Ep 71: DEMATS, PFICs & Provident Funds: What Indians Moving To America Need To Know
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Manasa was a guest on The Expat Wealth podcast a few months ago, hosted by Richard Taylor. It was such an amazing conversation, and with Richard's permission, we are bringing it to you on this episode.
Richard and Manasa Nadig discuss the financial landscape for Indian expatriates in America.
They explore common financial assets, tax compliance issues, and the importance of pre-immigration planning.
The conversation delves into specific financial tools such as bank accounts, retirement accounts, and the complexities of PFIC reporting.
They also touch on real estate and inheritance considerations, emphasizing the need for proper reporting and planning to avoid pitfalls.
Key Takeaways
Understanding the common financial assets for Indian expats is crucial.
Bank accounts are the simplest financial tools to manage.
PFICs can lead to punitive taxation if not reported correctly.
Pre-immigration planning can help avoid financial pitfalls.
Inheritance and gifts from India must be reported to the IRS.
Real estate can be a valuable asset, but requires careful management.
Insurance policies in India may have complex reporting requirements.
The importance of understanding the differences in financial products across countries.
Tax compliance is essential for maintaining good standing with the IRS. Seeking professional advice can help navigate cross-border financial issues.
Chapters
00:00 Introduction to Indian Financial Assets in America
07:12 Common Financial Tools for Indian Expats
12:12 Understanding Bank Accounts and Reporting Requirements
20:39 Navigating PFICs and Investment Accounts
28:13 The Importance of Pre-Immigration Planning
35:36 Real Estate and Inheritance Considerations
40:00 Conclusion and Resources for Indian Expats
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Jane
There are over 3.2 million foreign-born residents from India in the US today – they form the second largest group behind Mexico. They hold a ton of wealth back in India in the form of bank accounts, mutual funds, investment accounts, gold, and other forms of wealth.
Of course, this needs to be reported to IRS, but it takes special expertise to know what to report.
A few weeks Manasa joined Richard Taylor on his podcast plan first wealth to help unravel this complexity. Richard is the owner and founder of the investment company Plan First Wealth.
We’ve known Richard for a long time, and love the work he does, and infact we are happy to call him a friend of the show.
He has graciously allowed us to share this episode with you our listeners –enjoy the conversation.
Richard Taylor (00:00.046)
We've all got our war stories. In the cross-border space, we've all got our war stories. Right, okay, so let's start this from the beginning. Indians in America, what are the most common Indian financial assets, tools, accounts that you see cropping up and how should they be treated?
Manasa Nadig (00:19.726)
There are ways that in India, let's say for example, going back to this country, there is a way that you can classify certain things. You can never, if, you know, there are other people that you have spoke to and they've already talked about this. It's really not, you can't go and put things in a trust, you know, just because you're leaving that country because that again, triggers a whole lot of other situations which we don't want.
Richard Taylor(00:49.334)
My guest today is Manasa Nadig. Manasa is the owner and CEO of MN Tax and Business Services. And she is also the co-host with our friend, Jane Mepham, of the International Money Cafe podcast. And she is joining us today to discuss what Indian expats in America and those thinking of coming to America need to be aware of from a tax and financial perspective. Hi, Manasa. Welcome to Expat Wealth. Okay, so if you wouldn't mind.
Manasa Nadig (02:13.272)
Hi Richard.
Richard Taylor (02:16.171)
Would you just introduce yourself for the folks listening?
Manasa Nadig (02:19.502)
Absolutely. So I'm an enrolled agent, which means my license to practice is from the Internal Revenue Service for those who don't know and I have the same rights to represent my clients with the Internal Revenue Service and all of that good stuff. I live in the Southeast Michigan area and I have been practicing for a long time now.
Although I've been on my own, say maybe about around 13 or 14 years. So during this time, do a lot of cross border tax compliance and foreign assets reporting and all of that because we have found that there aren't as many people that there should be who can help out in this area. that's a little bit about me and we can get started with whatever questions you have.
Richard Taylor (03:15.572)
Yeah, well, you know, this is a bit of an unusual one for me actually because Historically, we've stuck mostly to British expat stuff, which is very much my wheelhouse But having decided to expand the scope of the podcast You are our first guest who is explicitly going to be talking about another expat group So I'm actually gonna be leaning quite heavily on you this time now the reason I decided to expand the scope was because I want
One, so much of the cross-border stuff is transferable. The 80-20 rule, 80 % is applicable to all expats.
