US IRS Tax Issues for Americans Living and Working in Mexico

It is that time of year again. The time of year when our banks, employers, mutual fund companies send us notices of our income from last year (2013), which allows us to pay our annual tribute to the State and Federal Governments.

For CURRENT details, see our master article on taxes at: IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article

money changing handsBrave readers who venture into reader’s Comments on other Yucalandia articles have noticed that there have been a spate of questions about tax issues for expats living and working in Mexico. This year’s questions have taken on more specific and detailed forms than ever, including Fideicomiso filing issues (3520 & 3520 forms), even to the level of requesting specific advice about their particular personal situations. Scary, nu ? Do we really have any business giving tax advice? … continue reading here

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Full Article can be read at:
IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article

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Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry

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12 Responses to US IRS Tax Issues for Americans Living and Working in Mexico

  1. Joe says:

    Steve, you wrote, “”In June, 2013 the IRS made a FINAL RULING that Mexican Land Trust (MLT) Fideicomisos now NO LONGER need to file at foreign trusts (3520/3520A) AS LONG AS your Fideicomiso specifies that your real estate trust (fideicomiso) ONLY allows just ONE activity: “holding title to the property“. No renting, no multiple properties, no other activities are allowed if you want to claim exempt status.”” Can you quote the portion of Rev Ruling 2013-14 that lead you to conclude that a trust that would otherwise be exempt from reporting on Forms 3520a and 3520 would not be exempt if the property held by the trust were rented to another?

    • yucalandia says:

      Hi Joe,
      If you click on the link above to our main tax article: IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article

      in the article it describes IRS rules on FBAR, FINCEN, and FATCA – including how Fideicomisos fit with them:
      ~ Recent Changes in IRS Requirements for Americans Living Abroad – FBAR and Fideicomisos and FINCEN

      … it takes you to the IRS ruling:
      Mexican Land Trust Not Considered a Foreign Trust (Rev. Rule 2013 – 14) (PDF)

      [An] MLT [Mexican Land Trust, or fideicomiso] is not a trust within the meaning of § 301.7701-4(a). [However] If, under the MLT agreement, B [“B” in the holding refers to your bank] holds legal title to any assets other than Greenacre or is permitted or required [by the terms of the fideicomiso] to engage in any activity beyond holding legal title to Greenacre, the holding of this revenue ruling does not apply

      So, the Fideicomiso must hold only one asset (one property) and it must not allow any other activities like renting. It must only allow “holding legal title”. ”

      IRS Bulletin No. 2013-26, June 24, 2013, has the IRS’s detailed set of analyses and detailed descriptions of Rev. Rul. 2013-14. http://www.irs.gov/pub/irs-irbs/irb13-26.pdf

      In “Situation 1″ on p 1267 the IRS clearly describes the exempt type of Mexican Land Trusts (fideicomisos) and on page 1268, the IRS describes under “Situation 1″:
      “X (the American taxpayer) retains the right to manage and control Greenacre. X has the right to collect any rent on Greenacre. In addition, X has the obligation to pay directly any taxes and other liabilities due with respect to Greenacre. Accordingly, because X is treated as a disregarded entity under § 301.7701–2, A is treated as the owner of Greenacre. ”

      This one IRS publication clearly identifies an American taxpayer who has a fideicomiso as an exempt Mexican Land Trust, is not a foreign trust for tax purposes, and does not have to file the 3520/3520A forms – and DOES have the right to collect rents.
      Happy Trails,
      steve

  2. Joe says:

    “”Renting is an “other activity” that is not part of the single allowed activity of “holding title to one property””.

    Thanks, Steve. Two points though. The holding makes no reference to renting at all; and, the holding only makes reference to activities permitted or required of the bank, not the taxpayer. Generally, it is not the bank that is renting the property, if it is rented. I can’t see why you would conclude that a fideicomiso otherwise exempt from reporting on Forms 3520a and 3520 loses that exemption when the property is rented to another, since that income can be reported with the individual From 1040. So long as the trust does not have a bank account of its own, no money is flowing through the trust to report.

