IRS Comes to Its Senses on Mexico Land Trusts

Recall that whether an organization is an “entity,” separate from its owners for Federal tax purposes doesn’t depend on whether the organization is recognized as an entity under local law.

The term “trust” refers to an arrangement under which trustees take title to property for the purpose of protecting or conserving it for the benefit of the trust beneficiaries.  For quite some time, the Mexican Federal Constitution has prohibited non-Mexican persons from directly holding title to residential real estate in areas of Mexico located within 100 kilometers of its inland borders, or 50 kilometers of its coastline, though they may hold residential real property (often just a personal residence and not even rental or business property) in a “Mexico Land Trust,” also referred to as a “fideicomiso,” with a Mexican bank after obtaining the requisite civil permits.

The question has long been pondered whether such arrangements, for U.S. purposes, mandated the filing of Forms 3520/3520-A (Annual Return to Report Transactions With Foreign Trusts/Annual Information Return of Foreign Trust With U.S. Owner).

Finally, IRS propounds (in Rev Rule 2013-14) that in general these Mexico Land Trusts are not trusts under the definitions in the IRS regulations, and the individual U.S. person owner is treated as such for U.S. tax purposes.