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OWNING REAL PROPERTY IN MEXICO REQUIRES SPECIAL
IRS FORMS IF YOUR PROPERTY IS A RESIDENCE OR IN FEDERAL RESTRICTED ZONE
(This is also true if you are beneficiary
or creator of any foreign trust including a fideicomiso)
By Don D. Nelson, CPA, Attorney,
CPA
If you, as non citizen of Mexico, 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 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 the trustee is to file Form 3520A for each year thereafter. The Form 3520
must be filed with your tax return, while the Form 3520A is due on March 15
of each year, though you can apply for an extension of time using Form 2758. These forms must be filed for any foreign trust controlled by a US citizen or those of which a US citizen are the beneficiaries. This includes "asset protection trusts" in many situations.
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.
Recent discussions with an IRS International Division Counsel has reaffirmed
that the IRS considers Section 6048(a) to apply to fideicomisos as used in
Mexico and Form 3520 and 3520A should be filed. They have indicated they
have no current plans to issue any future rulings on this subject.
Items that are required to be included in the 6 page Form 3520 include:
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The name and address of the trustee and all beneficiaries
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The value of the property and money transferred to the trust
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Distributions from the trust
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Copies of Trust documents
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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.
Therefore any taxpayer that has failed to file this
form and continues to not file this form is at great risk of potential past,
present and future penalties.
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 5% 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.
If you purchase property in Mexico outside of the "restricted zone" you probably have title in your name and are no required to file these forms. The same holds trust 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.
If you need advice or information on
the U.S. tax aspects of purchasing, selling, or owning real estate in Mexico, please contact us. 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 real estate attorneys in
Mexico who is also a U.S. Citizen for help on your specific Mexican legal
issues. David Connell has practiced real estate and business law in Mexico for
many years and can be reached at
dconnell@mexicolaw.com.mx
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INFORMATION ON
FIDEICOMISO BANK FEES AND EJIDO PROPERTY PURCHASES IN MEXICO
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