|January 31, 2013|
Previously published on January 2013
Mexican law prohibits non-Mexican citizens from owning land within 100 kilometers of Mexico’s inland borders or 50 kilometers from its coastline, encompassing the entire Baja peninsula. Since many U.S. citizens and other non-Mexican citizens find the Mexican coastal zone a desirable location for vacation homes, a legal structure has evolved that enables non-Mexican citizens to acquire beneficial interests in properties within the restricted areas.
A “fideicomiso,” or trust, formed with a bank approved by the government of Mexico serving as the trustee, acquires legal title to the property. A non-Mexican citizen can purchase the beneficial interests in the land trust. The terms of the trust agreement give the holder of the beneficial interests virtually all of the rights of an owner of the property, and the bank often does little more than hold bare legal title to the property and collect a fee for doing so.
In PLR 201245003 (November 19, 2012), the IRS ruled that one of these Mexican trusts is not treated as a trust for U.S. income tax purposes, but rather simply serves as an agent for holding legal title to the property. For U.S. income tax purposes, the holder of beneficial interests is treated as the owner of the property.
The ruling is very favorable for the taxpayer who requested the ruling. If U.S. income tax law treated the Mexican trust as a trust, it would be a foreign trust and would require significant tax reporting and compliance. The ruling applies only to the taxpayer who received it, however. In addition, because these trust agreements may have varying provisions, each agreement should be reviewed to determine whether the bank holds bare legal title as trustee and does not have additional responsibilities, so that the trust need not be reported for U.S. income tax purposes.