2012 US TAX RETURN REQUIREMENTS IF YOUR MEXICAN PROPERTY IS OWNED IN A
OWNING REAL PROPERTY IN MEXICO MAY REQUIRE SPECIAL IRS FORMS 3520 AND 3520A IF YOUR REAL PROPERTY IS LOCATED IN THE FEDERAL RESTRICTED ZONE
(This is also true if
you are beneficiary or creator of any foreign
trust including a fideicomiso)
By Don D. Nelson, CPA,
Attorney, CPA - US International & Expatriate Tax Expert
If you, as an American who does not have Mexican citizenship, own a home or other residential real
property located in the "restricted zone" close to the coast in Mexico, the Mexican constitution has been construed
to require that you own it in a bank trust called a "fideicomiso." The Mexican bank acts as trustee
and you as the equitable owner of the real property are the beneficiary. The trust has a term of 50 years and can be
Under US tax law the fideicomiso meets the definition of a "foreign trust." That means
you are required to file Form 3520 when you initially establish the fideicomiso or foreign trust and the trustee is to file
Form 3520A for each year thereafter. The Form 3520 must be filed by the extended due date of your tax return. Form 3520A is due on
March 15th of each year for the previous calendar year. You can apply
for an extension of time using Form 7004. These forms must be filed for any foreign
trust controlled by a US citizen or those of which a US citizen is
the beneficiary. This rule includes "asset protection trusts" created in other foreign countries also.
Some international tax professionals have argued that the fideicomiso is not really a
trust but is an agent for holding title to real property in Mexico. There is a recent Private Letter Ruling (only binding
on the IRS with respect to the Taxpayer that Received the ruling) that held that taxpayer (only) does not have to file the
Foreign Trust forms with respect to the Fideicomiso. The IRS has not issued any ruling or written instructions to Fideicomiso
owners exempting them from filing forms 3520 and 3520A. In fact it has issued penalty assessments against those who
have filed the form. If you ignore the IRS failure to exempt Fideicomisos from filing the Forms 3520 and 3520A,
you at risk of being assessed very high penalties for failing to file these forms (up to 35% of the value of the property
in the Fideicomiso). The PLR mentioned above is linked to our blog at www.us-mexicantax.blogspot.com.
Items that are required to be included in the 6 page Form 3520 include:
§ The name and address of
the trustee and all beneficiaries
§ The value of the property and money transferred to the trust
§ Distributions from the trust
§ Copies of Trust documents
§ The name of any US agent appointed for the
If you fail to file Form 3520, there is a penalty charged equal to 35% of the value of the property transferred
to the trust, or of any unreported distribution. This penalty can be waived by the IRS for reasonable cause (which has
not been clearly defined). The IRS has issued no guidance with respect to what is considered reasonable cause for failure
to file Form 3520 and 3520A for a Mexican fideicomiso. We have helped many taxpayers who have filed this form late or are many years in arrears, and
to date have successfully had penalties assessed for late filing abated. There is no guarantee the IRS will continue to be
so generous in the future.
The Form 3520A reports each year's income and
expenses for the trust. It includes a year end balance sheet for the trust and information on distributions made to
beneficiaries. The US owners or beneficiaries of the trust are subject to a penalty of 5% of the trust's gross asset
value for failing to file this form. Penalties can be waived for "reasonable cause" but as stated above, what
that reasonable cause is has not been defined by the IRS. You must file this form if the Trustee Bank does not. To date,
to our knowledge, no Trustee bank in Mexico has agreed to file this form for the US Fideicomiso beneficiary. Therefore,
you must file it because you as an American will be the taxpayer who will be penalized if it is not filed, or if later
the IRS discovers it should have been filed but you do not cause it to be filed.
clients have asked us if it is possible for the IRS to discover if they own property through a Fideicomiso in Mexico. The
answer is YES! When you purchase the property the Mexican registry of foreign property ownerships gets a copy of your
passport. Your US passport is tied to your social security number. This information is regularly sent to the IRS.
The US and Mexico have a tax treaty which allows them to conduct tax investigations and receive information on each
other citizens in the other country. Therefore, should the IRS wish to discover which Americans have Fideicomisos in Mexico,
it would be easy.
When you purchase
property in Mexico outside of the "restricted zone" you can have title in your name and is no requirement
to file these forms. The same non fiing requirement holds true if you purchased commercial property using a Mexican or foreign
corporation. However, you should be aware that as a US Citizen, you are required to file Form 5471 each year with your tax
return if you hold a 10% or more interest in a foreign corporation any where in the world. There is a $10,000
penalty for failing to file this form.
If you have rental property in Mexico
owned by a Fideicomiso, you must report all income and expenses of the property on your US tax return each year. You can however,
claim a foreign tax credit for any income taxes you pay in Mexico on that rental income against any US tax due
allocable to the net rental income on your US tax return. Because the rental property is located outside of the US,
it can only be depreciated using the 40 year straight line method of depreciation. Learn more about owning rental property in Mexico.
If you need advice or information on
the U.S. tax aspects of purchasing, selling, or owning real estate in Mexico, please contact Don D. Nelson Attorney CPA. We can help you with general information also. If you need specific help in Mexico we can refer you to one of the
most experienced, knowledgeable, Mexican property specialists in Mexico who is also a U.S. Citizen: Linda Neil.
She has assisted Americans with the purchase, sale and Mexican tax compliance for real property in Mexico for decades.
Remember you must pay property taxes and taxes in Mexico if you rent out your property. She is a recognized expert on
these matters. Learn more about Linda's services at her website at www.lindaneil.com
INFORMATION ON FIDEICOMISO BANK FEES AND EJIDO PROPERTY PURCHASES IN MEXICO
If you would like us to prepare your Forms 3520 and 3520A for you, please click here to download our current questionnaire. These forms must be filed whether or not you have income from your Mexican property
and even if you pay taxes in Mexico. We have filed hundreds of these forms for Americans which own properties located
everywhere in Mexico. Fax or email it to us for a fee quote and further information.