And it's just more interesting, I think, as well, to learn about all these different perspectives. So whilst I think I'm on relatively safe ground, because I think I do know myself in the cross-border world, the 20 % that is very specific to Indians in America or Indians thinking about coming to America, I'm going to be leaning on you very heavily. So that's what we're going to talk about today is how should Indians who are already in America or thinking about coming to America, what do they need to be thinking of? What do they need to be aware of? What are the traps that exist?
How can we help them avoid those traps? How can we help set them up for success here?
Manasa Nadig (04:24.138)
Absolutely. Definitely. For any expat coming to the US, there's a whole list of things that needs to be done. And as far as Brits and everybody else, actually, a lot of these rules apply to no matter which country you're coming from.
But when you get to a certain specific country, there are all of these terminology and maybe similar kind of assets, but with different names and those are subject to US tax reporting. And funny story of course is, you know, I mean, we have so many clients and they necessarily may not have had only a footprint in India, right? They could have traveled to different countries and then they must have come to the US as well.
For example, the last time you and I spoke, I was telling you the story about one of my clients who went from India to Australia, worked there for a few years, accumulated some retirement accounts and bank accounts, and then moved from there to the UK, accumulated some other pensions in the UK and stuff like that, and then came to the US. And during this time, they did also build their wealth in India. So now they had a footprint across four countries. But staying specific to India today, there are many...
Richard Taylor (05:51.662)
When they first approached you, so this is an Indian with Indian stuff, with Australian stuff, with British stuff, with American stuff. When they first approached you, what was their affairs like? they in well order or from a US perspective, were they a of a disaster?
Manasa Nadig (06:10.616)
Surprisingly, because they were one of those high net worth individuals who had been helped by one of the big four companies until the time that they approached me, their foreign reporting, so to speak, especially because they had their footprint in so many different countries, were relatively in good order. Now, there were some specifics that had kind of been missed, but I think that I take that as a win actually, especially when you are looking at that kind of an extent of holding and there's so many different countries involved.
So fortunately, this particular person did not have a horror story to go with their reporting, but there have been horror stories from other people, which, you I don't know if we'll have time to go into that today, but definitely, yeah, all kinds of you know, non-reporting, non-compliance and everything which we've helped clean up, but not in this particular
Richard Taylor (07:12.078)
We've all got our war stories. In the cross-border space, we've all got our war stories. Right, okay, so let's start this from the beginning. Indians in America, are the most common Indian financial assets, tools, accounts that you see cropping up and how should they be treated?
DEMAT Accounts - Similar to Mutual Funds Accounts in the US
Manasa Nadig (07:31.726)
So of course, there are the bank accounts. That's the no-brainer. Now, when there is a US person and they go and open a bank account in India, and know, India and the US have the FATCA agreement, the Intergovernmental Agreement.
So, like we always talk about FATCA, when you go and you are not a person of that country, the bank asks you, you know, if you are a US person and then, everything gets reported under FATCA. So if you are such a person, then you would have opened a non-resident account in India because you're not allowed to open an ordinary bank account.
They already tagged that with a non-resident ordinary or a non-resident external account. Now you may have opened an account when you lived in India and it was an ordinary bank account, but the rules under the Reserve Bank of India say if you've been outside India for a while then there is a period of time after which these ordinary accounts get converted to a non-resident account. anything, any bank account, even if you have not made that change, you know, even if they continue to be ordinary bank accounts, they need to be reported of course.
There are now mutual funds, et cetera, are called differently. They are kind of the way that we have the ETFs and the brokerage accounts in India, they're called DMAT.
Richard Taylor (09:04.206)
What's that called? Sorry, DMAT.
Manasa Nadig (09:06.21)
DEMAT, yeah, D-E-M-A-T. It's a short form for, think it says, it's short for dematerialization or something like that, but that's what it is. These are DMAT accounts. And usually DMAT accounts hold mutual funds, other ETFs, sometimes life insurance policies, and sometimes DEMAT accounts could also hold savings accounts within that wrapper. So.
These are DEMAT accounts and we'll come back to that later.
Richard Taylor (09:36.77)
So broadly, that's what we would call a brokerage here or in the UK, a GIA.
PPFs (Public Provident Funds) and EPFs (Employees’ Provident Funds) Accounts
Manasa Nadig (09:41.88)
Broadly. Yeah, broadly. Yes. Yeah. And then of course, there are the retirement accounts, there are the employer provident funds, which, you know, the employer contributes into and the employee contributes into.
