The Purpose of the Fideicomiso
In 1917, Mexico’s government created a constitutional law, Article 24, that would keep foreigners from buying up and owning outright, the nearly 5,800 miles of coastline on the Pacific, the Gulf of Mexico and the Caribbean as well as areas along land borders between the U.S., Belize and Guatemala. At that time, this was a military strategic move to protect against enemy agents as well as discourage foreigners from buying up and owning prime real estate in a vulnerable country.
Land not within restricted zones has always been allowed to be owned outright by foreign investors with straight title and interestingly, land next to the coast (20 meters from the highest tide line) is federal property which cannot be sold to anyone.
Article 24 set in motion the creative establishment of Article 27, or the “Fideicomiso”, so that foreigners could begin owning land in the highly desirable restricted zones without a Mexican national spouse or partner and thereby create more foreign investment and interest abroad.
A Fideicomiso is a trust, much like a trust in the U.S. or Canada, where the bank, as trustee, buys the property for the foreigner, then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary.
For clarification, a Fideicomiso states that a bank owns the property but that the owner of the Fideicomiso has all the rights of ownership (rent, expansion, improvements) and the property can be freely sold to a new purchaser when ever they want. The length of term of a trust is typically 50 years with the ability to extend.
The Benefits of a Fideicomiso
Over the years, Article 27 created benefits to both Mexico (banks) and a foreign investor wanting to own land in a restricted zone. The system has indeed worked well for all parties involved over the years.
Benefits to Mexico and Their Banks
The obvious benefit of the Fideicomiso for Mexico is they generate income for Mexican banks. When restricted zone real estate property is sold, a new Fideiocomiso is established and the buyer pays all associated costs and fees as long as they have the property. Therefore, Fideicomiso income to Mexico banks is virtually perpetual. The clear benefit to Mexico is additional foreign investment. Without the Fideicomiso there would not be an opportunity to own that coveted land on or near the beach or border zones as a foreigner.
It also allows for the Constitution to be upheld while allowing foreign investment to flourish.
Benefits to the Foreign Investor
The benefits to the foreign investor are that they have the ability to purchase property in desired areas of Mexico and that they will never have to go to probate if there is an issue with ownership. In the unfortunate event that you have to proceed through probate, you would incur attorney’s fees, which certainly could add up to more than what the annual cost of the trust had been over many years.
Another benefit to having your property kept in a trust is that there are U.S. tax benefits because in June, 2013, the IRS ruled that Fideicomiso property owners no longer had to file forms 3520 and 3520a.
Why Review the Law?
Article 27 has served it’s purpose well over the years for Mexico and for foreign owners but has been up for review in recent years because not owning property outright has made a lot of foreigners uncomfortable about buying property in Mexico and discouraging foreign investment.
In order to amend a constitutional law in Mexico, 16 of the 32 states need to approve the change when it goes to the Senate.
In April of 2013, the Mexican Chamber of Deputies, the lower house of Mexico’s congress, voted to amend situations where a Fideocomiso will continue to be necessary.
The measure, which passed 356-119 in the Chamber of Deputies, approved legislation which would allow foreigners to purchase property outright if they will be utilizing the property as their personal residence and not as a rental property that produces income.
Since many foreigners purchase second homes in Mexico and rent their property when not being used, a Fideicomiso will still be necessary…..and not necessarily a bad thing.
However, in early 2014, the initiative to ammend the rules was rejected due to not continuing with the vote in a timely manner. We will keep you updated with further news on this interesting vote.