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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While millions of people are obsessed with taxation there are apparently people who may (but who knows) wish to simply opt out of the discussion.

I am becoming less and less interested in the intricacies of taxation. At its core the principles of tax are really pretty simple. Tax laws exist for two purposes: (1) To redistribute assets from one person to another person (with the government taking an administrative cut along the way) and (2) to punish (sin taxes) or reward (buying a fuel efficient car) certain kinds of behaviour. Certain cultures are more tax obsessed than others. When it comes to obsession over taxation the USA is certainly a world leader. In fact, what started out as US “citizenship-based taxation” more than one hundred years ago, has created a culture of “Taxation-based citizenship” (Yes, they are different concepts).

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Many people want to leave the substantial wealth they have accumulated in retirement accounts in trust for their beneficiaries, rather than having the retirement accounts pass outright to them.  However, the IRS has established extremely complicated rules governing when retirement plan, IRA and Section 403(b) annuity contracts payable to a trust can be distributed over the life expectancy of one of the trust beneficiaries, rather than under the general five year distribution time limit.

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In order for a deferred compensation trust to the “qualified,” it must comply with all of §401s specific requirements.  Complete compliance creates tax-deferred status.  §501 states (emphasis mine),

An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.

One of 401’s most important requirements is that funds can only be used for the benefit of the employees.  §401(a)(2) states in relevant part, Read More

Hale Stewart, Tax Advisor

Over the last few months, I’ve documented a series of cases where courts forced grantors of a foreign asset protection trusts to disgorge assets despite placing this fund into a “bulletproof” offshore structure. Those who continue using FAPTs offer the following rebuttals to the case law.Over the last few months, I’ve documented a series of cases where courts forced grantors of a foreign asset protection trusts to disgorge assets despite placing this fund into a “bulletproof” offshore structure. Those who continue using FAPTs offer the following rebuttals to the case law.

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Hale Stewart, Tax Advisor

This is the fifth entry in my series on foreign asset protection trust failures. It shares a number of facts with the other cases. These are:

  • A less than savory character. Bilzerian was convicted of securities fraud.
  • A lengthy legal process. This August 2000 decision was the last in a series of hearings and trials that started in the early 1990s.
  • An offshore asset protection scheme: The taxpayer had a Cook Island trust.
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Long ago, drafters of foreign assets protection trusts (FAPT) realized that courts might hold grantors in contempt because they wouldn’t repatriate assets from a foreign jurisdiction into the U.S. To prevent this outcome, drafters included a “duress clause” in a FAPT document. This clause states that should a court threaten a U.S. grantor with contempt, he will not only be stripped of any power to control the trust, but will also lose all trust benefits.  This should allow the US grantor to argue that compliance with the repatriation order is impossible. The Anderson case, which I discussed in my last post, dealt a serious blow to this strategy. Lawrence v. Goldberg – the topic of this post – adds another nail in the “duress clause” coffin. Read More

Long ago, attorneys that drafted foreign asset protection trusts (FAPTs) recognized that a court could eventually force their client to disgorge assets. They used several strategies to prevent an actual payout. A “duress clause” – which I discussed in my last post – was one such tactic. Another was to place assets into a family member’s name — a tactic was used in Solow. But like the taxpayer in Lawrence, Solow lost, invalidating this structure. Read More

Hale Stewart

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John Dundon

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