LATEST IRS LETTER CONCERNING IF A MEXICAN FIDEICOMISO OWNER MUST FILE FORM 3520

The following letter from an IRS Technical Reviewer  was Published by Tax Analysts(R) concerning the issue of whether or not a Mexican Fideicomiso must file Forms 3520 and 3520A.

UIL: 6048.00-00
Release Date: 6/24/2011
Date: November 17, 2010
Refer Reply To: GENIN-141622-10 – CC:INTL:B01:* * *
Dear * * *:
This is in response to your request for general information regarding the infor-mation reporting obligations with respect to Mexican fideicomisos that own certain Mexican residential real property on behalf of U.S. persons who are not also Mexican citizens.
Under section 6048(a) and (c) of the Code,¹ a U.S. person who makes a transfer to or receives a distribution from a foreign trust generally is required to report certain information on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Under section 6048(b) of the Code, a U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (sections 671 through 679 of the Code) is required to complete Part II of Form 3520 and to ensure that the foreign trust files Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner. Section 6677 of the Code imposes significant penalties (up to 100 percent of the gross reportable amount) for failure to comply with section 6048.
The rules for determining whether an entity is classified as a trust for U.S. federal income tax purposes are found in section 301.7701-4 of the Procedure and Administration Regulations. The rules for determining whether an entity that is classified as a trust is a foreign trust are found in section 7701(a)(31)(B) of the Code and section 301.7701-7 of the Procedure and Administration Regulations. Any U.S. person who transfers property to or has an interest in a Mexican fideicomiso that is classified as a foreign trust must comply with section 6048.

            This letter provides general information only and does not constitute a ruling. See Rev. Proc. 2010-1, section 2.04, 2010-1 I.R.B. 7. If you would like a definitive determination as to whether a particular fideicomiso is classified as a foreign trust for U.S. federal income tax purposes, you must request a private letter ruling pursuant to the procedures set forth in section 7 of Rev. Proc. 2010-1.

We hope this information has been helpful to you. If you have any questions, please contact * * *, Identification Number * * *, at * * * (not a toll-free call).

Sincerely, M Grace Fleeman - Senior Technical Reviewer, Branch 1 (International)

TRANSLATION OF THE ABOVE REFERENCED LETTER FROM THE IRS:

We’re not telling you that your particular fideicomiso is a trust and we’re not telling you your particular fideicomiso is NOT a trust.  All we are saying is that if it IS a trust you have to file Form 3520.  In other words, if you wish to be safe you should file form 3520, 3520a because the IRS refuses to state Fideicomisos are not foreign trusts.  That refusal is a clear  message to taxpayers. 

MEXICO RENTAL INCOME…………….PAYING TAX IS NOW EASIER THAN EVER AND WITH STATESIDE BENEFITS!!

by Linda Jones Neil

Those who have rental properties in Mexico can now rest easy. SAT, Mexico’s Uncle Sam, has provided a straightforward and relatively simple way to declare and pay taxes on rental income for those foreigners who have long wished to be in compliance but did not know the way to do so.

As of February 2010, SAT eliminated the requirement for a taxpayer identification number (RFC) which had previously been obtained only through extreme efforts,

Now the foreign taxpayer has two options: One to obtain the taxpayer identification number (RFC), file monthly declarations whether there is income or not, and enjoy a deduction of expenses. This is Option One.

Option Two provides for the taxpayer to make a declaration when income is received, pay a flat tax and obtain a receipt to take to the tax authorities in his/her tax residence, for credit or deduction of taxes in the home country.

On any rental the owner, or his/her property managers, are responsible for collecting the IVA tax (the added value tax) which is 11% on the Baja Peninsula and the Yucatan peninsula and 16% elsewhere. Owner or property manager must also collect the state hospitality tax which is 2 to 4% of the rental amount. These taxes must be delivered to the federal and local governments, as applicable.

It is important for the foreign person with rental property in Mexico to make arrangements for payment of these taxes since penalties can be high in Mexico for non-payment and, additionally, these same tax payments and expenses can be deducted or credited against income in taxpayer’s home country.

The next part of the equation for the US taxpayer has been deciding how to declare this income and enjoy the deductions in their US returns.

Don Nelson, Attorney and Certified Public Accountant located in California reports the following regarding tax treatment for U.S. taxpayers:

• If the Mexican rental property owned in an individuals name or through a Fideicomiso, all rental income and expenses are reported on Schedule E of the form 1040.
• Allowable rental expenses are the same as for a US property.
• Management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance…ALL are deductible!
• Depreciation on a Mexican property is 40 years straight line
• Taxpayer can take a Foreign Tax Credit against the US income tax paid on the net rental income for income taxes paid in Mexico on that income.
• IVA (added value tax) collected from the renter must be included in rental income, but then deducted out so no double taxation.
• The special Vacation Home rules applicable to US rental property occupied part time by the owner is also apply to Mexican rental property.
• IN A SALE OF THE PROPERTY, net gain is taxed in the US at the applicable lower capital gains rates and Mexican ISR paid is a credit against that US tax on that profit.

For further information on the Rental Payment Program for Mexican properties, please contact: Lic. Quirino Parra: quirino.parra@settlement-co.com.

For further information on the payment of US taxes when Mexican income is involved, please contact attorney and CPA Don D. Nelson: ddnelson@gmail.com . His website is at www.taxmeless.com.

Author Linda Neil is the founder of The Settlement Company. It is the first escrow company in Mexico, and is dedicated to counseling buyers and sellers, processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located ANYWHERE in Mexico and, now, for payment of taxes on rental income for foreigners with properties in Mexico.. Ms. Neil is also licensed as a Real Estate Broker in California, is an Accredited Buyer Representative through NAR, and has over thirty five years of hands on experience in all aspects of Mexican real estate. She holds membership in AMPI, NAR and FIABCI and PROFECO Certificate 00063/96.

E-Mail; linda.neil@settlement-co.com Web Site: http://www.settlement-co.com.

copyright 2011, Consultores Phoenix, S.C., reproduction prohibited without permission.