2012 US TAX RETURN REQUIREMENTS IF YOUR MEXICAN PROPERTY IS OWNED IN A MEXICAN FIDEICOMISO
OWNING REAL PROPERTY IN MEXICO REQUIRES SPECIAL
IRS FORMS 3520 AND 3520A IF YOUR REAL PROPERTY IS LOCATED IN THE FEDERAL RESTRICTED ZONE
By Don D. Nelson, CPA, Attorney,
CPA - US International & Expatriate Tax Expert
as an American who does not have Mexican citizenship, own a home or other residential real property located in the "restricted zone" close to the coast in Mexico, the Mexican constitution has been construed to require that you own it in a bank trust called a "fideicomiso." The Mexican bank acts as trustee and you as the equitable owner of the real property are the beneficiary. The trust has a term of 50 years and can be renewed thereafter.
Under US tax law the fideicomiso currently meets the definition of a "foreign trust." That means you are required to file Form 3520 when you initially establish the fideicomiso or foreign trust and for each year thereafter. The Trustee is suppose to file form 3520A for each year of the fideicomiso's existence but in Mexico does not. Therefore under US tax law you as the beneficiary must file that form to avoid penalties being assessed against you personally. The Form 3520 must be filed by the extended due date of your personal tax return. Form 3520A is due on March 15 of each year for the previous calendar year. You can apply for an extension of time using Form 7004. These forms must be filed for any foreign trust controlled by a US citizen or those of which a US citizen is the beneficiary. This rule includes "asset protection trusts" created in other foreign countries also. (SEE BELOW FOR A POSSIBLE FUTURE CHANGE)
Some international tax professionals have argued that the fideicomiso is not really a trust but is an agent for holding title to real property in Mexico. Discussions with an IRS International Division Counsel has indicagted that the IRS considers Section 6048(a) to apply to fideicomisos as used in Mexico and Form 3520 and 3520A should be filed. One Texas attorney has applied for a Private Letter ruling (only binding with respect to that individual taxpayer) that Fideicomisos do not have to file this form. That private letter ruling has now been issued. It is only binding on the IRS with respect to the taxpayer that applied for it and they do not by law have to follow it with respect to any other taxpayer trying to cite it as authority. TO DATE THE IRS HAS ISSUED NO OPINION, RULING OR HOLDING APPLICABLE TO ALL TAXPAYERS ON FIDEICOMISO FILING REQUIREMENTS. THEREFORE UNTIL THEY DO, IT IS BEST TO CONTINUE TO FILE THE FORMS TO AVOID POSSIBLE PENALTY ASSESSMENTS (WHICH MANY TAXPAYERS HAVE COME TO US FOR ASSISTANCE IN GETTING THE PENALTY RESCINDED.
Items that are required to be included in the 6 page Form 3520 include:
The name and address of the trustee and all beneficiaries
The value of the property and money transferred to the trust
Distributions from the trust
Copies of Trust documents
The name of any US agent appointed for the trust, etc.
If you fail to file Form 3520, there is a penalty charged equal to 35% of the value of the property transferred to the trust, or of any unreported distribution. This penalty can be waived by the IRS for reasonable cause (which has not been clearly defined). The IRS has issued no guidance with respect to what is considered reasonable cause for failure to file Form 3520 and 3520A for a Mexican fideicomiso. We have helped many taxpayers who have filed this form late or are many years in arrears, and to date have successfully had penalties assessed for late filing abated. There is no guarantee the IRS will continue to be so generous in the future.
The Form 3520A reports each year's income and expenses for the trust. It includes a year end balance sheet for the trust and information on distributions made to beneficiaries. The US owners or beneficiaries of the trust are subject to a penalty of 15% of the trust's gross asset value for failing to file this form. Penalties can be waived for "reasonable cause" but as stated above, what that reasonable cause is has not been defined by the IRS. You must file this form if the Trustee Bank does not. To date, to our knowledge, no Trustee bank in Mexico has agreed to file this form for the US Fideicomiso beneficiary. Therefore, you must file it because you as an American will be the taxpayer who will be penalized if it is not filed, or if later the IRS discovers it should have been filed but you do not cause it to be filed.
Many clients have asked us if it is possible for the IRS to discover if they own property through a Fideicomiso in Mexico. The answer is YES! When you purchase the property the Mexican registry of foreign property ownerships gets a copy of your passport. Your US passport is tied to your social security number. This information is regularly sent to the IRS. The US and Mexico have a tax treaty which allows them to conduct tax investigations and receive information on each other citizens in the other country. Therefore, should the IRS wish to discover which Americans have Fideicomisos in Mexico, it would be easy.
When you purchase property in Mexico outside of the "restricted zone" you can have title in your name and is no requirement to file these forms. The same non fiing requirement holds true if you purchased commercial property using a Mexican or foreign corporation. However, you should be aware that as a US Citizen, you are required to file Form 5471 each year with your tax return if you hold a 10% or more interest in a foreign corporation any where in the world. There is a $10,000 penalty for failing to file this form.
If you have rental property in Mexico owned by a Fideicomiso, you must report all income and expenses of the property on your US tax return each year. You can however, claim a foreign tax credit for any income taxes you pay in Mexico on that rental income against any US tax due allocable to the net rental income on your US tax return. Because the rental property is located outside of the US, it can only be depreciated using the 40 year straight line method of depreciation.
If you need advice or information on the U.S. tax aspects of purchasing, selling, or owning real estate in Mexico, please contact Don D. Nelson Attorney CPA. We can help you with general information also. If you need specific help in Mexico we can refer you to one of the most experienced, knowledgeable, Mexican property specialists in Mexico who is also a U.S. Citizen: Linda Neil. She has assisted Americans with the purchase, sale and Mexican tax compliance for real property in Mexico for decades. Remember you must pay property taxes and taxes in Mexico if you rent out your property. She is a recognized expert on these matters. Learn more about Linda's services at her website at www.lindaneil.com
If you would like us to prepare your Forms 3520 and 3520A for you, please click here to download our current questionnaire. These forms must be filed whether or not you have income from your Mexican property and even if you pay taxes in Mexico. We have filed hundreds of these forms for Americans which own properties located everywhere in Mexico. Fax or email it to us for a fee quote and further information.
Download IRS Instructions to Form 3520
Download IRS Instructions to Form 3520A
D. Nelson, US TAX Attorney & Certified Public Accountant
Member of American Institute of Certified Public Accountants and American Bar Association
© TaxMeLess.com 2013 Last Updated on:6/3/13