Matters of the HEART (Act) – Part Four

This is the fourth in a series of blogs discussing the rules for expatriates under the 2008 Heroes Earnings Assistance and Relief Tax (HEART) Act. As previously stated in our prior blogs, there are numerous traps under the HEART Act for expatriates who are “covered expatriates” as defined in the Act.

For the covered expatriate with property the HEART Act imposes a stringent taxation regime.  Under this regime (referred to as “mark-to-market” regime), there is a “deemed sale” whereby the covered expatriate is deemed to have sold, for fair market value, any interest in property that he or she is considered to own on the day before expatriation.  So all your investments (such as stocks and bonds), any real property, and any interests in certain trusts are considered  “sold” on the expatriation date..

Property ownership is established in the same manner that ownership interests are determined for purposes of Federal Estate taxes.  It’s as if the covered expatriate died on the day before expatriation.  (Still more heartless treatment by the HEART Act.)

Each deemed “sale” of each asset must be reported in the expatriate’s expatriation year tax return.  Taxes must be paid if there is any gain on those “sales”.  (There is one slight benefit – the tax basis of the deemed sold property is increased by the gain on this deemed sale and thus could potentially reduce the amount of reportable gain on any actual sale in the future.)

Since the HEART Act looks at property owned on the day before expatriation, there are a number of pre-expatriation gift strategies that the covered expatriate can use to mitigate the deemed sale tax regime imposed by the HEART Act.

If you are a covered expatriate who owns property, then failure to properly consider the tax implications of the HEART Act can result in unnecessary taxation. So if you plan to relinquish your US Citizenship, or have been a long-term resident in the United States and plan to leave, and you seek to eliminate or, at least, minimize the tax liabilities that may result, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.