You have real estate in Iran that you wish to sell and then transfer the proceeds to the United States. Several questions will come to mind:
- What are the implications under U.S. economic sanctions laws and regulations?
- If permitted to do so under U.S. sanctions, can you transfer the proceeds to the United States?
- Should you indeed be able to lawfully remit the proceeds to your U.S. bank account, what are the U.S. tax consequences?
Answers to these questions stem from the laws and regulations administered and enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the Internal Revenue Service (“IRS”). OFAC administers U.S. economic sanctions programs, including on Iran, and it goes without saying that the IRS administers U.S. federal taxes. There may also be state and local tax considerations depending on where you reside, but we won’t delve into those here.
U.S. Economic Sanctions Considerations
OFAC’s Iranian Transactions and Sanctions Regulations (“ITSR”), 31 C.F.R. Part 560, prohibit U.S. persons from engaging in virtually any transactions or dealings with Iran or the Government of Iran, including transactions related to the export/import of goods or services, as well as investment-related transactions. The term U.S. person is broadly defined by the ITSR to mean any U.S. citizen, permanent resident alien (i.e., green card holder), entity organized under the laws of the U.S. or any jurisdiction within the U.S. (including foreign branches), or any person in the United States. U.S. persons are also prohibited from facilitating transactions involving foreign persons, where the U.S. person would be prohibited from engaging in the transaction by themself.
With these broad prohibitions in mind, U.S. persons can still engage in transactions that are statutorily exempt from the prohibitions of the ITSR or that are authorized by an OFAC general or specific license. For our purposes here, it is important to keep in mind the distinction between an OFAC general vs. specific license. A general license is made publicly available by OFAC for persons to engage in otherwise prohibited conduct, and without the need to submit a written application to the agency requesting relevant authorization. In short, they are self-executing, and you can go ahead and use the license but in strict accordance with its published terms and conditions. For all transactions that would otherwise be prohibited under the ITSR and for which there is no general license authorization or statutory exemption available, a written application can be submitted to OFAC requesting specific license authorization. Should the agency grant your wish for such authorization, it will provide you with a specific license that will have relevant terms and conditions that must also be strictly complied with.
Now getting more to the point: can you sell your real estate in Iran? Short answer is that there is a general license available under § 560.543 of the ITSR that authorizes sales of certain real and personal property in Iran and transfer of the related funds to the U.S. Under that general license, if you are a U.S. person who acquired the real and personal property in question either: (a) before you became a U.S. person as defined above; or, (b) inherited such property from persons in Iran, then you are authorized to engage in necessary and ordinarily incident transactions for the sale, including as OFAC illustrates: “engaging the services of any persons in Iran necessary for the sale, such as an attorney, funds agent, or broker.”
Use of the general license in § 560.543 must be in strict accordance with its terms, while keeping in mind any other overriding OFAC sanctions programs’ prohibitions (e.g., dealings with any designated or blocked persons that may be involved). Under the scope of this general license your real or personal property sale cannot involve the wind-down of commercial enterprises in Iran (e.g., the real estate relates to a family business), or re-investment in Iran of the proceeds from the sale (e.g., buying another property or contributing the funds into a financial investment vehicle).
For any real estate related transactions involving Iran that do not fit squarely within the scope of the general license in § 560.543, you would need specific license authorization from OFAC prior to engaging in any such transactions. For example, many Iranian-Americans acquire legal title to real estate in Iran through inter vivos gift, including when their parents transfer legal title in real property to their children while they are still living, so as to save their children from Iran’s burdensome inheritance laws upon their passing, while retaining a life estate for themselves until then. Such transactions do not fall under the scope of the general license, and would probably require a specific license from OFAC.
Transfer of Sale Proceeds to the U.S.
As OFAC’s Iran sanctions program essentially prohibits any relations between the U.S. financial system and its Iranian counterpart, and the ITSR only authorizes U.S. banks to process funds transfers to/from Iran if it is considered ordinarily incident and necessary to any underlying transaction that is itself authorized by a general or specific license (e.g., § 560.543), practically speaking the only means for transferring the proceeds of an otherwise authorized Iranian real estate sales transaction is through a currency exchange broker in Iran (a.k.a. “sarafi”). For the sarafi’s transfer from Iran to not run afoul of U.S. financial regulations and a potential law enforcement response, it should be remitted to your U.S. bank account through a third-country bank, and should not involve any designated or blocked persons other than Iranian financial institutions that are blocked solely pursuant to Executive orders 13599 and/or E.O. 13902.
