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When you own property in Mexico


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#1 Coz2wonder

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Posted 01 August 2011 - 11:35 AM

US IRS TAX RULES YOU MUST FOLLOW
WHEN YOU OWN AND RENT OUT PROPERTY IN MEXICO
By Don D. Nelson, Attorney, CPA

When you are renting out your real property in Mexico, as a US Citizen or permanent resident, you must not only comply with all Mexican tax requirements but you must also comply with the Internal Revenue Service's US income tax return filing requirements. The rules are almost the same as those for rental property located in the US, but with some variations.

If you own the Mexican rental property through a Fideicomiso, or outright in your individual name, you report all of your rental income and expenses on Schedule E of your Form 1040. All of the allowable expenses are the same as for US property.

Expenses you can deduct include management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance, depreciation, and other miscellaneous expenses.

Unlike property located in the US, you must depreciate the property (amount allocatable to the structure) over a 40 year period rather than shorter times sometimes allowed for US property.

You can take a credit against your US federal income tax for income taxes paid to Mexico on your net rental income after deducting all expenses. That credit is limited to the amount of US Federal tax you paid on that rental income on your tax return. Any unused foreign tax credit can be carried over to future year. Most states do not allow any credit for income taxes paid foreign countries. That credit can be taken for Mexican income taxes and any income tax imposed by a State in Mexico. That state tax income is 3% in Baja California Sur. Some states in Mexico have no income tax.

Any IVA or occupancy tax collected from the renter should be included in your rental income, but then you can deduct out those taxes so you do not have to pay any tax on those items. IVA in the Baja California is 11% and 16% in much of the rest of Mexico.

The same restrictions and limited allowable deductions for “vacation homes” apply when you have occupied the property yourself part of the time and rented it out to third parties at other times.

When the property is sold (if it is held in your individual name or in a Fideicomiso) your net gain is taxed in the US at the applicable lower capital gains rates, and you can claim a credit against your US tax on the sale for Mexican capital gains taxes paid on that profit to Mexico.

If the property was used for the 2 years during the previous 5 years prior to sale as your personal primary residence (you must actually live in it full time during that period), you may be able to exclude up to $500,000 of the gain from your US income taxes under the exclusion allowed for sales of personal residences. If the property was rented out part of that time, some of the gain on sale will be subject to US income tax.

If your Mexican property is held through a Mexican corporation, there can be adverse US tax consequences while renting out the property and upon sale on your US tax return. With the proper type of Mexican corporation, certain elections with the IRS can be made for US tax purposes which will negate almost of these US tax problems. These elections are only made for US tax purposes and do not in any way affect the way your Mexican corporation is taxed under Mexican law.

Other US Tax Forms That May be Required:

Form 3520/3520A: If you own your Mexican rental (or personal residence or second home real property) through a Fideicomiso, you must file these forms each year to avoid extreme penalties. These forms are filed separately from your personal return. The first form is due on March 15th following the end of the calendar year and the other form is due on the extended due date of personal tax return.

Form 5471: If your Mexican real estate is held in a Mexican corporation, you must file this form each year if you own 10% or more of the shares (actually or constructively) in the corporation. This form is due on the extended due date of your personal return. The IRS can impose a $10,000 per year penalty for filing this form late or not at all.

Form TDF 90-22.1: This form reports your ownership in foreign bank and other financial accounts. It would include any accounts where your property manager or accountant is using to collect rents or pay Mexican taxes and rentals. If the highest total of all of your foreign financial and bank accounts when combined together equal or exceed at any time $10,000 US per year, you must file this form to report details of all accounts. It is filed separately from your tax return and is due on June 30th following the end of each calendar year. The due date cannot be extended. The IRS can impose a $10,000 penalty for filing the form late or not at all.

