under the wrong filing status. If your parents had a mortgage with a US bank, they would’ve needed a tax ID (either an SSN or ITIN) for the first name on the deed/mortgage.
In this case, you might need to file a return to provide missing info (like filing status, gain from the sale, and how long the property was held). Definitely talk to a tax pro who knows international filings to make sure your dad doesn’t get taxed twice on the gain.
Just a guess based on what you shared, but I’d contact a pro to be safe.
@Kellen
This sounds about right. And remember, everything will be calculated in USD, not CAD. Just making sure you were talking in USD, but it’s good to be clear.
This shouldn’t be a big concern. The IRS generally assumes the surviving spouse inherits everything and owes taxes on whatever income was owed.
That depends on if the IRS has your father on record. If your parents never filed US tax returns, this could’ve slipped through until the property sale.
@Kellen
I figure they probably filed jointly, given that there were some US-based investments. So after your mom passed, there may not have been a need to file a final return since everything passed to your dad. Estate tax wouldn’t kick in until your father passes.
Things get a lot trickier with foreign citizens, especially nonresidents. The estate tax exemption for nonresidents is only $60K, and you don’t automatically get the spousal exemption if your spouse is a nonresident, noncitizen.
There is a tax treaty with Canada, but you might have needed to file an estate tax return to claim the treaty benefits. I’m not sure if that would’ve cleared the estate tax in this case. I haven’t dealt with a notice like this before, so I’m not sure if there’s a way to fix it, but you should reach out to a tax attorney in the US for help.
Mal said:
This is why people should set up living trusts.
Trusts still need to file tax returns. The real issue here is that someone didn’t file the right paperwork. The taxable gain should only be $200K and taxed as long-term capital gains.
You need a tax attorney or CPA who knows Canadian/US estate tax rules. It’ll cost some money, but way less than $120K.