Then there are the public provident funds, which are the PPFs and the EPFs earlier.
Now the public provident funds are like individual retirement accounts here in the US. There is no employer and you can contribute into the public provident fund on your own and that does lower your taxes on your Indian tax account. I mean a return if you have to file. So definitely both of those and then insurance policies.
Insurance Policies
Now, insurance policies in India are very popular and there are many insurance policies that are wrapped like a retirement policy. You know, these are people who pay premiums into these policies and then leave them alone, and then there is a balloon payment after a certain amount of time. So these insurance policies are there.
We get into the whole gray area of PFIC reporting, but I'll come to that later. So the big broad ones here are bank accounts, retirement accounts like the provident funds, the insurance policies like the, that we already talked about and the DMAT accounts, I'm sorry.
So these are the four broad category of financial accounts that most Indians are there popular among expats in India and the US residents who have Indian bank accounts, yeah, financial
Richard Taylor (11:42.478)
Imagine Indian moves here, mid-career. They're going to have bank accounts. They're going to have a DEMAT account. They're probably going to have at least an employer provident account, maybe also a public provident account. And maybe, quite possibly for that popular, they're going to have some of this life assurance, cash value, investment value, insurance as well going on.
All of which can cause major headaches in America. So should we go through one by one? So let's start with this.
The most obvious one, the bank accounts. What does that require?
Indian Bank Accounts
Manasa Nadig (12:14.926)
Well, bank accounts are actually simplest of all of these, right? Because you have statements available from them. You have the interest rates and then you have the exchange rate. basically everything comes together pretty simple. You can get a statement from the bank which corresponds to the calendar year, whereas you know, the Indian tax year, like the UK and Australia and some other countries are at a different cadence.
They do not correspond to the calendar year, but statements are available. So to parse through the information that you need to, you know, report on a person's US tax return is pretty straightforward. So there's the bank account and the bank account, of course, there are the fixed deposits, the recurring deposits and all sorts of certificates of deposits that are there within that. So that's pretty straightforward.
Is the EPP a Retirement Account or Social Security Account?
The next one is the Employer Provident Fund. That one and the Public Provident Fund. The Public Provident Fund is where people kind of get into this gray area. Some people think and treat it as if it is social security. Now, there is no guidance, of course, from the Internal Revenue Service that says,
Public Provident Fund is easy cool into Indian Social Security, which if you really just look at the language of what social security benefits are and you look at the Public Provident Fund, there is some overlap, but it's not black and white. You can't say that this is social security because somebody who is high net worth can still opt to contribute into a public.
Provident Fund, or I'll call it PPF.
Richard Taylor (14:13.807)
Yeah, when you were explaining it, it sounded more like an IRA.
Manasa Nadig (14:17.29)
Exactly. It sounded like an IRA and I think that it is an IRA. It's not a social security account because you have access to the funds and you can see the money, you can see the growth and all of that. Basically, you go to any bank and you can open a PPF over there. that's a common...
Richard Taylor (14:40.898)
Yeah, that's not... That doesn't sound like Social Security to me. Is there a Social Security equivalent in India? Like, we have the basic state pension in the UK, Social Security in America. Is there an Indian equivalent?
Manasa Nadig (14:52.576)
Not really. really? Not really. Wow. yeah. There is no social security there. There are all sorts of welfare schemes, those are targeted to the not so fortunate strata of society. People who may not necessarily be in the U.S., right? So there is nothing that would just equal U.S. social security or national insurance in the U.K.
People like to think that the PPF is one, but I think that, you know, that's, that is not a correct assumption. I would treat it as a retirement account.
Richard Taylor (15:34.158)
It certainly sounds like a retirement account from what you've explained to me. Yes.
Manasa Nadig (15:36.952)
Yeah. Yes. Yes. There is the EPF, of course. Now, the EPF is where it gets tricky and it is dependent on where the person is. Now, suppose if this is a US citizen expat who is living in India and working in India and contributing into the EPF, you know, actively right now, they're actively employed.
It could be treated as a defined benefit or a defined contribution plan, right? Because it seems like it's a similar sort of wrapper. But if this is a person who used to work in India and has now come to the US and is no longer actively contributing into it, they can still keep the EPF active, so to speak. They don't have to, you know, close it out or take money out.
