My wife (a US citizen) inherited 3 acreas of land in Honduras. She recently sold it for $100,000. To date she has only received a down payment of $20,000 of which she had to pay a capital $4000 capital gains tax to Honduras based on the total sales price.

The purchaser has run into some legal complications (corrupt government) and is currently withholding an monthly payments.

Does she have to pay income taxes on inherited property and would it be on the full amount even though she may never receive any remaining installments?

Thanks

The fact that she paid a captal gains tax to Honduras implies that the property was sold for a profit.

I am not sure what the basis for the property will be, because I do not know off-hand whether the step-up provision for capital assets under current estate tax law applies for inherited foreign property; perhaps IntlTax can address that issue.

As for whether she pays on the difference between the basis and $20,000 or the difference between the basis and $100,000 paid under an installment plan cannot be determined at this time, because you do not know for sure whether any additional money will be received.

You also have the need to claim a Foreign Tax Credit (Form 1116) for the $4,000 paid to Honduras.

The complexity and the number of unknowns associated with this situation virtually demands that you contact a local tax professional with experience in both estate taxes and international tax issues. Trying to prepare the return yourself, using advice from a tax forum, is a recipe for disaster In my opinion.

Your wife's U.S. tax basis in the property would be the value of the property on the date of death of the person she inherited it from. If the land is held through a Honduran corporation (not uncommon in Central America), she may need to file Form 5471 to report the ownership (and the taxation of the gain could be complicated if the corporation is selling the property).

One item that is unclear from the facts presented is whether the property has already been sold (closing has occurred) and payments are being made on an installment note, or whether you have received a down payment to purchase the land but closing has not yet occurred. The U.S. tax treatment varies depending on this determination.

It would be helpful if you let us know whether closing has already occurred and how much time passed between the date of inheritance/death and the date of sale.