IGNORING U.S. INCOME TAX RULES ON OWNERSHIP OF MEXICAN PROPERTY THROUGH FIDEICOMISOS OR MEXICAN CORPORATIONS CAN COST THOUSANDS OF DOLLARS IN PENALTIES!
(Your clients probably do not know about this rule, but should)
There are three serious potential IRS tax problems which may cause you or your American real estate and business investors in Mexico to pay tens of thousands of dollars in penalties. Each of these problems areas is briefly outlined below and be immediately communicated to your clients or and future buyers and sellers..
Foreign Corporations: Though the rules are complex, generally if a US person (Citizen or permanent resident) owns ten percent or more of a Mexican corporation, they are required to filed Form 5471 with their personal U.S.
tax return each year. Though this form usually has no tax effect, failure to file this form on a timely basis results in a $10,000 penalty for failure this return in time or never filing the return. This penalty may only be abated for reasonable cause which is not clearly defined. There is another form which must be filed when assets are transferred to a foreign corporation.
It is also important to chose the proper type of Mexican corporation to own your real estate of Mexican business. The type of Mexican corporation most commonly used can result in double taxation of all income on your US tax return and the inability to pay the lower US capital gains tax and take foreign tax credits for the taxes paid in Mexico when the real property owned by the corporation is sold. If the correct Mexican entity is utilized using the U.S. “check the box” regulations it is possible to take advantage of the corporations losses on your U.S. individual tax return, and take foreign tax credits on Mexican taxes paid by the corporation.
Fideicomisos (Foreign Trust): If you own your Mexican real estate through a fideicomiso (as required by Mexican law) and are a U.S. citizen you are required to file Form 3520 and 3520A each year. If you fail to file form 3520 in a timely manner there is a late filing penalty of 35% of the value of the assets in the trust. If you fail to file 3520A in a timely manner
there is a penalty of 5% of the value of the assets in trust.
Form 3520A is is due on March 15th following the end of each calendar year.
It can be extended, but the extension request must be filed by the original
due date. Form 3520 is attached to your personal tax return.
Foreign Bank and Financial Accounts: Form TDF 90.22.1 must be filed
separately from your tax return with the U.S. Treasury for each year you have more than $10,000 in one or more foreign bank accounts, stock accounts or other financial accounts. On this form you report the name of the financial institution, account number, co-owners, and range of balances held in the account during the calendar year. This return is due June 30th, following the end of the calendar year. It is not filed with your tax return severe civil and criminal penalties can be assessed if you fail to file this form.