Mexican Land Trusts Aren’t Trusts

One of the things that I am asked at least once a year is about question 8 at the bottom of Schedule B of Form 1040: “During 2012, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If ‘Yes’ you may have to file Form 3520….” Of course, most individuals don’t have foreign trusts so this question is usually answered no.

However, when you are a tax practitioner in Southern California (which I was until late 2011), you will come across fideicomisos. These are Mexican land trusts. Under Mexican law (at least, how it’s been explained to me), non-Mexicans cannot own property in many areas of Mexico. So if an American wants to purchase a home in Mexico, a fideicomiso is used as the vehicle.

The problem is that these are a trust, and they’re clearly foreign, so that means that individuals who have these have to tangle with Form 3520. In 2012 there was a private letter ruling on this; unfortunately, a PLR is only applicable to the exact situation involved. Today the IRS announced in Revenue Ruling 2013-14 that common fideicomisos are not trusts under Section 301-7704-4(a). Thus, for most individuals who use fideicomisios, a nasty IRS form is now in the trash heap.

This is excellent news for Americans who hold Mexican property through fideicomisos. Tax professionals who have clients in a fideicomiso should still read the Revenue Ruling; if the fideicomiso has any other property (besides real estate), it appears that the fideicomiso would be considered a trust.

One Response to “Mexican Land Trusts Aren’t Trusts”

  1. [...] has been proven again: For every action, there is an equal and opposite reaction. This morning, I reported on a decision by the IRS that makes complete sense and will save both the IRS and taxpaye… So a decision by the IRS that would cost taxpayers and the IRS money was, I suppose, inevitable. [...]

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