    • yucalandia says:

      Hi Joe,
      IRS Bulletin No. 2013-26, June 24, 2013, has the IRS’s detailed set of analyses and detailed descriptions of Rev. Rul. 2013-14. http://www.irs.gov/pub/irs-irbs/irb13-26.pdf

      In “Situation 1″ on p 1267 the IRS clearly describes the exempt type of Mexican Land Trusts (fideicomisos) and on page 1268, the IRS describes under “Situation 1″:
      “X (the American taxpayer) retains the right to manage and control Greenacre. X has the right to collect any rent on
      Greenacre. In addition, X has the obligation to pay directly any taxes and other liabilities due with respect to Greenacre. Accordingly, because X is treated as a disregarded entity under § 301.7701–2, A is treated as the owner of Greenacre. ”

      This one IRS publication clearly identifies an American taxpayer who has a fideicomiso as an exempt Mexican Land Trust, is not a foreign trust for tax purposes, and does not have to file the 3520/3520A forms – and DOES have the right to collect rents.
      steve

  3. Joe says:

    You said, “If you rent your fideicomiso, or even if your fideicomiso simply permits you to rent the property to others (without you ever renting it), those are both additional “activities” outside the IRS allowed single-use….” But, the holding speaks of limits on the bank’s activities, not the owner’s, as I read it. You said as much yourself, earlier, when quoting the holding, “[An] MLT [Mexican Land Trust, or fideicomiso] is not a trust within the meaning of § 301.7701-4(a). [However] If, under the MLT agreement, B [“B” in the holding refers to your bank] holds legal title to any assets other than Greenacre or is permitted or required [by the terms of the fideicomiso] to engage in any activity beyond holding legal title to Greenacre, the holding of this revenue ruling does not apply….”

    • yucalandia says:

      Hi Joe,
      You are welcome to interpret the IRS Rev. Rul. 2013-14 however you like. Readers should note that every single reliable CPA we’ve contacted concurs/agrees with the interpretation that the IRS ONLY allows exemptions for fideicomisos that only allow the sole activity of “holding the title to the property”.

      These good CPAs universally agree that renting your fideicomiso or having a fideicomiso that allows renting disqualifies the fideicomiso as an exempt Mexican Land Trust. Anyone who doubts this interpretation should read the IRS precedent: “Illinois Land Trust” ruling.

      Joe, Good luck fighting the IRS to try to get your opinion approved, as the IRS has shown that it has applied penalties of $25,000 and up to 40% of your property’s value – which threatens having your US bank accounts and retirement accounts frozen and seized if you choose not to pay.

      I suspect most readers would choose to file some forms once a year – especially since no taxes are owed – just reporting your assets.

      ???
      steve

  4. Joe says:

    “These good CPAs universally agree that renting your fideicomiso or having a fideicomiso that allows renting disqualifies the fideicomiso as an exempt Mexican Land Trust.” Why not quote one, and give us details so we can check out this assertion?

    • yucalandia says:

      Hey Joe,
      I’m changing our view on this. There have been at least 3 different schools of legal thought on this issue, and I could not previously find any clear legal evidence to clearly say which one was correct, so, we previously chose the conservative school of thought, to help people avoid penalties with the IRS. While searching for the CPA references we had previously used, I found the IRS Bulletin No. 2013-26, June 24, 2013, that has the IRS’s detailed set of analyses and detailed descriptions of Rev. Rul. 2013-14 on Mexican fideicomisos. http://www.irs.gov/pub/irs-irbs/irb13-26.pdf

      In the regularly published IRS bulletin of the details of their Revenue Rulings: IRS Bulletin No. 2013-26, June 24, 2013, describes how and why exempt Mexican Land Trusts DO allow the American taxpayer the right to rent their property, and still claim that their fideicomiso is an exempt Mexican Land Trust (MLT).

