wh os likely to gain more from investing overseas, a resident of the united stat

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You are here: Investment > Overseas Investing Overseas Investing In ever-increasing numbers, Americans are discovering the dramatic economic and lifestyle benefits of owning real estate in Mexico. Many people who start out wondering if it is even possible to own Mexican real estate end up, a year or so later, watching a perfect ocean sunset from the comfort of their modern, safe, and completely legal Mexican home. Getting to that sunset view is a process which quite understandably involves a lot of questions and a learning curve. This article answers some of the questions you (and your tax consultant) may have about the US income tax implications of owning real property in Mexico. IRS REQUIREMENTS FOR FIDEICOMISO BENEFICIARIES The Ownership in Mexico section of the Emerald Coast website describes the fideicomiso1 This is a perpetually-renewable beneficial trust in which a Mexican bank holds the deed as legal owner, while the beneficiary of the trust (you) enjoys all rights of ownership, including the right to sell, lease, encumber and pass the property to heirs under US law. The IRS treats fideicomisos as foreign trusts within the meaning of Section 6048 of the Internal Revenue Code. If you own your Mexican real estate in a fideicomiso, you are subject to the filing and reporting requirements of Section 6048.2 To comply with Section 6048, file an annual 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 US Owner).3 These are information returns. The obligation is to report activity in the foreign trust. Since fideicomisos, unlike most trusts, do not generate income, the only US income tax obligation arising from ownership of Mexican real estate in a fideicomiso is to file Forms 3520 and 3520-A. If you hold title to Mexican property outright, as opposed to being the beneficial owner through a fideicomiso, you are not subject to these filing and reporting requirements. The requirements, however, are neither difficult nor expensive to comply with, and there is no reason to avoid the fideicomiso form of ownership because of IRC 6048. In fact, fideicomiso ownership has many advantages and is recommended for most people. ENTITY OWNERSHIP OF MEXICAN REAL ESTATE US entities can be the beneficial owners of Mexican real estate in a fideicomiso. The form of entity you choose will be a matter of the law of your state. In Colorado, for example, the limited liability company (LLC) is a popular choice. Consult your attorney to discuss the pros and cons of the various forms of entity available in your state. US INCOME TAX TREATMENT FOR YOUR MEXICAN HOME In addition to filing Forms 3520 and 3520-A, additional US income tax obligations may arise, depending on how you use your Mexican home. As long as you are a US citizen, you are subject to US income tax obligations, even if you live in Mexico. Contrary to what you might read, living out of the US does not relieve you of your US tax obligations. Only giving up your US citizenship does that! If you use your Mexican house as a second home, and you don’t rent it out or use it to generate any income, the IRS treats it as a vacation home. Real estate taxes, casualty losses, and mortgage interest are deductible on your US federal income tax return (see 26 U.S.C. Section 280A). If you use the house yourself and rent it, you can still deduct rental expenses, if you stay in the home yourself for less than 14 days per calendar year or less than 10% of the number of days per calendar year in which you rent the home. How much rental income is includable as income on your US tax return, and how depreciation, maintenance expenses, operating expenses, mortgage interest, property taxes, and insurance are allocated between personal use and rental use on your tax return depend on how many days the property is used for each purpose (see 26 U.S.C. Section 280A4). If your Mexican property is strictly a rental, the same rules apply as for US rental real estate. You can take deductions on Schedule E of your US federal income tax return for mortgage interest, insurance, operating expenses, repairs, and maintenance, and you can offset those expenses against gross rental income. If you “actively participate” in the management of the property, you may be able to use up to $25,000 of real estate losses to offset other income on your US tax return. However, this benefit only applies if your adjusted gross income is $150,000 or less. If your Mexican home is your principal residence, you can take the same deductions that apply to a US principal residence. You can also deduct foreign property taxes (see 26 U.S.C. Section 164(a)(1)(3)). MEXICAN TAX ISSUES If you generate income in Mexico, for example by renting your Mexico house, you need to report that income on a Mexican income tax return. You do not have to pay double taxes, thanks to a tax treaty5 between Mexico and the United States. (You don’t have to pay tax to both countries, but you still have to report the income to both countries. You pay income tax to one country, then take a credit in that amount on your return in the other country.) In other words, if you rent your Mexico house, you’ll need a Mexican accountant. Many good ones are available. I recommend using one with existing American clients who is already familiar with the particular issues pertaining to the filing of Mexican income tax returns by non-Mexicans. Another alternative is to hire a Mexico-based property management company. For a fee, they will take care of everything, from renting to taxes, so you don’t have to sweat the details

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