Mexico Also Taxes Rental Income: Mexico imposes income taxes, IVA and other taxes on all rental income derived by Landlords from renting properties in Mexico. You must pay these taxes even if you do not live in Mexico. The rules are complex and failure to comply with those rules can result in serious monetary and other problems with the Mexican taxing authorities. We recommend you contact a Mexican accountant, or rental property tax expert to learn what it takes to be in legal compliance with those Mexican tax laws. The Settlement Company at www.settlement-co.com has an excellent service helping those who own Mexican rental property comply with Mexican rental tax laws and returns.

Source document:http://www.mexicoonline.com/blogs/25/150/living-in-los-cabos-taxes-and-r
Date of document: Jan, 2011
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#2 hillbilly

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Posted 02 August 2011 - 06:12 AM

This is the reason we quit renting our little house out. It aint just lala land down there and to take a chance on having legal problems on a trust held property was out of the question.
On the other hand that was really a pisser to have to file form with the IRS (uncle sammy) to declare a property that should be none of their business. Another reason I cannot wait to get out a here.
This was all good advice from Paula and I hope people know about the legal requirements for Landlords as someday they may come looking for their share of revenue.
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#3 strucman

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Posted 03 August 2011 - 11:20 AM

Regardless of how you own your property in Mexico, whether through a trust or outright, how would the US government know anything about your financial dealings in Mexico if you kept everything related to your business in Mexico? What I mean is that if you deposit money from the states into a Mexican bank, purchase the property and do all of the things the Mexican government requires, how would the US know? Is there some form of communication between La Hacienda and the IRS when it comes to Mexican residents?
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#4 Kandy

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Posted 03 August 2011 - 05:56 PM

Strucman:

Actually, yes. The banks in Mexico are required to report trusts to the IRS. There are penalties of some type (it's been a while and I don't remember what they are) if they do not report. So, yes, the IRS will know you have it. I'd strongly recommend that you adopt the following philosophy if you enjoy a life in Mexico... Follow the letter of the law or lose it all.
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#5 DebB

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Posted 03 August 2011 - 08:39 PM

Actually, mandatory reporting to the IRS by Mexican financial institutions doesn't go into effect until 2013. That's if it goes into effect at all -- there are some problems with both the law and the proposed IRS regulations that need to be worked out. Before 2013, reporting by Mexican institutions is voluntary and most do not report.

However, the IRS has mandated that US citizens report certain foreign holdings -- for example, bank accounts with significant balances and ownership of Mexican fideicomiso trusts. This has been in effect for a number of years.
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#6 Ron

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Posted 05 August 2011 - 05:47 PM

There is a new form that has to be filed out it starts with 8 somthing I will find it. It was not ready last year so you had to attach the 3520a to the 2520. But is should be ready this year. I also need to contact the treasury there was a question last year if they were going to tax the use of the foreign trust. Last year they said when I called that if you are the grantor the one that set it up the tax would not apply but it was not finalized
I did find out that you do not have to file an Fbar form if you own a fedi, even though when you read the rules it sounds like you do. I emailed Fbar directly and they sent an email confirming this.
This is a rehash of last years posts

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#7 Coz2wonder

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Posted 06 August 2011 - 11:23 AM

sorry, but this is NO rehash of what had been posted.

This is a well written,concise article that explains the obligations to the Mx government as well as the US government on owning property in Mexico in regards to taxes, and reporting of such.

I get the feeling some just don't like anything I post.
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#8 DebB

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Posted 06 August 2011 - 12:19 PM

It's a great article & thanks for posting here. Reporting details for both sides of the border will always be subject to change and should be discussed separately as relevant. Most important is for people to understand that, no matter where in the world private assets are located or how they are used, governments want to know, collect dues, shuffle papers.

As an aside: A friend told me that the Swiss bankers -- long known for keeping private information private -- are asking US citizens to close their accounts in that country.

Also: IVA on goods & services here, as in Baja, is 11%. Pretty sure that hotel & occupancy taxes are at 14% now.
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