The Foreign Account Tax Compliance Act
by Lic. J. Beaulne LL.B
The United States of America IRS determined that a Fideicomiso, which is the instrument through which Americans hold title to Mexican real estate in the restricted zone, is a foreign trust. In fact, the IRS says it is a foreign grantor trust. The Foreign Account Tax Compliance Act (FATCA) was passed on March 18, 2010 and its provisions generally become effective for tax years beginning after that date. For most taxpayers, that means it goes into effect on January 1, 2011.
In its never-ending quest to find taxable income that may be hidden outside the United States, FATCA brings in some new tax regulations. One of those new regulations says the fair market value of foreign property occupied by the grantor or beneficiary of a Fideicomiso -- or a close relative -- is now taxable income. This comes into play for Americans who live in Mexico on property they own with a Fideicomiso. If one does not have a Fideicomiso, FATCA does not apply. Here are some examples:
1. An American taxpayer owns a home Mexico city and lives there full time. The Capital of Mexico is not in the restricted zone so ownership is not through a Fideicomiso. The taxpayer has nothing to report to the IRS on account of his ownership of the home.
2. An American taxpayer rents a home in La Paz, Baja California Sur and lives there full time. Renting a home is not ownership in the prohibited zone. The taxpayer has nothing to report to the IRS on account of his renting home.
3. An American taxpayer builds a home in Los Cabos, Baja California Sur on land he leases from a Mexican and lives there full time. Building a home on leased land is not ownership that requires a Fideicomiso, and Mexico does not require the taxpayer to have a Fideicomiso. The taxpayer has nothing to report to the IRS on account of his owning the home and leasing the land.
4. An American taxpayer owns a a home or condominium in Mulege, Baja California Sur and lives there full time. Being in the restricted zone, he has a Fideicomiso. Looking at the numerous advertisements to rent these homes to Americans on vacation, as they appear in Craigslist and Baja real estate agents websites, that taxpayer's home or condominium has a fair market rental rate of $175 per day. Under FATCA, the taxpayer should report $63,875 of taxable income to the IRS, commencing in 2011. Individual tax rates in 2011 vary from 15% to 39.6%, so this could create an additional federal income tax liability of $9,580 to as much as $25,300, in the example.
Most of the Baja California real estate agents' websites. There was not even one mention of this new FATCA tax and there is not even one mention of the requirement to file IRS Forms 3520 and 3520A, which has been an IRS requirement for years.
There is much more to FATCA than just the impact on Americans with Fideicomiso. FATCA also increased the reporting requirements of foreign banks on transactions of American to the IRS.
One way to get away from not paying the IRS is to become Mexican, inform the American government that you resign your American citizenship.
This article is reproduced in part and modified for the purpose of informing the Americans of the changes which can affect their liabilities with IRS USA if they do not fulfill their responsibilities in declaring their income.
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Lic. J.E. Beaulne, LL.B.