Expatriate Owned Businesses

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Comment by Don D. Nelson on February 20, 2012 at 3:14pm

Want to know more about your US tax obligations, rules and regulations in Mexico?  Read the Quick Expat Tax Facts at http://mexicomyspace.ning.com/profiles/blogs/quick-us-expatriate-ta...

Comment by John K. Glaab, CIPS on February 1, 2011 at 11:58am

Thanks CDon,

 

Many owners want to stay legal and pay tax on rentals. The problem is they do not know how to do this.

The Settlement Company has developed a process for those owners who rent  out their Mexican properties.

 

John K. Glaab, CIPS

Comment by Don D. Nelson on February 1, 2011 at 10:53am

US IRS TAX RULES YOU MUST FOLLOW
WHEN YOU OWN AND RENT OUT PROPERTY IN MEXICO

By Don D. Nelson, Attorney, CPA
with over 20 years experience helping clients living and working in Mexico

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 US owners from renting properties in Mexico. You must pay these taxes even if you do not live in Mexico. The rules are complex. Your failure to comply with those rules can result in serious monetary as well as other legal 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 , a Mexican escrow company at www.settlement-co.com or Linda Neil who has been a real estate consultant in Mexico for over 33 years at www.lindaneil.com both have excellent services assisting those who own Mexican rental property comply with Mexican tax law.






Don D. Nelson is a US Attorney and CPA who has specialized in helping Americans living and working in Mexico with their US Tax planning and compliance for the last 20 years.
Mexican/US Tax Planning
US Tax Return Preparation (including all US states)
Fideicomiso US Form Preparation
Mexican Corporation US Return Preparation
Foreign Bank & Financial Account Reporting Form Preparation
Expatriate and International Tax Forms Prepared
Consultation on US tax aspects of owning property and operating a business in Mexico



Mailing Address:
34145 Pacific Coast Highway # 401
Dana Point, CA 92629-2808 USA
Phone (949) 481-4094
Fax (949) 218-6483
Email: ddnelson@gmail.com
Websites: www.TaxMeLess.com www.expatattorneycpa.com
Blogs: www.us-mexicantax.blogspot.com www.usexpatriate.blogspot.com
Skype address: dondnelson

Comment by John K. Glaab, CIPS on January 9, 2011 at 9:07am

Looking for property in Baja California Sur? ( Commercial or Residential)  Check out

www.lindaneil.com  AND

 

A place to stay in Michoacan" Check out

 

www.casaserenity1.com 

 

Comment by Sabina Rowlison on January 8, 2011 at 7:41pm

To all of my valued owners and clients;  Happy New Year.  Are you tired of the same old vacation spot? Looking for somtheing a little more relaxing? Why not try San Felipe Baja Californai Mexico. Check out www.mysanfelipevaction.com  you can see each of our units, you can reserve on line.  Questions of comments you can call or email me. I hope to see all of you back along with a lot of new faces for fun and relaxation.   Sabina

Comment by Don D. Nelson on December 20, 2010 at 4:29am

RE: 2010 Year End Tax Planning for US Expatriates in Mexico

Dear Clients & Expatriates:

The midterm elections have changed the Congressional landscape, with Republicans winning control of the House of Representatives and picking up seats in the Senate. The Congress in mid December passed the 2010 tax legislation everyone has been waiting for. Click here to see the details.

We have compiled a checklist of actions that can help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Expatriates:
The foreign earned income exclusion for 2010 is $91,500 and the IRS has revised the maximum housing deduction for many foreign countries.

You can reduce your taxes by (subject to the exception below) making contributions to an IRA (before 4/15/10) but that will only work to the extent your foreign earned income exceeds your foreign earned income exclusion by at least the amount of the IRA contribution. The same rules apply whether the contribution is made to a Roth or a regular IRA. Exception: If you are covered by a US pension plan by your employer in most cases you would not be able to make any IRA contribution unelss your earnings are low.
Form 8839 will be required with your form 1040 this year if you have $50,000 or more in foreign investment or financial assets. It requires a lot of information on those assets has large penalties for not filing. Though the insructions to that form have not yet been release, financial assets include foreign bank accounts, brokerage accounts, stocks, bonds, rental properties,financial contracts, etc. See the draft of the form at www.usexpatriate.blogspot.com

Year End Moves for Individuals:

•Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget that you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids (2010 is the last year that FSAs can be used for nonprescription drugs).


•Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

•Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

•Take an eligible rollover distribution from a qualified retirement plan before the end of 2010 if your are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2010. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2010, but the withheld tax will be applied pro rata over the full 2010 tax year to reduce previous underpayments of estimated tax.

