Non-Mexican persons cannot directly hold title to residential real property in certain restricted zones in Mexico, but may hold title to residential real property in the restricted zones through a fideicomiso—a Mexican land trust (MLT) arrangement with a Mexican bank—provided that a permit is obtained from Mexico’s Ministry of Foreign Affairs.
The IRS concluded in Rev. Rul. 2013-14 [PDF 27 KB] that none of the MLT arrangements discussed in the revenue ruling is a “trust” under the Treasury regulations, regardless of the nature of the owner.
Tax professionals note that in issuing Rev. Rul. 2013-14, the IRS alleviates an ongoing taxpayer concern that Mexican land trusts might be classified as true “trusts” for U.S. federal income tax purposes, thereby necessitating the filing of foreign trust informational returns—for example, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner—in order to avoid significant penalties.
Although the IRS in late 2012 issued a private letter ruling—PLR 201245003 [PDF 62 KB]—that reaches the same conclusion as today’s revenue ruling, Rev. Rul. 2013-14 constitutes published guidance that all taxpayers can rely on.
Rev. Rul. 2013-14
Rev. Rul. 2013-14 examines three factual situations involving U.S. citizens and MLTs.
- In one situation, the U.S. individual purchases Mexican residential real property (referred to as “Greenacre” in the revenue ruling) through a U.S. limited liability company.
- In the second situation, the U.S. individual uses a C corporation through which to purchase the real estate in Mexico.
- In the third situation, the U.S. individual purchases the property directly.
In all three situations, the real property is purchased pursuant to a MLT agreement with a Mexican bank (because the residential real property is located in a restricted zone).
Title to the property is transferred to the bank, subject to the MLT agreement. However, the property can be sold without permission from the bank, and the bank also must grant a security interest in the property to a third party, such as a mortgage lender, if requested.
The bank is identified as a fiduciary in the MLT agreement, but it has disclaimed all responsibility for the property, and other than collecting a nominal annual fee, has no duty to defend or maintain the property.
In all three situations, the IRS concluded that none of the MLTs in the three situations in Rev. Rul. 2013-14 constitutes a true “trust”—regardless of the nature of the owner. In the first situation, since the limited liability company was a disregarded entity, the U.S. individual was considered the owner of the real property. This was also the result in the third situation. In the second situation, the C corporation was considered the owner.
Tax professionals have noted that Rev. Rul. 2013-14 does not apply if the Mexican land trust owns any property other than Greenacre or is permitted or required to engage in any activity beyond holding legal title to Greenacre. Thus, it would be important for taxpayers to review the specifics of a trust agreement and confirm these points before concluding that a given Mexican land trust is not a true “trust” for federal income tax purposes.