Trusts And Taxes | TaxConnections

08 Feb 2023

Buying Real Estate In Coastal Mexico: Tax Implications In The U.S. And Mexico

Tulum, Cabo, Cancun, and Playa del Carmen are not only wonderful vacation destinations in Mexico, they are also very attractive destinations for American investors. Clients interested in acquiring real estate in Mexico, often inquiry about recommended structures to acquire real estate in coastal Mexico and the tax implications from such investments.

This article provides a general overview of the process to acquire real estate in Mexico, as well as the most common legal and tax implications with respect to such investments in the U.S. and Mexico.

Generally, non-Mexican citizens can legally acquire real estate within Mexico areas. Although Mexican law may prohibit such investors from directly acquiring or holding real estate in certain areas of Mexico. This restriction is established in the Mexican Constitution and applies to an area known as the “restricted zone” (zona restringida). This area encompasses 100km (approx. 62 miles) in the border area and 50km across the coastal zone of Mexico (approx. 31 miles). Under the applicable Mexican law, non-Mexican citizens cannot directly hold real estate in the restricted zone. For example, a U.S. investor may not acquire real estate in any of the coastal areas of Mexico and hold it for residential purposes.

Fortunately for foreign investors, there are legal avenues to overcome these restrictions. A U.S. investor seeking to acquire real estate within the restricted zone, may seek to acquire the property through a “Mexican Trust” (fideicomiso). A fideicomiso has the flexibility for real estate acquisitions or the pursuit of certain business endeavors, such as construction in Mexico.

A Mexican Trust created by a U.S. investor to acquire real estate within the restricted zone serving purpose is to hold title to the property. The Mexican Trust has three participants: (i) a fideicomitente (or grantor) who is the foreign investor that contributes the assets to acquire the real estate in Mexico, (generally cash); (ii) the fiduciario (or trustee), which is a licensed financial institution in Mexico that will act as a trustee of the assets contributed by the fideicomitente, and who will use such assets to acquire the real estate; and, (iii) the fideicomisario is the beneficiary of the Mexican Trust. The beneficiary is often the same individual as the grantor.

Once the foreign investor (grantor) contributes money or assets to the Mexican Trust, the Trustee will allocate such assets to acquire the real estate. The Mexican Trust holds title and ownership of the property. However, under the terms of the Mexican Trust, the foreign investor is allowed to use the real estate, sell the property, and collect rents from occasional leasing.

Mexican Tax Implications Of A Mexican Trust
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Written by Stephanie Uribe | Posted in Trusts • Trusts And Taxes • U.S./ Mexico Real Estate And Taxes

11 Jan 2023

Internal Revenue Code Section 643(b) and Trusts

Recently, there seems to be some confusion regarding section 643(b) of the Internal Revenue Code of 1986, as amended (the “Code”), and its application to trusts. Indeed, that provision—particularly to those not well-versed in federal trust taxation—can confound many. This article seeks to dispel some of the complexity surrounding section 643(b).

The Taxation of Trusts Generally

The federal income taxation of trusts and beneficiaries puzzles even tax professionals. Does the trust pay tax? What about the beneficiaries? What is the difference between a grantor trust and a complex trust? The questions can become endless.

I don’t seek to answer all those here. But I will try to provide some background on certain trust concepts so that you are more familiar with them. First, let’s start off with general concepts associated with the taxation of trusts. In Subchapter J of the Code (which addresses the taxation of trusts), it states in the very first provision: “[t]he tax imposed by section 1(e) shall apply to the taxable income of . . . any kind of property held in trust[.]”[i] That same provision further clarifies that this income includes: (i) income accumulated in trust (even contingent income or income for the benefit of unascertainable persons); (ii) income that a trustee is required distribute to the beneficiaries; and (iii) income that the trustee has discretion to retain in trust.[ii] Accordingly, as a general rule, a trust pays income tax on its activities.

Written by Matthew Roberts | Posted in Federal Income Tax • Section 643(b) • Subchapter J • Trusts And Taxes

08 Dec 2022

Why You Should Hire A Tax Professional To Review Your Trust

Trusts come in many variations, rendering them often difficult for non-attorneys to follow and comprehend. Indeed, this variation can often be seen in the nomenclature used for trust arrangements, which includes terms such as grantor and non-grantor, simple and complex, revocable and irrevocable, and discretionary or non-discretionary. In many instances, trusts may also have provisions designed to protect the trust principal from third-party creditors—such as spendthrift clauses—making trusts even more difficult for a layman to understand.

Of course, the many variations of trusts also give rise to income tax reporting complexity. Although the IRS has readily recognized that there is nothing unlawful in establishing a trust, it has also actively communicated that it will police trust arrangements to ensure that trusts and trust beneficiaries are complying with the federal income tax and reporting laws. Accordingly, taxpayers establishing trusts—and particularly those where the drafter intends to charge a large fee—should have the trust agreement carefully scrutinized by a tax professional to make sure that the trust complies with these tax laws.

Written by Matthew Roberts | Posted in Trusts And Taxes