•Make energy saving improvements to your main home, such as putting in extra insulation or installing energy saving windows or buying and installing an energy efficient furnace, and qualify for a 30% tax credit. The total (aggregate) credit for energy efficient improvements to the home in 2009 and 2010 is $1,500. Unless Congress acts, this tax break won't be around after this year. Additionally, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home (this break stays on the books through 2016).
• Convert your traditional IRA into a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your adjusted gross income for 2010. However, you will have the choice of when to pay the tax on the conversion. You can either (1) pay the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax on the conversion when you file your 2011 return in 2012, and the other half when you file your 2012 return in 2013.

• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2011, and (2) held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.

Take required minimum distributions (RMD) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. A temporary tax law change waived the RMD requirement for 2009 only, but the usual withdrawal rules apply full force for 2010. So individuals age 70 1/2 or older generally must take the required distribution amount out of their retirement account before the end of 2010 to avoid the penalty. If you turned age 70 1/2 in 2010, you can delay the required distribution to 2011, but if you do, you will have to take a double distribution in 2011—the amount required for 2010 plus the amount required for 2011. Think twice before delaying 2010 distributions to 2011—bunching income into 2011 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.

•Make annual exclusion gifts before year end to save gift tax (and estate tax if it is reinstated). You can give $13,000 in 2010 or 2011 to an unlimited number of individuals free of gift tax. However, you can't carry over unused exclusions from one year to the next. The transfers also may same family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year End Moves for Business Owners

•Hire a worker who has been unemployed for at least 60 days before year end if you are thinking of adding to payroll soon. Your business will be exempt from paying the employer's 6.2% share of the Social Security payroll tax on the formerly unemployed new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire on the payroll for a continuous 52 weeks, your business will be eligible for a nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This credit will be taken on the business's 2011 tax return. In order to be eligible, the formerly unemployed new-hire's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Put new business equipment and machinery in service before year-end to qualify for 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance won't be available for property placed in service after 2010.

Make expenses qualifying for the $500,000 business property expensing option. The maximum amount you can expense for a tax year beginning in 2010 is $500,000 of the cost of qualifying property placed in service for that tax year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2010 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). Note that at tax return time, you can choose not to use expensing (or bonus depreciation) for 2010 assets. This is something to consider if tax rates go up for 2011 and future years, and you'd rather have more deductions after 2010 than for 2010.

•Set up a self-employed retirement plan if you are self-employed and haven't done so yet.

•Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation's losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

•Consider whether to defer cancellation of debt (COD) income from the reacquisition of an applicable debt instrument in 2010. The business can elect to elect to have the cancelled COD income included in gross income ratably over five tax years beginning with the fourth tax year following the tax year in which the repurchase occurs (i.e., beginning with 2014).

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
Very truly yours,
Don D. Nelson
Attorney at Law, CPA


Draft of Form 8938 -Report of Foreign Financial Assets

Comment by Catriona Brown on December 11, 2010 at 1:18pm

Here I am in Puerto Morelos, Quitana Roo I own:

The Little Mexican Cooking School -authentic Mexican Food classes

El Mundo para Puerto Morelos - charity for schools, clinics, emergency services and families in distress

and have built 4 houses so far. Hope to see you here on eday!

 

Comment by Robin Miller on October 22, 2010 at 9:20pm

Hey Mercy, PV is treating me well, been taking the bus, tonight was like a rollercoaster ride at Disneyland, an "E ticket" ride. Lots more to do true, I do get homesick for the "known" back home in Penasco, but knew I was ready for a huge change. yes, will refer to you anyone wanting GDL property. Kathy Witt said she was just there too with REX.

Comment by Mercy Stirling de Duenas on October 22, 2010 at 5:52pm

Hey Robin, how is Puerto Vallarta treating you??? Lots more to do there than Penasco, huh!!? But I still miss Penasco!! If you ever have anyone over in Vallarta that would like to buy here in Guadalajara Metro area...I am here!
Hope all is well with you!! All the Realty Execs guys were here a couple weeks ago..didn't get a chance to see Steve...next time!

Comment by Robin Miller on October 22, 2010 at 1:12pm

I'm happy that Dr Lenny posted his info, I saved his number in my cell, (my cell if you need me 322-164-2655) I just moved to Vallarta 3 weeks ago from Puerto Penasco, both areas selling real estate. We did not have a Chiropractor at all in Penasco, and nice to see a friendly face here for Chiropractic.
By the way, since I have my real estate business, I am happy to pay referral fees to anyone who brings a Mexico real estate buyer or develope. I have a $3 million finders fee to pay, ask me about THAT property and how you can earn that fee.
Thanks

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