In June 2013, the IRS handed down Rev. Rul. 2013-14 which states that Mexican Land Trusts (MLTs), also known as “fideicomisos”, are not trusts for purposes of IRS tax law. Prior to the ruling, there was confusion over whether these MLTs were trusts subject to onerous tax reporting requirements involving foreign trusts. As a result of the ruling, those who hold MLTs, which include many individuals who own vacation or retirement homes in Mexico, are not required to comply with burdensome tax reporting requirements typically applicable to foreign trusts.
Under the Mexican Federal Constitution, non-Mexican persons cannot directly own real property located in “restricted zones” in Mexico. The restricted zones include real property located within 100 kilometers (63 miles) of Mexico’s inland borders and 50 kilometers (32 miles) of its coastline.
However, non-Mexican persons, with the help of a Mexican bank, can indirectly own real property through MLTs. Under an MLT, documents are drawn up whereby the MLT entity would be set up, the Mexican bank would nominally hold bare legal title and the beneficial ownership would be retained by the non-Mexican person.
Rev. Rul. 2013-14 essentially disregards the MLT as a true entity and treats the non-Mexican person as the owner of the real property. The great advantage of this is that the U.S. taxpayer does not need to file forms typically required for foreign trusts.
U.S. persons who receive money from foreign trusts are required to file Form 3520 “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” and owners of foreign trusts are required to file Form 3520-A, which is a return for the trust. In addition, 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 need to file Form 8938.
One caveat – the ruling is expressly limited to situations in which the Mexican bank holds only bare legal title. It the non-Mexican person has a bank account out of which the Mexican bank, on its own initiative pays taxes or other expenses related to the property, the IRS could treat the MLT as a trust for U.S. tax purposes. In addition, U.S persons would still be required to disclose ownership of foreign accounts in Mexico and elsewhere and report foreign interest income and foreign rental income on a U.S income tax return.
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