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8621 form and the timing of becoming a green card holder

Technical topics regarding tax preparation.
#1
cl2018  
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Client became green card holder early 2019 and have PFICs purchased in 2015. If she sold out all the PFICs at gain in 2020. Will all the gain be included when calculating excess distribution or just the portion allocated to the period he is US resident?
She has not made any election to mark to market, etc.
Any comments will be greatly appreciated!
 

#2
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The gain is probably taxable in full I believe, but with an MTM election made for the year the person becomes a US resident the owner may get LTCG for the holding period prior to change in residency (https://www.form8621.com/pfic-taxation/ ... onal-rule/). There are certain exceptions with treaty countries ... and there is also a small holdings exception of some sort ($25k or less?). I don’t think the excess distribution rules apply to the full holding period, just to the period of residence, if you don’t make the MTM election. I’d pretty much always recommend the MTM election with foreign mutual funds.

Make sure you’re calculating basis correctly - FX fluctuations create some pretty big swings with gains that wouldn’t arise in the local currency.
 

#3
cl2018  
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HenryDavid wrote:The gain is probably taxable in full I believe, but with an MTM election made for the year the person becomes a US resident the owner may get LTCG for the holding period prior to change in residency (https://www.form8621.com/pfic-taxation/ ... onal-rule/). There are certain exceptions with treaty countries ... and there is also a small holdings exception of some sort ($25k or less?). I don’t think the excess distribution rules apply to the full holding period, just to the period of residence, if you don’t make the MTM election. I’d pretty much always recommend the MTM election with foreign mutual funds.

Make sure you’re calculating basis correctly - FX fluctuations create some pretty big swings with gains that wouldn’t arise in the local currency.


Thank you so much! You answered my questions and provided solutions! Very very helpful!
 

#4
cl2018  
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HenryDavid wrote:The gain is probably taxable in full I believe, but with an MTM election made for the year the person becomes a US resident the owner may get LTCG for the holding period prior to change in residency (https://www.form8621.com/pfic-taxation/ ... onal-rule/). There are certain exceptions with treaty countries ... and there is also a small holdings exception of some sort ($25k or less?). I don’t think the excess distribution rules apply to the full holding period, just to the period of residence, if you don’t make the MTM election. I’d pretty much always recommend the MTM election with foreign mutual funds.

Make sure you’re calculating basis correctly - FX fluctuations create some pretty big swings with gains that wouldn’t arise in the local currency.


HenryDavid, another question, should we always recommend client to get rid of PFICs to avoid punitive taxation? Thanks again!
 

#5
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I don’t give investment advice, but when I tell the client that each 8621 is an additional fee to prepare, and they have zero tax advantage (compared to some other investments), they usually make their own decision pretty quickly!
 

#6
cl2018  
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HenryDavid wrote:I don’t give investment advice, but when I tell the client that each 8621 is an additional fee to prepare, and they have zero tax advantage (compared to some other investments), they usually make their own decision pretty quickly!


Thank you so much for your help!
 

#7
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Please allow me to use this thread to ask a follow up question.

Instead of PFICs, can we mark to market for the house, either primary residence or rental house?

To be specific, suppose someone, a single foreigner living in country X without special tax treaty with the US, bought a house 20 years ago for 100K in his home country, in 2018 he became US permanent resident and move to the US when the value of the house was 600K, and in 2019 he sold the house for 900K, can he "mark to market" in 2018 and report 300K gain (900-600 before 121 exclusion) in 2019? Or you needs to report 800K gain (900-100 before 121 exclusion) regardless?

Thanks a lot.
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#8
cl2018  
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puravidatpt wrote:Please allow me to use this thread to ask a follow up question.

Instead of PFICs, can we mark to market for the house, either primary residence or rental house?

To be specific, suppose someone, a single foreigner living in country X without special tax treaty with the US, bought a house 20 years ago for 100K in his home country, in 2018 he became US permanent resident and move to the US when the value of the house was 600K, and in 2019 he sold the house for 900K, can he "mark to market" in 2018 and report 300K gain (900-600 before 121 exclusion) in 2019? Or you needs to report 800K gain (900-100 before 121 exclusion) regardless?

Thanks a lot.


I am not experienced in this topic. But I reflected from some international tax course I took. The instructor mentioned that it is actually a tax saving strategy people use when they expect that they will become US tax person soon, they sell the appreciated real estate to recognize gain before the gain needs to be treated as taxable income once they become US tax person. If they still want to hold the property after becoming US tax person, they can buy it back or back a similar property. From that sense, I think once become US tax person, he may not be able to mark to market the basis.

You may need to verify this with more experienced professionals.
 

#9
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what country was (is) the taxpayer a former resident of? was the property owned within the same country?
 

#10
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HenryDavid wrote:what country was (is) the taxpayer a former resident of? was the property owned within the same country?


HenryDavid: The country was China and yes the property was owned in China.
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#11
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I don't think a "step-up" is going to be permitted here. Did the individual have to pay tax to China on moving to the US? Or will the individual have to pay tax to China when the property is sold, in which case, perhaps an FTC might be claimed in the US?

If the property was sold tomorrow, would the personal residence exclusion possibly apply (I don't know the answer to this offhand)?

you may want to check the treaty -

https://www.irs.gov/pub/irs-trty/china.pdf
https://www.irs.gov/pub/irs-trty/chintech.pdf

there are provisions to avoid double-taxation, but not single-taxation
 

#12
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HenryDavid wrote:I don't think a "step-up" is going to be permitted here. Did the individual have to pay tax to China on moving to the US? Or will the individual have to pay tax to China when the property is sold, in which case, perhaps an FTC might be claimed in the US?

If the property was sold tomorrow, would the personal residence exclusion possibly apply (I don't know the answer to this offhand)?


HenryDavid, thank you so much for the reply.

- I checked various sources as well and I think you are right that the "step up" does not apply here.
- I believe Foreign Tax Credit (FTC) does apply, however in Shenzhen China it is usually the buyer that pays tax.
- I also think the 121 exclusion applies but as the prices raises so rapidly, the exclusion helps but no much.

I would like to make sure I do things right. After posting my question and getting replies, I become confident that I did not miss anything. I appreciate your help.
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