Fideicomisos and IRS FBAR, FinCen, SSFFA Filing Requirements

Jan. 24, 2014:
Some fideicomisos have to file, others do not.

Yucalandia’s comments sections and various expat forums continue to have questions come up on US citizen’s upcoming responsibilities for 2014 filings of: FBAR FinCen Form 114,  Form 8938 Statement of Specified Foreign Financial Assets, and/or Foreign Trust 3520/3520-A forms (this coming March 15, 2014).   This post is an attempt to drag the dialogue out of the semi-buried forums, and cast a little sunshine onto the issue of official 2013 IRS rulings on fideicomisos.

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

Fideicomisos (Mexican Land Trust – MLT) for foreigners owning property in Mexico’s special border and coastal zones can be written/worded in one of 2 basic ways:

~  One type of fideicomiso – aka Mexican Land Trust (MLT) –   grants the bank the single solitary right of ONLY “holding legal title” to the property.
=> 1 Right to “hold legal title” = EXEMPT from filing.

yogior

~ The other variety of fideicomisos grant the foreigner multiple rights or hold multiple properties,  in addition to the basic “holding legal title” right to the property.  
=> More Rights: Has to file with the IRS and Treasury.

Each fideicomiso holder – (as either a corporation or an individual US citizen), must read their fideicomiso/MLT and determine if it was written so they ONLY have the right to “hold the legal title” to the property,   ~ or ~ if their fideicomiso also allows or requires additional rights or “additional assets” or “additional activities“.

IRS Bulletin 2013-26 specifies:  http://www.irs.gov/irb/2013-26_IRB/ar06.html

If, under the MLT agreement, (the taxpayer) holds legal title to any assets other than (the fideicomiso property)  or is permitted or required to engage in any activity beyond holding legal title to (the fideicomiso property), the holding of this revenue ruling does not apply and the rules of §§ 301.7701-1 through 301.7701-4 will determine the federal tax classification of the MLT.

This means that if your fideicomiso includes only 1 property (“asset”) and only allows “holding legal title”,  then you are EXEMPT from 3520 / 3520-A filing requirements on that fideicomiso /  MLT.

If however, your fideicomiso / MLT  is worded to: ~ hold title to more than one property or asset;  or   ~ allows you to engage in additional activities with that property (beyond simple “holding legal title”),   then you are NOT exempt,and you must file under IRS requirements (Form 3520-A et al) by the 15th day of the 3rd month after the end of the trust’s tax year – which is typically March 15.man with a headache

Finally,  if your fideicomiso is worded to allow the additional rights or additional assets or additional activities, then you are also potentially required to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)  and  a Form 8938, Statement of Specified Foreign Financial Assets.   Check this IRS summary table to determine your responsibilities:  http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

Finally, MLTs do 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.

Sidelight:   One US tax firm is advising people who have, in previous years, previously filed on their Mexican fideicomiso property (property that now qualifies as EXEMPT from filing in 2014), can also now consider filing one (1) last set of forms with the IRS – boldly declaring  FINAL FILING on their 2014   IRS 3520 and/or 3520-A filings.   http://www.btjlaw.com/index.php/fideicomisos-are-not-trusts-per-revenue-ruling happy retired couple

Other references:  RR-2013-14   and  IRS Revenue Ruling 2013-14

Hope this clarifies things and lifts some worries.

*     *     *     *
Disclaimer:  This information is not meant as legal advice. It is for educational and informational purposes only.   See a professional for advice on important issues.
*     *     *     *

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

Read-on MacDuff . . .

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9 Responses to Fideicomisos and IRS FBAR, FinCen, SSFFA Filing Requirements

  1. Joe says:

    Steve, it’s “holding legal title” that the foreign owner has not been permitted to do, and that’s why it has been necessary to use fideicomisos: the bank holds legal title, something the foreign owner cannot do under current law, but the owner gets the full use and enjoyment of the property. It’s cumbersome, but has served well for these many years. Looks like now we may be about to see a new era here, in which foreign owners can buy direct. That will be a relief to everybody but the banks who’ve profited from this arrangement.

    • yucalandia says:

      Hi Joe,
      Exactly true.

      That’s why the IRS is exempting only the limited-use fideicomisos that work-around only the foreign ownership issue.

      You mention the un-approved legislation on fideicomisos: Has the Mexican Senate passed the legislation that will eliminate the need for new buyers to have fideicomisos?

      Has SAT announced that they will waive gains taxes for existing fideicomiso holders who cancel their fideicomisos and “sell” their properties to themselves – transferring ownership from the fideicomiso to the person => 28.5% gains taxes owed?

      If gains taxes are owed, then the fideicomiso reforms may not give much relief to owners? … a $2 million pesos property could easily have $1 million of gains, and the owner would owe $285,000 pesos in taxes to SAT – which is much higher than the $5,000 peso a year fideicomiso bank fees. … requiring almost 60 years to recover the tax payment?

      Since permanent residents of Mexico who live full time in their Mexican home for 5 years can be allowed a homeowners exemption to the tax, many foreigners might be better to wait to cancel the fideicomiso until they qualify for the homeowner’s exemption.
      steve

  2. Daniel Tate says:

    Well, if you voted for a conservative… you deserve to pay taxes!

  3. Edward says:

    Each person will need to make their own decision about filing the FBAR forms. As for myself, I have filed a final form for 2014, with beginning balances of my property less full distribution and the comment that the distribution is made under RR 2013-16. The form ends with zero assert value.

  4. Joe says:

    It seems to me that Edward is probably doing the prudent thing. I will be filing Form 3520a and 3520 myself- this year, as before- because my trust does not fit within the general rule, but rather fits within the exception contained in the holding. The IRS did us a terrible disservice with Revenue Ruling 2013-14.

  5. Joe says:

    I have to confess I misread Edward´s post, and I don´t think I would have made the comment about it that I did had I read the post more carefully.

  6. playaright says:

    Hello, does anyone know if you can put your property into the trust (fideicomiso) if you are getting financing directly from the developer/builder? I have a friend (yes, it is a ‘real’ friend) who just dropped a bomb last night telling me he bought his condo directly from the builder, and that he doesn’t have a fideicomiso, and he was told that this because it is not paid for yet, and he can’t get the trust established? The “builder” even suggested that he take his time paying it off so that he can keep it out of the trust as long as possible. I have to admit, I was stunned. But perhaps for no reason, maybe if all the paperwork is done correctly, you actually have to wait until it is fully paid for- HELP me help him

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