It is a reportable asset on your FATCA or FBAR, all of that. So that is a regular retirement account.
Richard Taylor (16:40.782)
Manasa, is there also, is it more reporting? So we've got FBAR, you know, obviously, but is there also 8938? Is there a 3520 for any of these?
Manasa Nadig (16:52.078)
3520s and the 3520As is again, where we get into the gray with the guidance. Now, are these foreign grantor trusts and can they be classified as foreign grantor trust or are they exclusively not categorized as such under the RevProc 2020-17?
We don't have clear guidance on that. So right now, what most tax practitioners do is they do not treat this as a foreign grant or trust. It's a, like any other defined benefit, defined contribution plan, which is reportable on your FATCA and FBAR of course, if thresholds are crossed in aggregate, but it does not get any other special reporting like the 8621s or the 3520s.
Richard Taylor (17:50.862)
Okay, oh good to know. Okay, so no 3520 and no 3528, we think. That's nice. That's nice, okay. Good, well, I'll take that win.
Reporting the DEMAT Account In The US and PFIC Considerations
Manasa Nadig (17:56.334)
Yeah. Yeah. And of course, then there is the DEMAT account, which holds the mutual funds. then it comes whenever we say mutual funds, you know, we all get into that fun, which I'm saying fun in a very sarcastic way, the PFC regime.
And that's where it gets really tricky, because again, here, the DMAT is a very popular holding, right? Because if you are living in India, this is one of your investment vehicles. You want to contribute into it. You want to see the money grow. You want to see the wealth grow.
But then there are PFC reporting rules to that. And, you know, we do have the mark to market. Most of them we have to do the mark to market because they are not eligible for the QEF election. And when you do the mark to market, yes, the unrealized capital gains, et cetera. They are subject to ordinary income tax rates.
Richard Taylor (19:04.686)
Let's just bring everyone on speed on this. So I have done dedicated episodes on PFIC before, I can't remember the number off the top of my head, but if people go and look back for an episode of Brian Dunhill, we cover the demon that is PFIC.
So, non-US collective investments, mutual funds, and ETFs are generally considered PFIC, which stands for passive foreign investment companies. It doesn't matter, but in general, the rule is for US taxpayers to avoid them like the plague. This is because they come with additional reporting requirements, onerous reporting requirements on each individual PFIC, each individual investment.
So if you have a DEMAT account with 10 ETFs, 10 mutual funds in there, that's 10 individual forms. And these are not simple forms, folks. And then on top of that, the general rule is it's pretty onerous report.
I should say punitive taxation there are elections available to your point right?
But but am I right in thinking even if you can get the mark to model one You have to do that if you miss if you you have to do that Up front and if you miss it you miss it. It's gone. So And and and correct me if I'm wrong here if your experiences like mine Everyone moves to America no one knows about this.
People don't report the pensions on the forms of talking about. People don't report the PFIC. They miss the opportunity to elect and we are into a hole. Now we have non-compliance and high taxation and very little we can do about it.
PFICs and Insurance Policies (ULIPS)
Manasa Nadig (20:39.466)
Exactly. And, you know, when it comes to India, what happens is sometimes if the holdings are pretty substantive, you know, even with the not-so-great exchange rate, like last time I checked, it was 90 rupees to a US dollar. But even with that, you know, the taxation aspect of these PFIC can be, like you said, punitive.
So you cannot just tell somebody, you got to get rid of this. You know, they may have lived, they may be in their 50s and may have lived, you know, three quarters of their working life in India and they have these huge mutual funds.
So you just have to then look at what their big picture plan is from a financial planning perspective, a cross-border financial planning perspective.
Are they going to live in the US long term and what do they want to do with all of these PFICS and since we're talking about PFIC actually let me quickly insert here why we would we mentioned life insurance policies earlier there is a particular life insurance policy in India called the ULIP now the ULIP what happens is a lot of the ULIPs are the back end are invested in the market so these could also be subject to PFIC? These are not opaque insurance policies. So then you get into all of this PFIC reporting.
And so you here now take a 40 year old person who has been working since their 20s, this 20 years of accumulated wealth, insurance policies, DEMATs, et cetera. And they come to the US on an L1 visa. Now they come to you and they have all of this. You know there's PFIC reporting.
And even if you started from day one, just the mark to market election is you're looking at this and you're going, wait a minute, you know, and that's when it gets into, is it worth keeping this or getting, you know, selling them off? Because selling them off may not be an option. Maybe this person is here for just three years and they want to go back.
