There’s no escaping the long arm reach of Uncle Sam! Rick Ashley, a CPA in the USA, recently wrote this article for the Vallarta Real Estate Guide. Americans that own real estate in Mexico should take note.
If you are a U.S. citizen who owns or has just purchased a property in Banderas Bay, Congratulations!; you own a piece of what many refer to a paradise. What you need to be aware of is that you may now have additional reporting requirements to the IRS. If the property is located within 100 kilometers (about 62 miles) from Mexico’s international borders or 50 kilometers (about 31 miles) from its coastline (commonly designated as the “restricted zone”), then, as a foreigner, you must own the property through a Mexican Residential Trust (MRT) or a fideicomiso.
For purposes of U.S. federal income tax law, a “trust” is defined to mean an arrangement by which title to property is held by a person or persons, with a fiduciary responsibility to conserve or protect the property for the benefit of another person or persons. A trust is an arrangement by which trustees take title to property for the purpose of protecting or conserving the property for the persons purchasing the property. A Mexican Residential Trust meets this definition as the real property is held in trust for the person or persons purchasing the real property by a Mexican Bank serving as the trustee. This means that you are the grantor or beneficiary of a foreign trust and required to file a Form 3520 in the year following the year you created the foreign trust.
There are other reportable events that require the filing of a Form 3520, but creation of the foreign trust is most common. This form is due to be filed by March 15th of the year following the creation of the foreign trust. Failure to file this report could result in the assessment of penalties for failure to file in amounts up 35% of the fair market value of the property transferred to the trust. Additionally, for each year that you are the grantor or beneficiary of a foreign trust, a form 3520A, must be filed with the IRS by the trustee of the foreign trust. This form 3520A reports the annual activity of the foreign trust. The trustee is to forward a copy of your statement from the 3520A so that you can report any reportable income on your tax returns.
Who is the trustee you ask? The trustee is the Mexican Bank that administers your trust and to whom you pay annual fees. That sounds great except for one important exception and that is that the Mexican bank will not prepare these forms for you probably because they are not subject to the requirement of the IRS. Unfortunately, IRS directions indicate that you, a person subject to their requirements, have ultimate responsibility for the timely and proper filing of these forms. This form is due to be filed by March 15th of the year following each year you are the grantor or beneficiary of the trust.
Failure to file this report could result in the assessment of penalties for failure to file in amounts up 5% of the fair market value of the property in the trust. U.S. Citizens that live in Mexico the majority of the time often open a local bank account. This is perfectly acceptable to the IRS as long as you properly follow the reporting requirements. Currently, if at any time during the year you have cumulatively more than $10,000 in foreign accounts, you must file a Form 90-22.1 with the IRS. The maximum value of an account is the largest amount of currency or non-monetary assets that appear on any quarterly or more frequent account statement issued for the applicable year. If periodic account statements are not issued, the maximum account asset value is the largest amount of currency and non-monetary assets in the account at any time during the year. In determining the largest amount of currency or non-monetary assets for the year, convert the foreign currency by using the official exchange rate at the end of the year.
This form is due to be filed by June 30th of the following year. Failure to file this report could result in the assessment of penalties for failure to file in amounts up to 75% of the largest cumulative amounts in foreign bank accounts during the year and possible criminal sanctions. This potential penalty is particularly egregious; so make sure you are in compliance with this requirement.
If your favorite Mexican friend comes to you with a business venture and you are enticed to invest in this venture in Mexico or any other foreign country, please be aware that the IRS wants to be notified if you own 10% or more of the outstanding stock in a foreign corporation. There are business ventures in Mexico that are worth pursuing; just make sure you keep our favorite Uncle Sam informed. This form 5471 must be attached to your tax return and is due by April 15th or later if you have an extension filed. Failure to file this report could result in a $10,000 penalty as well as other potential financial penalties.
The United States is becoming more interested in what its citizens are doing on the world stage. In fact, the federal budget for next year includes funds to hire 800 more agents to review and investigate foreign investments. Make sure you are compliant with these IRS requirements in order to avoid these penalties. For those of you that are down here and bored and thinking of starting a new enterprise in Mexico, there are some U.S. tax benefits to living abroad. But that’s a subject we will have to cover later.
If you think you may be needing assistance with filing these forms, contact Rick Ashley at: rickashleymex@gmail.com
September 26, 2009 at 10:39 pm |
I thought things could not get any worse for buying property in Mexico along the coast, but they now have. There are four major issues now with this absolutely ridiculous requirement. If I was a developer in Mexico trying to sell to Americans I would be in a state of depression.
1. The economy- It is not just money, it is fear, and a new found modesty
2. Mexican drug gang violence (I know it is not killing tourists, but people have a bad taste in their mouths from the publicity.
3. Swine Flu: even though you can get elsewhere, people will associate Swine Flu with Mexico until it passes to the next flu strain next year.
