by Brian Mahany
Although the title of this post may be a bit boring, the subject matter is of vital importance to every U.S. taxpayer owning property in Mexico. Mexican nationals can own property anywhere in Mexico but Americans often must hold the property in the form of a “fideicomisos.” A fideicomisos is a like a trust – a trustee holds title to the property while the grantor retains the power to sell the property. Many Americans who “own” vacation or retirement homes in coastal areas where foreign land ownership is prohibited use a fideicomisos to hold the property. (Mexico’s constitution prohibits foreign ownership within 100 kilometers of its borders and 50 kilometers of the sea – the area where 90+% of Americans seek homes.)
The new reporting rules under FATCA – the Foreign Account Tax Compliance Act – have serious implications for taxpayers with foreign trusts. The penalties for not properly reporting a foreign trust are quite severe. Although the new rules were intended to target taxpayers who used foreign trusts to avoid U.S. taxes, they may impact on Americans with a Mexican fideicomisos.
A recent private letter revenue ruling released by the IRS in November found that a fideicomisos (called a Mexican Land Trust by the IRS) is not a trust for U.S. tax purposes. IRS counsel found that the sole purpose of the fideicomisos was to satisfy the Mexican Constitution’s prohibition of foreign ownership of certain land. The ruling found that “the trustee has no duty defend, maintain, or manage the property. Taxpayer retains sole authority to manage and control the property, the direct right to collect any rents or proceeds generated by the property, and the direct obligation to pay all taxes and liabilities related to the property. We also note that there is no arrangement between Bank [the titleholder] … or any other person to utilize the condominium in an activity for profit, such that ownership of the condominium could be classified as a business entity.”
A private letter ruling is only binding on the person who requested and paid for the determination. They do carry persuasive weight with the IRS, however, and are published so that tax practitioners and the public can better understand the position of the IRS on complex tax matters. While not binding on others, the message from the IRS is clear. If you simply have a home in Mexico for your own personal use, the fact that it is owned by a Mexican Land Trust is probably of no special consequence. If that property is leased out or if there is some type of partnership or joint venture arrangement with the trustee or titleholder, however, the guidance may not apply. Such could be the case, for example, if you finance a time share with a promoter who also acts as a leasing agent.
With so much attention being placed on reporting offshore financial interests, we recommend that all taxpayers holding offshore property speak with a competent CPA or tax attorney well versed in offshore reporting requirements. The tax lawyers at Mahany & Ertl are the CPAmerica organization of accounting firms preferred legal services provider for offshore reporting. We can help with a wide variety of tax matters including unfiled FBARs, FATCA compliance, foreign land ownership and foreign partnership and corporation filings.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Tax and IRS related legal services available worldwide.