Mother passed away… Now IRS says we owe $100K in taxes?

General
1

I first posted about this on a Canadian tax forum, and it was suggested to post here for more advice. Here’s a summary of the situation:

  • Both parents were Canadian citizens and owned a US home together. They bought it for $600K, and after my mom passed away, my dad sold it for $800K.
  • We set aside money to cover the taxes for the $200K gain.
  • Total family assets are about $5 million, with additional US assets between $50K and $200K.
  • My mom was never a US citizen and had no US income, yet we just got a letter from the IRS asking for $120K in taxes from her estate.

Based on everything I’ve read, her estate shouldn’t be subject to US estate taxes, but the IRS says we owe money. Could this be due to a mistake in the tax return? What should we do?

2

Just a guess, but I’ve seen similar cases.

If your mom was listed first on the deed, the IRS may be assuming she sold the house and is taxing the full amount of the sale. They might think she earned the entire $800K, which would trigger a tax bill. If a US bank was involved, they might have needed her tax identification number, which could have linked her to the sale.

You might need to file a return with the right details, like how the sale was split and how long you owned the property.

Best to talk to someone who knows international taxes to avoid double taxation. But this is just a guess from what you shared.

3

This sounds more like an income tax issue rather than an estate tax. When you sell property in the US, the IRS treats it as US income, and they might be assuming the entire $800K was profit. That would explain the $120K tax bill at the 15% capital gains rate.

Did your dad file a US tax return after selling the house?

Also, when someone passes, they’re usually required to file a final income tax return. Did that get done?

4

Yeah, spot on. Also, just to be clear, we’re talking about US dollars, right? Better to make sure when dealing with the IRS.

5

You don’t have to worry about the final income tax return. The IRS will assume the surviving spouse inherited everything and will handle the taxes based on that.

6

That’s true as long as the IRS knows about the surviving spouse. If the spouse was a foreign national, though, they might not have filed a US return before the property sale.

7

You’re probably right. If they filed jointly before, the IRS would already have the info. And if dad inherited everything, there might not be a need for a separate estate tax return until he passes.

8

It’s tricky when you’re dealing with foreign citizens. The estate tax exemption is only $60K for nonresidents, and spouses don’t automatically get a spousal exemption unless they’re US citizens.

Canada has a tax treaty with the US, but to use the treaty benefits, you might have needed to file an estate tax return. Not sure if that would’ve helped you avoid the estate tax entirely.

You should definitely get in touch with a US tax attorney for more advice. They’ll know how to navigate this situation.

9

If this is about Canadian taxes, check out our sister forum on Canadian tax issues.

10

Why not redact the letter and post it here? Everything else is just guessing without seeing the details.

11

We don’t have enough info about the additional US assets, so anything said here is speculation.

Could you owe $120K? Possibly. Did something get filed wrong? Maybe.

What exactly does the IRS letter say? Does it break down the tax owed? That’s the key here.

12

Non-US citizens only get a $60K estate tax exemption. Could that be what’s happening here?

13

This is why having a living trust is so important.

14

Trusts still have to file tax returns. The issue here is probably that no return was filed at all. The gain should be $200K and taxed as long-term capital gains, not $800K.

You need to find a tax attorney who specializes in US-Canada tax issues. It’ll cost you something, but definitely not $120K.