A new IRS ruling has now changed the classification of a Mexican fideicomiso from a trust to a nominee agreement. What this simply means is less paperwork for US citizens that own property in a Fideicomiso in Mexico.
Article 27 of the Mexican constitution dictates that all non-citizens that want to buy property in one of the “restricted zones” (property within 50 kilometers of the coastline or 100 kilometers of the border) must do so in a special agreement with a bank called a fideicomiso. There is practically no difference between owning property yourself or in one of the agreements. The only technical difference is that the bank holds the actual title and you have to pay a yearly maintenance cost of 4,500 pesos. In every other respect the property is yours and you are responsible for all the maintenance. I would speculate that the reason for this law is a sort of property tax on foreigners who are used to paying far more than the standard property tax in Mexico. These are very easy to set up and I have never heard of a case where a bank has tried to illegally take someones property, if this did happen it would surely case a loss of confidence and crash the real estate market.
The IRS has always considered the Mexican fideicomiso to be the same as a trust and all US citizens who have one have been required to file IRS Form 3520, with failure to do so resulting in a fine of 25% of the value of the property. The IRS has recently taken a second look at this law and ruled that the bank is acting as a nominee rather than a trustee and should not be considered a trust. Therefore US citizens will no longer need to file this additional form.
There is even better news coming from the Mexican government. Mexico’s House of Representatives have voted to change the law and allow foreigners to directly own real estate in Mexico. Now the bill must pass the Federeal Senate, majority of state congresses and signed into law by the President. This is all very likely to happen by the end of the year. All existing fideocomiso contracts will still be valid until the expiration of the contract, they will then be able to transfer the title directly to the owner. This means that once the law passes new buyers will save of 34,000 pesos in trust fees and existing owners will save 4,500 pesos a year.
Although it may not be required it is usually a good idea to hold your substantial assets in some sort of vehicle such as a trust or corporation. This can protect you from liability, gives you an extra layer of protection and can come with big tax advantages. You should have a professional go over your individual situation to see what’s right for you. I know of several properties with potential cashflow located in Mexico as well as lawyers who are knowledgable of the tax code. If you are interested in real estate in Mexico please feel free to contact me.