      Further Conclusion: Fideicomisos that allow THE BANK to have any additional “activities” beyond just “holding title to the property” ARE trusts and the American still has to continue to have to file with the IRS as foreign trusts (including Forms 3520/3520A) (so you have to read your fideicomiso to find out which type you have) http://www.irs.gov/pub/irs-irbs/irb13-26.pdf

      Re Renting: In “Situation 1″ on p 1267 the IRS clearly describes the key characteristics of exempt Mexican Land Trusts (fideicomisos) and again on page 1268, the IRS describes yet more details under “Situation 1″:
      “X (the American taxpayer) retains the right to manage and control Greenacre. X has the right to collect any rent on Greenacre. In addition, X has the obligation to pay directly any taxes and other liabilities due with respect to Greenacre. Accordingly, because X is treated as a disregarded entity under § 301.7701–2, A (the BANK) is treated as the owner of Greenacre. ”

      This one IRS publication clearly describes that American taxpayers who have the type of fideicomiso that qualifies as an exempt Mexican Land Trust, (just one property in the MLT, and the bank only has the right to the one activity of “holding title to the property”) does NOT have a foreign trust for IRS tax purposes, and does not have to file the 3520/3520A forms – and still DOES have the right to collect rents.
      So, Joe, Thanks!

      I’m off to scrub out and correct all the old mistaken references around Yucalandia that say renting the exempt MLT-fideicomiso property is supposedly not allowed.
      Thanks again!
      steve

  5. Joe says:

    I appreciate you hearing me out on this. I recognize that there is always room for error in the way I understand this stuff, so I appreciate you dialoging with me on it- putting our heads together, so to speak!

  6. Pingback: 2014 Reporting requirements, trusts and financial accounts - Page 2 - Playa del Carmen & Riviera Maya Forum by In The Roo

  7. Jennifer says:

    I am currently in the process of becoming a permanent resident and my husband is becoming a temporary resident of Mexico. We own a condo in Mexico but we do not rent it. We only use it for personal use. We are not living full time in Mexico and we do not work in Mexico. Do we have to pay taxes in Mexico for earnings in the US (income, stocks, etc)? Also, once I become a permanent resident do we still have to pay our fidiecomiso? I have heard that permanent residents do not? We own a US plated vehicle in Mexico. Does it have to be imported to Mexican plates eventhough one of us is temporary resident? Both of our names are on the vehicle. Thanks!

    • yucalandia says:

      Hi Jennifer,
      Do we have to pay taxes in Mexico for earnings in the US (income, stocks, etc)?
      Based on the USA being you tax home, with no earnings in Mexico, you do not owe any Mexican income taxes.

      For details, see our master article on taxes at: IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article

      This false rumor about foreign Residents owing Mexican taxes has circulated in under-educated gringo circles for a few years – especially since the Residente Permanente was created by INM.

      *************
      once I become a permanent resident do we still have to pay our fidiecomiso?
      All foreigners must keep a fideicomiso on properties personally held in coastal and border regions. You both are still foreigners, unless you become a Naturalized citizen of Mexico. If you become a citizen of Mexican, then you can cancel out your fideicomiso.

      There is a fideicomiso bill that was approved by the lower legislature, but has not been approved by the Senate nor by a majority of states. This bill will likely NOT become law, because so many voters and powerful groups oppose having a boom of foreigners taking over prime coastal areas.

      *************
      We own a US plated vehicle in Mexico. Does it have to be imported to Mexican plates eventhough one of us is temporary resident?
      A foreigner with a continuously valid Residente Temporal visa can keep the vehicle in Mexico under a Temporary Import Permit from Aduana. If your visitors visa expires or if you have a break in your Temporary visa (or the previous FM2/FM3), then you must take the vehicle out of Mexico and either permanently import it, or have the Residente Temporal person get a fresh new TIP for the vehicle in their name.

      For details see our master article on importing and driving vehicles in Mexico at: Importing & Driving a Car in Mexico

      ******************
      …Both of our names are on the vehicle.
      Check with Aduana about whether you need to have the car title changed to just the person with the Residente Temporal (RT). I think that there are good work-arounds for this issue: I believe that if the person with the Residente Permanente created a Notarized letter granting the RT spouse to import/take the car into Mexico, Aduana would accept that. As you create the permission letter, you could also write/get a notarized general Power of Attorney (Carta de Poder), transferring ALL rights and responsibilities for the vehicle to the spouse.

      This sort of Carta de Poder letter (describing all the key data: VIN, registration, license, make & model) has worked very well for me when taking friends cars to the border to cancel old TIPs, to get new TIPs, and to sell the car.
      Happy Trails,
      steve

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