Maintaining the proceeds of an otherwise authorized real property sale at an Iranian financial institution would likely be prohibited under the ITSR—as any new investment by a U.S. person in Iran is prohibited under § 560.207—and/or under other OFAC sanctions programs that impose their own blocking sanctions against numerous Iranian financial institutions. Engaging in any prohibited transactions under the ITSR, and without proper license authorization from OFAC, may lead to civil and/or criminal enforcement action by the U.S. government.
U.S. Federal Tax Considerations
The first step in determining U.S. federal tax implications for the sale of real property located in Iran—assuming there is appropriate license authorization from OFAC—is to determine how that property was initially acquired. Was the property purchased in Iran by you? (i.e., the same U.S. person individual that is attempting to determine their tax reporting requirements ), or was this property acquired through inheritance (legal title passed to them upon death) or inter vivos gift (as explained above)? Depending on the answer, the taxes you’ll owe (or not owe), are calculated differently. Note that the term U.S. person is generally defined by the IRS the same as it is by OFAC under the ITSR.
If the property was purchased (notwithstanding any OFAC issues depending on when this occurred in relation to your becoming a “U.S. person”), the sale of the property would be treated by the IRS as would any real property that is bought and sold in the U.S. or elsewhere. The US person would have to calculate their tax basis in the property, which generally is the difference between the “adjusted basis”—i.e., the cost in originally acquiring the property plus the cost of any capital improvements made, and less casualty loss amounts and other decreases—and the amount they realized on the sale. The resulting difference in value is the amount the U.S. person will pay Federal income taxes on (i.e., “taxable gain”), in consideration of their respective tax bracket.
Where a U.S. person has inherited real property from another U.S. person that they now wish to sell in Iran, to determine if the sale is taxable, the tax basis must first be determined in the property. In general, this is calculated by assessing the fair market value (“FMV”) of the property on the date of the decedent’s death (subject to whether and how the executor of the estate files an estate tax return). Pursuant to the Lifetime Estate and Gift Tax Exemption—set at $12.92 million for the year 2023—such property and its sale proceeds are exempt from Federal taxes, only if the sale amount of the property in question falls under this exemption because the maximum dollar threshold has not been surpassed by the deceased. However, if the sale of the property is more than your tax basis, there is a taxable gain. Even if there is no taxable gain, the U.S. person will likely still need to report the sale of the property on their tax return under IRS Form 8949, titled Sales and Dispositions of Capital Assets. Alternatively, where the U.S. person inherited the Iranian real property from a non-U.S. person inside of Iran, then an additional IRS Form 3520, titled Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, may also need to be filed.
Where a U.S. person has received the property through inter vivos gift, you must first know three amounts: (1) the donor’s adjusted basis just before gifting the property; (2) the FMV of the property at the time the donor made the gift; and (3) the amount of any gift tax paid on the gift. Subject to various methods of calculation to arrive at your adjusted basis, based on these three known amounts, the resulting difference between your adjusted basis and the amount realized on the sale is what amounts to your taxable gain (or loss).
Finally, it is also important to note that in maintaining the proceeds of any real property sales at an Iranian financial institution by a U.S. person, it would be considered a reportable foreign financial account to the IRS. In brief, if during any day of the calendar year, such account’s balance exceeds over $10,000 for any amount of time (i.e., even a minute), then the U.S. person must file a Report of Foreign Bank and Financial Accounts (“FBAR”), FinCen Form 114, by the applicable due date (usually by April 15 of the calendar year, with an automatic extension to October 15 permitted). This is notwithstanding any applicable OFAC prohibitions in maintaining such an account as noted above, and reports to the IRS indicating the existence of such an account may be shared with OFAC.
Regardless of how you acquired any real property in Iran, it is important to speak to your CPA or a tax attorney to determine the specific federal and state tax consequences upon sale for all U.S. persons involved. Of course, this is in addition to ensuring compliance with all applicable OFAC sanctions programs. Failure to abide by applicable filing and reporting requirements can lead to the possibility of an audit by the IRS and civil/criminal penalties.
The authors of this joint blog post are Kian Meshkat (on U.S. sanctions considerations) and Cassra Minai (on U.S. federal tax considerations). Kian is the Principal Attorney of Meshkat Law, P.C., specializing in U.S. economic sanctions and export controls matters. Cassra is the Principal Attorney of Advantage Tax Law, P.C., specializing in federal and state tax matters. If you have any questions, please contact either Kian at [email protected], and/or Cassra at [email protected].
