Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Form 3520 – Mexican Trusts

With the scorching summer heat here in Arizona, I like many other Phoenicians look forward to spending some weekends near the ocean. For many people this means California, and for others maybe Rocky Point or some other Mexican Gulf coastal city.

If you’re like me and have ever considered investing in a vacation property in these ocean locations, you may have found that Southern California is a bit pricey. Investing in Mexico may represent a more affordable option.

You may already know that if the property you’re interested in is located in one of the Mexican “restricted” areas (basically near a coastline or anywhere in the Gulf) property title generally must be held in a Mexican vehicle called a “Fideicomiso”, essentially a Mexican Trust. That Trust is what brings me to the tax relevance of this post.

Having an ownership interest in a Foreign Trust may require that the US Taxpayer file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Certain Foreign Gifts, as well as requiring that the Mexican Trust itself file For 3520-A, Annual Information Return of a Foreign Trust With a U.S. Owner. Although these tax filing requirements do not require a payment of tax (unless the trust generates income from rental or otherwise), penalties for not filing are ridiculous. The IRS can assess penalties equal to 5 % of the gross value of the property held in the trust. And an additional penalty equal to 35% of the value of any transfers into or out of the Trust.

There are some advisers that believe the Fideicomiso is not a “Trust” for purposes of these filing requirements, but until the IRS provides some definitive guidance we recommend the conservative approach of filing the forms.

So, if you’re considering investing in a Mexican getaway, don’t forget that Uncle Sam wants to hear from you.

Robert McCanless, CPA

Comments

  1. admin says:

    We have many clients with 3520 filing requirements and generally is not over burdensome. The complexity of the Form 3520 and companion Form 3520-A (Report of Foreign Trust With US Owner), is dependent upon whether the property is leased or held for investment only. When the property is leased, the reporting becomes a bit more complicated due to the requirement to report movement of cash in and out of the “Trust”. If held for investment only (usually in the case of land only investment), the reporting is less complicated, but still could be intimidating and bit confusing to a person unfamiliar with the forms.

    Dealing with international tax issues, we frequently serve in an advisory or “subcontractor” capacity to other professionals. Our fees are based on the time we spend and therefore, frequently varies by client – usually a function of the condition of the records provided. In order to provide a fair estimate we generally prefer to spend a few minutes discussing the facts and scope of engagement.

    Please feel free to contact me at (480) 483-1170 or robertm@hhcpa.com so I can provide you with a fair estimate.

    Robert McCanless, CPA

  2. Robert,

    I have a client who has an interest in property through a Mexican trust. How difficult is the Form 3520 to complete? I’ve not done one before. What would you charge to do the form for my client?

    Terri Ward