Employee Benefit Plan Audits in Montana

Winter in Montana means short, overcast days with sidewalks to shovel and icy roads to navigate. Many Montanans do their best to spend the winter months on sunny beaches in warm climates. Some even purchase a second home in temperate countries, like Mexico. Although this can be tempting, it’s important to understand the tax implications of purchasing a vacation home in a foreign country.

Reporting Issues You May Face After Purchasing a Vacation Home Outside the US

Before you go to Mexico and purchase a home on the beach, you need to be aware of the potential U.S. reporting issues associated with owning property in a foreign country. Most beachfront property in Mexico is in a restricted zone. Mexico prohibits foreign nationals (aka nonresidents of Mexico) from owning property outright in restricted zones. There are two ways nonresidents can own property in Mexico:

  1. Own property in a bank trust called a “Fideicomiso.” The Fideicomiso is a trust that holds the deed to the property and the foreign buyer is the beneficiary.
  2. Own property via a Mexican corporation. The Mexican corporation buys the property and the foreign buyer is a shareholder in the corporation. 

Complications You May Face While Navigating the Process

For US reporting purposes, the Fideicomiso is not treated as a separate entity. The IRS ruled that Fidicosmiso is not a foreign trust. The Mexican corporation is a foreign corporation and generally will be a Controlled Foreign Corporation (CFC). A US shareholder of a CFC is required to file an annual Form 5471 with their US income tax return disclosing the annual activity of the foreign corporation. 

The US shareholders usually contribute the funds to the Mexican corporation to purchase and maintain the home in Mexico. Contributions of $100,000 or more to a foreign corporation require the US taxpayer to file Form 926. The interest in the foreign corporation is treated as a foreign financial asset for purposes of Form 8938. Failure to file any of these forms can generate IRS penalties of $10,000-$100,000.

The Mexican corporation may have a bank account and you as an individual may have your own bank account in Mexico. If the total of all your bank accounts (including the corporation’s account) is $10,000 or more U.S. dollars, you will be required to file Form 114, FBAR. Failure to file the FBAR can generate a penalty of 50% of the account balance.

Although there are several hoops to jump through when purchasing a second home outside the US, you shouldn’t be deterred from the process. Connecting with a tax attorney or accountant that is knowledgeable in international reporting will make the process much smoother. If you’d like to connect with a member of the Anderson ZurMuehlen International Tax Team, please submit a contact form below.

This article was written by Shirlee Walker, CPA, CFE, and Shareholder in our Missoula office.


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