WHAT ARE THE IRS FILING REQUIREMENTS
By Don D. Nelson, Attorney at Law, C.P.A.
If you own your Mexican real estate through a Fideicomiso you have a yearly U.S. Tax filing obligation with the IRS. There are two informational forms which must be filed each year by Fideicomisos which have been deemed to be foreign trusts. These filing requirements are set forth below:
• Form 3520A is due on March 15th following the end of each calendar year. The due date of this form can be extended for six months if the extension is filed before the due date.. None of the Banks in Mexico who act as trustee will file this form for your as required by US tax law. Therefore, you must file it yourself since it is you the IRS will penalize if it is not filed. There is a penalty of 5% of the value of the assets in the trust for failing to file this form. This penalty can be waived for resonable cause. The form contains information on the Fideicomiso, its beneficiary(ies), its income and expenses, and the value of its assets, etc.
• Form 3520 is due on the extended due date of your personal tax return. However it is filed separately from your personal return. Failure to file this form can result in a penalty equal to 35% of the value of the Mexican real estate transferred to the Fideicomiso. This penalty is currently waived if you provide the IRS with a reasonable late filing excuse. This form mostly duplicates the same information contained in the form 3520A the addition of other informational items.
• Both of these forms are filed separately from your personal tax return and go to a different address than your tax return.
• The Fideicomiso must secure a US Federal ID number from the IRS. The ownership of all US owners must be reported.
• To date, we have successfully managed to file these forms late for Mexican property owners who did not know their obligation to file, and have succeeded in avoiding all potential penalties.
• If you the property you own in your Fideicomiso has been your primary personal residence for 2 out of the past 5 years, and you filed jointly with your spouse, the first $500,000US ( $250,000US if you are singled) can be exempt on your US tax return. You can claim a foreign tax credit for taxes paid on your sales gain in Mexico against your US tax on any gain on the sale in excess of the exemption amount.
• If the property in your Fideicomiso is a rental, you must report the income and expenses on of the rental on your US tax return. You must depreciate the value of the improvements and structure on the property over a 40 year period. Keep in mind that you must also file and pay income and IVA taxes on your rental income in Mexico or risk problems with the Hacienda.
In the past year several attorneys have written articles analyzing the IRS foreign trust filing requirements and have expressed their opinion that a Fideicomiso is not a foreign trust and should not have to file Form 3520 and 3520A. That is good theory, but does not reflect the position of the IRS. Unfortunately the Fideicomiso document is worded as a foreign trust, holds title to the property in your behalf, and is administered by the Mexican Bank trustee. The IRS has never issued any pronouncement in writing that exempts Fideicomisos from filing the forms. Representatives of the IRS have indicated that it does not have any plan to exempt Fideicomisos from filng these forms. Therefore, if you chose not to file you are at risk of being assessed the high penalties for nonfiling as set forth previously.
If you own your Mexican real estate through a Mexican corporation you are required to file Form 5471 each year with your US income tax return. This form reports various information on the shareholders, income and expenses, and assets and liabilities of the corporation and the property it holds. Failure to file this form on filing it late can result in a $10,000 per year penalty. If you have a reasonable excuse for late filing that penalty is currently usually waived, though this policy may change in the future.
Don D. Nelson is a U.S. Attorney and C.P.A. who has been assisting US Citizens who live, work or own property in Mexico with their US tax return filing requirements and tax planning for over 20 years. His clients have “attorney-client” privilege which is not available from other tax preparers and C.P.A.s. In the past six years he has assisted a large number of Americans file their Fideicomiso US Tax Forms and has been to date very successful in helping all of them avoid any penalties for filing past years or filing late. Whether the IRS will continue to waive the penalty in future years is not known.
For the latest developments and news concerning US and Mexican taxes visit his blog at www.us-mexicantax.blogspot.com