Mexican Land Trust Is Not a “Trust” to the IRS

Many Arizona residents own vacation property in Mexico. Most Arizonans are at least somewhat familiar with Mexico’s land laws governing property ownership by U.S. citizens.

The Mexican Federal Constitution of 1917 prohibits non-citizens (of Mexico, that is) from owning property within 100 kilometers of the border or 50 kilometers of the coast. That includes all of the most-popular vacation areas, from Puerto Peñasco (Rocky Point, to the gringos) to Cancun. So how do American citizens manage to buy vacation properties in those restricted zones?

The answer, developed over a number of decades and now quite commonplace, is to put the property in what is often called a “bank trust.” Sometimes the mechanism is called a “Mexican Land Trust,” or by the Spanish word for “trust”: fideicomiso. It looks very much like the Anglo-American concept of a trust. The non-Mexican negotiates the purchase of the property with the seller, but rather than taking title directly pays a Mexican bank to hold title for the benefit of the buyer. The bank trust provides that all taxes, bills and insurance are the responsibility of the individual, and the bank charges an annual fee to hold title in its name.

But here’s an interesting American tax question: is the fideicomiso a “trust” within the meaning of our tax law? Because if it is, that will raise a host of other issues. Is it a “foreign trust” for U.S. tax purposes? That would require additional filings and possibly treat the use of the property (i.e.: staying in your Mexican vacation home) as a taxable distribution. It could be much more complicated if the American citizen were to rent out the property for some of the year, for instance.

This month the IRS gave some good news to U.S. owners of Mexican property. The fideicomiso is not a “trust” for IRS purposes, according to the agency. That means the property can be treated as if it were owned outright by the taxpayer, and the bank trust arrangement can be ignored.

That news came in what the IRS calls a “Private Letter Ruling” (usually referred to as a PLR). The PLR is a response to a particular question posed by a single taxpayer; it can not be cited as authority, but it does indicate the IRS’s thinking on a subject. PLRs are widely read as guidance for other taxpayers in similar situations. Of course, every situation is different and it can be risky to put too much reliance on a single PLR. But for the typical American participant in a Mexican Land Trust, Private Letter Ruling 201245003 (published November 9, 2012) gives both comfort and guidance.

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