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April 22, 2012

Tax Planning for Acquiring US Citizenship or a Green Card (Permanent Residency)

Those who acquire US permanent residency and/or  US Citizenship often are caught by surprise when it comes time to sell assets (property or stocks or ?) owned before they became US taxpayers.  They  often erroneously assumed the assets they owned before becoming US taxpayers will have a tax basis equal to the value of those assets on the date they became US taxpayers. THIS IS NOT CORRECT.

Under US tax law including Court Decisions, even though an asset was acquired many years before becoming a US taxpayer (Citizen or tax resident) the tax basis for determining gain or loss is the original cost basis of the property (or if inherited the fair market value of the property when it was inherited).  That means when the asset does not get a revised basis on the date of becoming a US taxpayer and US taxes will be paid on appreciation of the asset prior to the date the individual became a US taxpayer.

What to do?  Before becoming a US taxpayer, consider selling your highly appreciated assets to avoid paying US taxes on the gain that occurred prior to that date.

The one exception to the rule stated above, is when you  Surrender your Citizenship or Long Term Tax Residency, for the purposes of determining if you have to pay an exit tax on form 8854, your tax basis IS the fair market value of the property or asset on the date you first became a Long Term Resident or Citizen.

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