Fideicomiso no longer Considered a Trust by the IRS

Phil Hodgen, a member of the ACA Professional Tax Advisory Council, has noted in his blog Jell-O-Shot 23 that “Americans with real estate in Mexico got a little blast of sanity from the IRS. Less paperwork!” Phil’s comment follows:

Persons with property in Mexico can breathe a bit easier.

The Mexican Constitution says that noncitizens cannot own real estate in the 'forbidden zone.' That is the land close to the coast or the border. So, if you want to buy property in Cabo San Lucas, you must set up a special arrangement with a Mexican bank. It is called a fideicomiso. The bank owns the property on title, but for all other purposes, it is yours. You maintain it. If it goes up in a fire, you bear the loss.

For years the IRS said that a fideicomiso is a foreign trust. Translation: the American owner of real property through a fideicomiso arrangement had to file Form 3520 and Form 3520-A. Failure to do so created a US tax penalty of massive metric tonnage -- 25% of the money you 'contributed' to this 'foreign trust'. In other words, 25% of the purchase price of the property.

Sanity has prevailed. Last year, Amy Jetel (a tax lawyer in Austin, Texas) applied for and received a Private Letter Ruling from the IRS for one of her clients. The IRS said that the fideicomiso was really a nominee arrangement, not a trust.

This was the correct decision, because the Mexican bank that owns the property for you through your fideicomiso arrangement behaves like a nominee. It does not behave like a trustee. A trustee of a trust has a special duty to safeguard property for the benefit of specified people. In a fideicomiso contract the bank explicitly disavows any responsibility for anything whatsoever.

Amy's effort apparently prompted the IRS to change its point of view. They have issued Revenue Ruling 2013-14 (PDF). This is a document that states the government's position as applicable to all taxpayers, not just Amy's client. (A Private Letter Ruling applies only to the taxpayer who obtains it).

Revenue Ruling 2013-14 gives three different fact patterns and says 'a fideicomiso isn't a foreign trust.'

This removes a tremendous amount of risk and paperwork from Americans with property in Mexico.

(June 2013)


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January 29, 2024