4. IRS, Fideicomiso requirements. Forget about it, next to impossible to actually file correctly, expensive, etc. Try to get your bank trustee to sign these forms, just try. If you can get them to sign, which I have never heard anyone will, expect to pay thousands in tax fees, etc.
If I could I wished I had just rented forever, don’t you?
September 27, 2009 at 4:27 pm |
Clay,
First, thanks for commenting Clay, unfortunately they don’t come frequently enough for me! My first thought was, when I read this article, was do I really want to post it and do people really need to hear another condition of living in Mexico? But I want to be forthright here, not hide this stuff, people need to know what they are getting into and what people have bought need to be doing.
When these conditions or requirements enter the marketplace, the first reaction is that this will kill the market. I saw this when they started tightening up on capital gains – everyone said this would kill the market. But it didn’t; the market adapted. Yes, these requirements are difficult to fulfill at this time, but someone will see an opportunity to make a buck helping people through it (such as Rick Ashley) and ease the pain in processing what needs to be processed. But I do agree, it wasn’t something that was needed right now. Fact is, though, the US government is currently doing everything they can to close anything they see as a way to avoid paying taxes on incomes earned by Americans.
With regards to the economy, this is effecting everyone and every country; it isn’t limited to Mexico. It doesn’t help Americans to be able to afford real estate here, or elsewhere. Although on the other side, some may say with the cost of living so much lower in Mexico, more Americans will find Mexico more enticing.
The swine flu threat is no longer labelled as “Mexican” , thankfully. And who knows where it will break out next and when, if it does. But just to be fair, let’s also mention that Mexico got very high international marks (positive PR) for the way they handled the outbreak.
Drug violence. Its serious. But as you say, no tourists have been killed/injured and for the most part, it isn’t taking place anywhere near popular tourist destinations. There is violence everywhere. There are parts of major cities in the Americas we just don’t go near, let alone buy a house there. Same down here.
Do I wish I had just rented?
I go back to the US and Canada quite frequently. I get out of the heat during the summer months. And after being up there for awhile, I obtain a new appreciation for what we have in Vallarta/Riviera Nayarit. There are problems, but there are all types of problems everywhere. Having a home six months of the year here, taking in the weather, the amenities, the towns, the people, the activities available, I really can’t think of a place where I’d rather be. And I’m at the stage in my life where I could choose another. November to May, this place is paradise, even with the challenges you mention.
October 1, 2009 at 2:40 pm |
I am delving into this as we speak. First of all, a Fidecomiso is not a trust in the sense that the IRS intends with this law. The kinds of trusts they are dealing with are trusts that hold money and other financial assets. A Fidecomiso is a trust only in the sense that it allows foreigners to hold title to property and there is no requirement for those who hold property titles elsewhere in Mexico to file. If this were an actual requirement everyone in the community would have known about it for years since it is not a new law. I strongly recommend that no one file this until they have thoroughly investigated it and not with a tax attorney who operates out of the US, but one intimately familiar with this issue.
October 1, 2009 at 8:04 pm |
Ed,
I passed along your comments to Rick Ashley and this is how he responded. I’ve included links to the documents he talks about in a new post on this blog. Thanks for bringing this to our attention.
October 1, 2009 at 8:09 pm |
There are some CPA’s online such as John Dillinger CPA who are looking to enrich themselves by scaring fideicomiso holders into filing these forms immediately at an eventual cost of thousands of dollars. Assuming that there is a responsibility to file, and there are many arguments against that premise, these forms are next to impossible to have filled out properly, there is very little liklihood that a bank rep in Mexico is going to sign as trustee, also expect a high fee and many months to work through the bank’s beaureacratic channels. Has anyone ever done it?
I have spoken to some very smart international tax specialists, actual lawyers, not CPAs who lhave investigated this situation. Their position is that these particular trusts are not considered grantor trusts under IRC 679. They are non-grantor trusts – they have no “owner.”
Of course, if a CPA calls the IRS they are going to say over the phone that such a “foreign trust” is required to file the forms. A phone call is not a ruling. I still see no analysis of the INTERNAL REVENUE CODE or U.S. TREASURY REGULATIONS. John Dillinger CPA is now advocating on his blog that all fideicomiso holders report themselves to the IRS Criminal Investigations unit by October 15th or risk a potential 20% penalty on the value of their property. This is irresponsible & reckless advice. Who does Mr. Dillinger represent, clients or the IRS??
See his posting here: http://fideicomiso.wordpress.com/
October 1, 2009 at 8:16 pm |
[...] I also suggest reading the comments that have been coming in regarding this at this post. [...]
October 30, 2009 at 2:26 am |
Can anyone report one case of the IRS actually taking action against a property owner for not submitting the proper forms?
You’re also required to notify the IRS of any interest income on accounts you have in Mexico, but I doubt there are very many doing that either….no?