Mexican Land Trusts Big IRS implications

BY: ORLANDO GOTAY

I was intrigued by a recent presentation by a Mexican bank on the subject of Fideicomisos (land trusts). By way of a quick primer, ownership of real property in the “restricted zone” (100km from borders, 50km from shore) by a foreigner must be done through a Fideicomiso.

As it turns out, Mexican banks have a monopoly on this Fideicomiso business. The bank’s role is to hold the title to property on your behalf. One can direct the disposition of the property; sell, give away, or otherwise encumber the property. ‘Fidos’ are good estate planning vehicles from the Mexican perspective. At death, the property is transferred via the trust, perhaps a more efficient mechanism than Mexican probate.

Some banks appear to be pulling out of the “fido” market. When I asked why, I was told there is increased emphasis on anti money laundering compliance by bank regulators, which to me means there may be a new spotlight in this market segment.

One of the reasons I attended was to see how much awareness there was on the part of bank officials on the federal income tax aspects of Fidos.  None. Zilge-ola. That means you, the person who may need to enter into a fido to own property, must pay special attention, because the bank won’t tell you.

Here’s the rub. What may work from a Mexican perspective may be sheer disaster from a U.S. tax perspective. Properly structured fidos (meaning they meet IRS requirements) are deemed to be “disregarded entities” and the IRS will not bother you. When they are not, they become IRS ‘radioactive’. They become reportable foreign trusts. Every time there is an IRS reportable ‘anything’ you have better had done it right from the beginning.

“Good” fidos have only one property in them.  At the presentation it seemed like it was common to add more than one property per fido. Again, ok from the Mexican point of view, but runs afoul of IRS ‘safe harbors’. In fact, bank officials later confirmed they gladly would add properties to an existing fideicomiso, for a fee.

Another trait of “good” fidos:  They do nothing but hold title to property. Be wary of the bank doing other things for the property; managing it, paying taxes or other things. The IRS does not like that.

Food for thought:  New owner, new trust, or just substitute the name? Does one inherit the federal tax troubles of the last fido owner?

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 federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.  This is just a most general outline. It is informational only and not meant as legal advice.