We previously reported to you (Vol.8, No 1, January 2013) on a private letter ruling issued by the IRS on the income tax treatment of a popular real property title-holding trust used in Mexico. Under Mexican law, non-citizens of Mexico cannot own real property in certain restricted zones, which generally are the areas near the country’s borders and the coastline. Mexico does, however, permit non-citizens to acquire such property in a form of trust known as a “fideicomiso.” In this arrangement, legal title to the property is held by a Mexican bank for the benefit of its beneficiary, who is the person who wishes to own the property. The beneficiary is free to sell his interest in the trust, and the bank must allow the property to be encumbered by a loan upon the request of the beneficiary. The beneficiary has all rights of possession over the property, as well as all of the economic benefits and burdens of ownership.
In the previous private letter ruling, the IRS ruled that such an arrangement did not constitute a trust because the bank did nothing more than hold bare legal title to the property. In Rev. Rul. 2013-14 (June 6, 2013), the IRS came to the same conclusion, holding that for United States income tax purposes, the beneficiary of the land trust would be treated as the direct owner of the real property. Because this is a published ruling, it can be relied on by all taxpayers. This ruling is beneficial because if the “trust” was treated as a trust for United States income tax purposes, a variety of annual reporting and compliance provisions would be applicable.