Yesterday I posted about a proposed change in the Mexican Constitution that would allow foreign nationals to own property in Mexico’s restricted zone. It occurred to me afterwards (hence the motivation for this post) that the proposed amendment would also eliminate the need for American citizens to file form 3520/3520a with their federal tax return.
The 3520/3520a is a form required by the IRS for Americans who are the beneficiaries of a foreign trust. A few years ago there was a push to get American owners of property in Puerto Vallarta (and I’m sure everywhere else in Mexico that requires a Fideicomiso, commonly referred to as a Mexican Land Trust – or MLT). There was an amnesty program to get people to file their forms or potentially face stiff penalties… really stiff – $10,000 USD or 35% of the property’s value, whichever is greater – per year!
With breathtaking fines such as these, you can imagine that a lot of people have filed their 3520’s. Ironically, though, a few months ago the IRS issued a PLR (private letter ruling) in response to an individual taxpayer’s petition to have their MLT classified as not a trust for federal income tax purposes. In that letter, the IRS agreed that the taxpayers MLT did not constitute a trust for tax purposes… you can see the full text of PLR201245003 here.
What this means, in essence, is that if the MLT is not a trust, then the property owner did not need to file a form declaring themselves to be the beneficiary of a foreign trust. for a more technical review, have a look at Andrew Mitchel’s blog post from November 2012. And Tomas Brown wrote this excellent essay from the property owner’s point of view. of course the PLR is only good for the person for whom it was issued, and they cannot be quoted as precedent for your own arguments. But it gives you a pretty good idea of how the IRS feels on the subject.
The requirement to file the 3520/3520a is largely a matter of opinion at this point… If you are wondering if you should file a 3520/3520a right now, I suggest you talk to a tax preparer you trust and bring this case to his/her attention.
With any luck though, the Mexican government will ratify the new amendment and render the MLT – and all the above information – irrelevant.
What are your thoughts? Leave a comment!