Tax Planning Time !
Yucalandia reader “Pedro” offered a very helpful reference/comment in our FBAR’s and Fideicomisos: To File or Not to File, That is the Question article.
Up to this point, the FATCA reporting requirements for US citizens owning property in Mexico using a Fideicomiso, have not been clear. Fortunately, with US TAX SEASON looming, the US Treasury (parent of the IRS) has issued a guidance document that describes how the U.S. Treasury Department collects information regarding financial accounts and products held by American citizens residing in Mexico, and how the US Treasury is committed to exchanging such information with the Ministry of Finance of Mexico and pursuing equivalent levels of exchange.
New Developments in International Taxation: Possible Fideicomiso Exemptions
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) holds just one property and only allows just ONE activity: “holding title to the property” to maintain the exempt Mexican Land Trust status. 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), but it does allow renting.
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.
The parts of this recent US-Mexico agreement that affect Mexican bank’s FATCA reporting of Fideicomisos are spelled out in:
ANNEX II, NON-REPORTING MEXICAN FINANCIAL INSTITUTIONS AND PRODUCTS
from page 33:
” II. Deemed-Compliant Financial Institutions.
The following categories of institutions are Non-Reporting Mexican Financial Institutions that are treated as deemed-compliant FFIs for purposes of section 1471 of the U.S. Internal Revenue Code:
A. Any exempt organization resident of Mexico entitled to the benefits provided in Article 22 of the Convention between the Government of the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and paragraph 17 of its Protocol.
B. Consistent with paragraph 3 of Article 5, a fideicomiso, to the extent that the fiduciaria of the fideicomiso is a Reporting Mexican Financial Institution and reports any information required to be obtained and exchanged pursuant to this Agreement with respect to any Controlling Person of the fideicomiso.
C. A fideicomiso that serves solely as escrow for a debt or purchase obligation of the settlor.
D. A fideicomiso the assets of which consist solely of real property. ”
These decisions seem quite clear cut: Fideicomisos for property that serve solely as escrow for a debt or purchase obligation, (as are commonly used by gringos to buy real estate in Mexico’s coastal and border zones), ARE EXEMPTED FROM REPORTING by MEXICAN FINANCIAL INSTITUTIONS.
US Treasury FATCA Reporting Agreement with Mexico
Happy Holidays ! steve
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For those with US tax obligations: Yucalandia has a growing body of US IRS information in several articles:
~ FBAR’s and Fideicomisos: To File or Not to File, That is the Question ,
~ Income Tax Liabilities in Mexico,
~ US Income Tax Filing Information for Ex-Pats, and
~ Tax Issues for Americans and Other Expats Living in Mexico
~ Updated 2011 IRS Requirements: Foreign Account Tax Compliance Act (FATCA)
~ Comparing Tax Rates and Tax Policies for US Earned Income and Mexican Earned Income
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Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry
Read on, MacDuff.
Pingback: IRS Reporting Requirements for Mexico: Fideicomisos / Mexican Land trusts | Surviving Yucatan
As always Steve, thanks for all you do, all year, for all of us.
Happy holidays and let’s hope the new year brings those of us who want it permanent residence and success in all our endeavors. You are the man!
HAPPY HOLIDAYS !
I think you’re right, Steve, to highlight that this speaks of the Mexican financial institution’s duty to report, as distinguished from the taxpayer’s duty to report. Now, a new reporting requirement has been imposed on the taxpayer, that of filing form 8938, and the value of real property held in a fideicomiso must be included in the calculation of the threshold for filing.
I am so confused now; and the more I read the worse my head hurts. I have a small lot in Merida (haven’t built yet) worth 27,000 USD. We still live in the US (until late 2013). What is our requirement? Many thanks in advance.
FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Reporting applies for assets held in taxable years beginning after March 18, 2010.So, if you have over $50,000 total of foreign financial/savings/checking/investment accounts, you are required to file a new form with the IRS every year, starting with our 2011TY filings in 2012. https://yucalandia.com/2011/12/20/new-2011-irs-requirements-foreign-account-tax-compliance-act-fatca/
Based on the limited amount of information your provided, since you do not exceed FATCA’s $50,000 limit, you do not need to file the Form 8938. When you build on the land, and make it worth more than $50,000, then you would likely need to file, but read the IRS requirements when that time comes – unless you can meet overseas residency requirements.
Since your land is held by a Fideicomiso, then yes, you do need to file the FBAR informational filing for having foreign financial assets greater than $10,000 => Either: File your FBAR AND possibly file a request for an Exemption from future filings. See: FBAR’s and Fideicomisos: To File or Not to File, That is the Question
If you choose to not file, you risk between $10,000 and $50,000 in IRS penalties, plus past interest from 2011… and yes, the IRS is whacking Americans with Mexican Fideicomiso-properties with these rather nasty penalties – so, it is not just some hypothetical issue.
Ok, thanks a bunch Steve. Now it’s clear to me. Happy New Year!
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We have a house we purchased for $60,000usd and have been able to rent it a few months to cover costs of property management. My tax accountant in the US is working on our taxes and I think it sounds like we need to file a FBAR? Can you confirm this. Thanks Donna
Point out to your accountant that the FBAR is not a tax form. Instead, it is required by Title 31 of the U.S. Code, rather than Title 26.
Several legal web sources report that the IRS OVDI says that simply receiving rental income does not mean that the owner has to file an FBAR. Is your property held by a Fideicomiso? If it is held by a Fideicomiso, then yes, as a foreign trust that generates income, you must file an FBAR and forms 3520 and 3520A (due March 15 – unless you have set up a different accounting year).
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To File or Not to File FBARS’ and Fideicomiso ? Any current 2018 updates available for this information? So, the Fideicomiso must hold only one asset (one property), but it does allow renting which then you must report, but what about if you have 2 separate Fideicomiso’s? One as a primary residence, one as a rental? Do you have to file for the Fideicomiso for the property used as a primary, second home?
Earning income from the fideicomiso trust property triggers required IRS filings – and depending on your income & $$ amounts in Mexican accounts, you may be required to file FBARs.
Because you are receiving rental income, you must file IRS Form 3520 “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” … and owners of foreign trusts generating income are required to file Form 3520-A, which is a return for the trust.
Because you earn income, additionally if the aggregate value of taxpayer’s interest in foreign assets exceed $10,000, he or she is required to file an FBAR form and may also need to file Form 8938.
Stiff penalties (up to 45% of the asset’s worth) can be imposed by the IRS if they think you have acted in bad faith.