Richard Taylor (23:00.59)
Ultimately, within a DEMAT, if it's just a regular ETF mutual fund, know, it's an easy process to sell if it's determined. I'm all right in thinking though, insurance can be much harder to unwind, much, much harder to unwind. It might not even, you know, without abandoning the whole policy, which can have an enormous cost. imagine. I'm unfamiliar with the specific plans, but that's, know, I'm familiar with the...
Manasa Nadig (23:19.022)
Exactly.
Manasa Nadig (23:31.608)
So you got to factor that in. So I've had a lot of these conversations with financial planners in India where we take into account the projected growth in all of these accounts, whether they are demands or ULIPs or insurance policies, whatever you have you, which may be subject to PFIC treatment, we look at the extent of the holding.
The exchange rate fluctuation and the projected growth in this to then determine whether this is something that people want to hold on to and whether the paying tax in the US on these is worth keeping those investments for them back in India. I mean, I know that we're kind of now getting into the specifics of this, but.
That is definitely a genuine concern for people who have these holdings in India and they then want to come to the US or are coming to the US, you know, or sometimes they inherit or are already here. And they inherit these DEMAT accounts and insurance policies from their family.
Richard Taylor (24:50.472)
You know, and you could have a situation where someone thinks they're coming for two years, three years, four years, whatever, right? And they hold onto these things. And imagine if you've got, I can imagine a scenario where someone's got various pensions that need, various retirement accounts that need declaring. They have a DMAT account. It's got a handful of mutual funds in it. They have some of this insurance. It's got a handful of mutual funds in it. Each individual mutual fund or ETF needs this 8621.
That adds up to a lot of reporting, which adds up to a substantial cost just for your tax preparer each year before you even get into any tax. But then that's great. Well, that's the wrong word to use, but that's fine, I guess, if they're go back and they can bear that cost in the short term. But I tell you what we see a lot is people come for two, three, four years, and then they're just getting started. And they decide to save for 10.
So when do you pull that rib cord? know, and then 10 turns into forever in some cases. You know, it's... I can imagine that had been a really... And then at that point though, you've got a sunk cost. You've been doing all this reporting for three, four, five years. Then you think you might stay. And then you're going to have to surrender them and bear all that cost anyway. It puts people in a real bad...
Manasa Nadig (27:05.366)
Yeah, it does. I totally agree with you because this is a conversation that you can't expect that you would have this problem, so to speak. don't know of any other word to say for that but you know, maybe then it's hindsight is not possible here.
You know you or even foresight you just have to take it as it comes, you know you
are in India at this point of time, I'm a 25 year old who's just got a job and hey, I think like my parents tell me, hey, you know what, you should start SIP. mean, you know what I mean.
Like that's the mutual funds are doing great. Our mutual funds are doing great. You just started working, go do that. And they start. And then, you know, four or five years down the road, they're in the US. Okay, heads up.
You have mutual funds, you need to do PFIC reporting. I think that's where our podcasts and things like that come in. We are hopefully people listen, and they're like, wait a minute, I have mutual funds in India. Maybe there's some reporting I need to do.
Richard Taylor (28:13.166)
Well, what's the ideal scenario? Is the ideal scenario that someone... we catch people before they come. That's why I always think about this from a British perspective, is that someone... I started it really to put this in for... our clients are people who are already here. So most of the time, we, you, are first of all clearing up a mess.
Right, inadvertent mess. But what I hope is that over time, and this is starting to happen, is that more people catch us before they leave. know, put it into Google or into the AI, whatever it is, they find this episode or they find a different episode, and they become aware of these issues and they reach out to us before they've left, they're before they're a tax resident in the US. And that so much of the problems we talk about can be averted before they arrive here. Absolutely. Can be averted entirely.
Or we can put them into a position where the problem can't be averted, but it can be managed while they're here.
Manasa Nadig (29:13.214)
Exactly. Because there are ways that in India, let's say, for example, going back to this country, there is a way that you can classify certain things. You can never, if, you know, there are other people that you have spoke to and they've already talked about this. It's really not, you can't go and put things in a trust, you know, just because you're leaving.
that country because that again triggers a whole lot of other situations which we don't want. and there's a time frame.
