Expatriation: Mark-to-Market Tax

Exclusion Agreement
Under the “Mark-to-Market Tax”, upon expatriation, the covered expatriate is taxed on the unrealized gain in their assets, to the extent it exceeds $651,000 (for 2012) (IRC Section 877A).

The IRC Section 877A exclusion amount must be allocated pro-rata across all assets having built-in gain owned by the covered expatriate on the day before the expatriation date.

Gain is determined as if a sale of the property, for fair market value, had taken place on the day before the expatriation date.

Losses from the deemed sale are generally taken into account, as otherwise provided in the Internal Revenue Code (except the wash sale loss rules do not apply).

Asset Basis
Asset basis will be adjusted for purposes of determining gain or loss, on a subsequent disposition, by the amount actually taken into account in determining gain or loss without regard to the exclusion amount attributable to the asset.

Tax Deferral
Regarding the covered expatriate’s right to defer the payment of the mark-to-market tax, the tax deferral election only applies to the tax arising as a result of IRC Section 877A, and not to an individual’s regular U.S. tax liability for the year of expatriation.

The tax deferral election is made on an asset-by-asset basis.  The tax for each property is determined by multiplying the total mark-to-market tax by the ratio of the gain on the deemed sale of the property over the total gain taken into account with respect to all property deemed sold.

The election defers payment of the tax until the due date for the return for the tax years in which the property is sold.  Payment of the tax may not be extended beyond the due date for the return for the tax year in which the covered expatriate dies.

Under IRC Notice 2009-85, in computing a covered expatriate’s tax liability under the mark-to-market provisions, the taxpayer is deemed to own:

1)  Any property that would be considered to be within his estate, were he to die on the day before his expatriation date;

2) Property held in a Grantor Trust;

3) Property owned through a non-grantor trust is disregarded.

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