June 3, 2013
For CURRENT details, see our master article on taxes at: IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article
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IRS Resources |
Issue Number: RR-2013-14Inside This IssueRevenue Ruling 2013-14 describes a typical fideicomiso or Mexican Land Trust (MLT) and concludes that the arrangement is not a trust within the meaning of § 301.7704-4(a). Revenue Ruling 2013-14 will be in 2013-26, dated June 24, 2013. |
http://content.govdelivery.com/accounts/USIRS/bulletins/7e36fd
New Developments in International Taxation: Possible Fideicomiso Exemptions
This IRS FINAL RULING that Mexican Land Trust (MLT) Fideicomisos now NO LONGER need to file at foreign trusts (3520/3520A) works as long as your Fideicomiso specifies that your real estate trust (fideicomiso) holds just one property and only allows (the bank) 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.
Good News for lots of folks. I’m traveling now, and will update the tax articles after travel to reflect this change…
The travel takes me to an area with no internet service, so we will not be approving new posts for the next 10 days…
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Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry
Read on, MacDuff.
Surviving Yucatan 
I bought my Mexican property using a Mexican corporation as the vehicle. Do you have any information on tax filing for corporations as opposed to fideicomisos?
Hi Cindy,
The BIG KEY is that as a corporation, you anticipate revenues.
Based on my first reading of the associated tax codes, the exemption from filing Fideicomisos with the IRS only applies if you are a private individual who is not renting and has no financial gain from the property. I will add more as I research it more thoroughly.
steve
Pingback: Pending US IRS Ruling on Fidiecomisos Good News! » Jaltemba Jalapeño
Does this have any affect on your situation? RICHARD LOWE 5108 RIVERVIEW DR INDIANAPOLIS, IN 46208 317-446-4753 Cell richard@casaflamboyan.com
Steve,
When you mention revenue it brings up an interesting point. As I understand Mexican law (I am not a lawyer) and the covenants of the individual Fideicomisos, renting is not allowed and can possibly cause forfeiture of the beneficiaries interest in the property back to the bank. In other words, losing your house. Yet, this is apparently done with impunity. I would guess one day the Mexican authorities may well look into the issue.
To clarify, I am referring to individual, private Fideicomiesos, not corporations. The new proposed legislation to allow foreign ownership in the restricted zones speaks explicitly to this issue and allows ONLY residential use, non-lucrative ownership.
The IRS revenue ruling addresses three US MLT ownership situations: LLC, C Corp and Individual Taxpayer. If the fide is the asset of a C Corp, annual income & expenses are reported on the US corporate return, If an LLC or individual, income and deductions are reported on the appropriate US annual income tax returns.
The ruling does not pertain to property owned by a Mexican corporation as there should not be a trust for such property.
This from KPMG, “Tax professionals have noted that Rev. Rul. 2013-14 does not apply if the Mexican land trust owns any property other than ‘Greenacre’ (name of the example property cited in the revenue ruling) or is permitted or required to engage in any activity beyond holding legal title to Greenacre. Thus, it would be important for taxpayers to review the specifics of a trust agreement and confirm these points before concluding that a given Mexican land trust is not a true “trust” for federal income tax purposes.”
Sorry, I forgot the end of the first paragraph, above:
The ruling transfers the reporting requirement for most US MLT owners from the 3520-A & 3520 to individual & corporate income tax returns or to zero reporting. YAY!
Its nice that the IRS finally stated what they had said in private letter rulings going back more than a year ago. The private letter ruling was a request for a ruling on a fideicomiso that was only used for personal use. They have had plenty of time to clarify or extend their stance if they wanted to include rental properties.
This ruling only applies to fideicomisos in which the bank assumes no other duties than the holding of legal title (I assume this is typical of most of them), so the ruling leaves open the possibility that some fideicomisos are still subject to those reporting requirements that include Form 3520 and 3520a. Corporations, as opposed to trusts, are unaffected by this ruling and they are still subject to the same reporting requirements as existed prior to the ruling. This reporting is done with form 5471, each year.
It’s worth keeping in mind that the provisions of Mexican Law relating to fideicomisos, and what you can or cannot do with the property, is separate from questions relating to U.S. Law, and IRS Regulations and Rulings. While it may be forbidden to rent property held in fideicomisos under Mexican Law (I’ll leave that question to more well versed than I am on it), many do it; and, to the question whether the new ruling from IRS applies to those properties from which rental income is derived, the ruling mentions that possibility and does not exclude income producing property held in fideicomisos from the benefits of this ruling.