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IRS Offers Good News for Mexico Property Buyers

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June 25, 2013

The US Internal Revenue Service has acknowledged that fideicomiso - the land trusts foreigners must use to buy property along Mexico's coast - are not 'trusts' under the definition of the US tax code

A recently announced ruling by the Internal Revenue Service could save United States citizens buying homes in Mexico thousands of dollars and endless headaches.

After lengthy discussions, the IRS formally acknowledged this month that fideicomiso - the Mexican land trusts foreigners must use to buy property along the coast - are not "trusts" under the definition of the US tax code.

Foreigners can't directly own land along the coast. Instead, the fideicomiso are set up by the bank to hold the title for the property, which can be sold or transferred at any time without the bank's involvement.

If the fideicomiso were considered "trusts" by the IRS, owners would be required to fulfill all the filing obligations and fees associated with a trust.

But the recently issued Rev. Rul. 2013-14 confirms that the tax group won't challenge the Mexican trusts, according to a statement from tax and accounting firm KPMG.

"Although the IRS in late 2012 issued a private letter ruling... that reaches the same conclusion as today's revenue ruling, Rev. Rul. 2013-14 constitutes published guidance that all taxpayers can rely on," KPMG writes in its report.

The IRS explored three different scenarios for buying a residential property through a fideicomiso - buying with a US limited liability company, using a C corporation or a direct individual purchase. In all three scenarios the IRS concluded that Mexican trusts do not constitute the IRS' definition of trust, KPMG reports.

There is a catch - the ruling may not apply if the Mexican trust owns more than the residential property or is engaged in any activity other than holding title to the residential property. But the vast majority of buyers don't use fideicomiso that way.

The ruling is only the latest good news for Mexico buyers. In April the Chamber of Deputies approved a measure that would remove the need for foreign buyers to use a trust to buy residential property on the coast. The measure, which provoked stiff opposition, still needs formal Congressional approval, but the industry was certainly buoyed by the measure's initial success.

Mexico's second home market continues to feel the impact of the sluggish US economy and the lingering images of the drug wars. And there are still occasional well-publicized conflicts over land titles, especially along the coast, which have plagued the market over the years.

The complexities are illustrated in a dispute in Manzanillo, where dozens of foreign buyers find themselves without clear title to their properties. According to published reports, a judge trying to resolve a conflict cancelled the registration numbers for several properties around the bay, including the 204-unit Puerto Las Hadas development. Without registration numbers, the owners are in limbo, unable to sell or create a trust, while they wait for the government to assign new numbers.

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