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