Richard Taylor (29:49.454)
I believe each country should have a different name for trusts because I think the general public thinks, oh, it's a trust. It's a trust there, it's a trust there, it's a trust there, it all works. That is not the case. think each country should have its own name that another country cannot use so that people don't fall into this trap of thinking it works everywhere.
Why Pre-Immigration Planning Is Crucial
Manasa Nadig (30:07.854)
Exactly. Definitely going back to your point earlier, pre-immigration planning, whether it is into the US or out, inbound, outbound, like we like to say, is a must. I think that it definitely is something that you should be thinking about because money, you know what, we are all in this business of money. mean, there's the other...ethereal side of things. when you come to this, you worked hard for it.
You know, this is something that you need to do. You cannot not pay taxes. You have to pay taxes. But at the same time, there is a smart way of doing things, which you are reporting this, but you're keeping the investments.
And then at some point, like you said about pulling the cord, I think that as long as you've been compliant, the reporting aspect of it. If you are at some point in time, this doesn't make sense to you anymore.
At least, know, the paper trail is there to show the government that this is where everything happened and this is the story, you know.
British ISA Equivalent in India
Richard Taylor (31:23.822)
Do you have anything like an ISA? So an ISA is a particular PFIC trap for Brits where they have this ISA they think is tax-free in the, it's like a Roth IRA, I mean I know you know, but it's tax-free growth in the UK and tax-free withdrawals and they moved to America keeping them intact because no one's sure how long they'll be here, they don't want to give up something they've been saving for 10, 15, 20 years into it, super valuable, not realizing that once they get into America, America doesn't recognize the ISA.
America looks right through the ISA wrapper, sees you're holding a portfolio of PFIC, and this tax-free account turns into, not only is it taxable, but it's also punitively taxed, and very often, no, there's certainly additional reporting requirements, and also very often, because you've not been doing those reporting requirements, you've fallen into non-compliance. So the ISA is a particular trap for Brits. Is there anything like that? It sounds like the life insurance policy you mentioned might be that.
Manasa Nadig (32:21.76)
Yes, exactly. The life insurance policies, especially if they are these so-called ULIPs, which are the unit linked insurance policies. That's what they stand for. And that's a common one because they called all sorts of things and people use them for all sorts of they use them for children's education funds, for their own retirement, for sometimes to just
Park extra money in because you know what? That's their plan five years down the road. I'm going to buy a flat in Mumbai. Let's say or whatever, you know, that's that's what they use the ULIPs for which in that context is a great idea, right?
I mean it couldn't be better than that. Like what's you put a hundred K rupees in it for 10 years, five years and then five years later you have a million, you know, I mean, I don't even know how that works, but it does, apparently. that's a common one that gets people all riled up when you have to tell them that, now there is a PFIC reporting. And like you said earlier, it's not easy to unravel. Yeah.
PPFs, Grandparents, Act of Love – Not Good
Actually, I have a story about the public provident fund, which kind of is again like we were talking about to the gray area, which, it's very, very common. You have grandparents in India putting money into a PPF for their grandkids who are US citizens and who live here. Now that's a big no-no, but people in India don't know that.
For them, it's an act of love go open a PPF and put money into it for their grandchild. But if you're not a US, I mean, if you're not an Indian tax resident, you cannot put money into a PPF. And if you're not an Indian tax resident, you cannot hold a PPF.
So after a certain period of time, if you have now stopped being an Indian resident and your plan is not to go back.
Manasa Nadig (34:38.67)
Then those PPFs are the first ones that need to get converted or liquidated. And if you have not reached a certain age, you know, just like here in the US, can, if you take money out of an IRA before you're 59 and a half, there are all of these penalties, then there are other penalties associated with that. So that's a common one as well. I see that quite a lot.
People come and then they're like, I have a PPF, you know, and then we have to talk about, can you keep holding on to that? You know, possibly you cannot. You need to close that out. Yes. that's a good one. You know, my Indian clients love their real estate. I love real estate. Yes. So many, many aspects to it.
Reporting Real Estate in India
Richard Taylor (35:18.508)
What about real estate?
Manasa Nadig (35:36.8)
Of course, real estate by itself is not something that is a reportable asset, but of course, if this is a rental property, then it is. So again, that happens when either you have built a, you know, or you bought a flat or you built a property, lived in it for a while, and then you come to the U.S.
Now, of course, the Section 121 exclusion, which let me explain is the exclusion that you get If a property was your primary residence and you sold it, and depending on your married filing status or your single status, you get a certain amount of money, which is not taxable.
