US persons are required to file Form 3520 if they create, transfer money to, receive distributions from, or are the owners of a foreign trust. While there is no tax liability associated with Form 3520, it is a complicated form and can be quite time consuming and expensive to prepare. As such, people avoid filing Form 3520 when possible. Fortunately, Revenue Ruling 2013-14 announced that under many circumstances the IRS would not consider Mexican Land Trusts (MLTs) trusts for US tax purposes.
Non-Mexicans are prohibited by Mexican law from directly holding the title to residential real estate that is located within 100 kilometers of Mexico’s border or 50 kilometers of the coast (“Restricted Zones”). A Mexican corporation may own commercial property within the Restricted Zones, regardless of the nationality of the corporation’s shareholders. Mexican Land Trusts (“MLTs”) were created to permit non-Mexicans the ability to own residential property in the Restricted Zones.
With an MLT, the non-Mexican purchaser directly negotiates with the seller of the residential real property and the purchaser signs an MLT with a Mexican bank to hold title to the property. Upon purchase, the legal title is transferred to the Mexican bank subject to the MLT agreement. Under the terms of the MLT agreement, the non-Mexican purchaser has the right, without the approval of the bank, to sell or grant a security interest in the property. In addition, the purchaser is liable for any costs and taxes associated with the real property.
In its announcement, the IRS focused on Treasury Regulation §301-7701-4(a) and noted that under these facts, the American was the true owner of the real estate and there would be no Form 3520 filing requirement. The American purchaser retained all rights to manage the property and that since the MLT just holds the legal title to the property there was no intent “to vest in trustees the responsibility for the protection and conservation of the property for beneficiaries.” In addition, the IRS specifically stated that if under the MLT agreement the Mexican Bank is “permitted or required to engage in any activity beyond holding legal title” this ruling would not apply.