Can A U.S. Corporation Own Mexican Property?

It’s (kinda) like an individual owning property
BY: ORLANDO GOTAY

A reader recently asked about what effect, if any, there is on a U.S. corporation owning property in Mexico. For this article, I’m talking specifically about a corporation owning residential rental property. Know anyone who has some?

The first thing people need to understand is that, for federal income tax purposes, U.S. corporations are just like any U.S. individual. They are subject to federal income tax on their global income, and subject to state tax in the state of incorporation (if it imposes any), plus any other states where it is doing business.

A deduction for depreciation is available when an individual or corporation uses property for income producing purposes. The idea is to “recover” the cost of the investment over its useful life by way of a deduction.

You should know that a residential income property located in the U.S. depreciates differently (over 27 and a half years) than one outside the U.S. (40 years). That means that comparable properties will be entitled to smaller depreciation deductions, and over a longer period, simply for being located outside the U.S. Ouch. A similar thing happens to “personal property” that is part of the business. It takes longer to write it off. And if it is a widget used predominantly outside the U.S., you can’t write it off the year you bought it.  Bummer.

Another important point is the “allowed or allowable” depreciation rule. When property is subject to depreciation and then later sold, the depreciation is recaptured (and taxed as ordinary income) at the time of sale. Whether you actually took the depreciation does not matter. It only matters that you could have taken it. If you did not take the deduction, you are leaving money on the table, because Uncle Sam will recapture depreciation that was “allowable.”

Another thing to consider if whether the corporation has foreign bank accounts. Corporations might have to file Foreign Bank Account Reports. And what’s better (or worse), shareholders and directors of those corporations might also have to file individual FBARs based on their ownership or control of a corporation that has foreign financial accounts. And if the corporation owns specified foreign financial assets, it too might have to report under FATCA.

The U.S. corporation will most likely be considered a permanent establishment and subject to Mexican tax and regulations. If it owns real property within the border or coast zone, it also requires a fideicomiso (a trust). Ah, you thought corps were not required to have fideicomisos? Well, you were wrong.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com, online radio at mixlr.com/orlandogotay or Facebook: GotayTaxLawyer.