And so the proceeds from the sale of these properties need to be within the threshold to be non-taxable, right? So that's an issue.
Now, if the person has a flat which they have purchased and then that was their primary residence, now they are in the US, they may be renting it, then that rental property is reportable on their US return. If they are not renting it, then it's not a problem at all, but it's growing in value and appreciating; that's a great reason to maybe hold on to it. Then of course, there's the inheritances. And some of these properties, depending on which city that they are in, can be very, very valuable.
And so if they cross the $100,000, then of course there's the one time reporting for inheritances from non-US persons. And that you report that and then it depends on what you're gonna do with that inheritance. Are you going to leave it? You're gonna sell it, it's capital gains. You get the step up in basis, or you're gonna keep renting it, then.
The rental income is reportable on your US taxes. The depreciation treatment is different.
Richard Taylor (37:38.958)
So just to be clear for people, if you're in the US or you're US person and you're gonna inherit property or assets from India, your relative has passed away in India and has left you money, assets, property, real estate, whatever, there may be tax to pay in India, but there's not gonna be tax on you inheriting this.
But if you're inheriting or being gifted, assets cash property worth more than $100,000 this needs to be reported to the IRS on form 3520 This is something that we people miss all the time and they don't really people are scared that it means they're get taxed no, you're going to potentially incur penalties just for not reporting it, but just reporting it doesn't mean you're going to incur taxation You're not going to incur taxation
Reporting Overseas Inheritance
So this is another, I'd say PFIC are the scourge of cross-border advisors, this receiving gifts, receiving inheritances, this is another common trap we all see.
Manasa Nadig (38:42.284)
Definitely. And there's no way of kind of getting around that. The only good thing is, of course, there is the step up in basis if any of your inherited property gets sold, you can take advantage of that if it were to be taxable. there's also the gift.
In India, the gift from, and there's a whole explanation to it, but there are the blood relatives, there's the first circle, second circle, et cetera.
And there are certain relatives that you can receive or give gifts to that are non-taxable. So if my father gave me a gift, that would not be a taxable gift. But if my father were a resident of India, and if this was more than $100,000, then yes, it needs to be reported to the IRS just because I received it in that year and it was more than that threshold.
And that goes even with a lot of my Indian clients get jewelry and other collectibles as inheritances and gifts. So those all, I mean, you don't want to talk about the gold and silver prizes today, but.
Richard Taylor (40:00.974)
There's a lot more people being caught by this is what you're right? With gold prices and where they are.
Manasa Nadig (40:06.016)
Yeah, yeah. So if you are going to get that jewelry valued and it's going to cross $100,000, you know, it wouldn't have been reportable on your Indian tax return or as an Indian gift, but it would be on your US tax return.
Double Check on Both Jurisdictions – Don’t Assume
Richard Taylor (40:22.702)
It's a mindset shift as much as anything. People gotta think just because it's okay in one jurisdiction doesn't mean... Okay is the wrong word. Just because there's no requirements or issues on this side, there's no on this side. even you've always got to double check on both sides to being compliant in America.
And it catches everyone out because it's kind of unique in the way it does this. This has been fantastic, thank you. Where can people find you?
Manasa Nadig (40:45.066)
Absolutely.
Manasa Nadig (40:49.128)
I am on LinkedIn. People can find me on LinkedIn. People can go to my website, mntaxbiz.com. That's pretty straightforward. I do dabble in other social media, but not as much as I am on LinkedIn and easily reachable. So those are some of the places.
Richard Taylor (41:10.894)
As I mentioned at the beginning, have your own, you have a podcast as well.
Manasa Nadig (41:14.84)
With Jane Mepham, one of my favorites.
Richard Taylor (41:18.794)
We know Jane. Friend of Plan First Well. Thank you for leading me on this journey out of my own comfort zone. This is my first time really exploring a group other than Brits. And as I expected, massive similarities.
The names of the products are different, but the problems are identical in many ways.
And hopefully, I hope there's someone in India who's yet to move to America who picks this up and avoids a lot of heartache, a lot of emotional strife, and hopefully a lot of potential savings as well as result of finding this podcast. So thank you.
Manasa Nadig (41:55.215)
Absolutely. Thank you, Richard. Thanks for having me. This was absolute fun. Of course. Yes. Of course. Please, please have me back again.
Richard Taylor (42:00.024)
Come back.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.