common u.s.tax questions

by Don D. Nelson, Attorney at Law, retired International CPA.

Can I do a 1031 Tax Free Exchange from my US investment property into a Cabo investment property?

Unfortunately no. You cannot do a US tax free exchange from US property into property located in a foreign country such as Mexico. It is interesting to note that you can do a US tax free exchange from property located in one foreign country into one in another foreign country. However, that does not make sense when replacing Mexican property with another Mexican property because the taxes you pay in Mexico on gain can be taken as a foreign tax credit against your US taxes on the gain on sale and due more often than not that credit more than offsets your US tax on the sale.

How do I report my Los Cabos Rental property on my US tax return?
A rental property held in your name or in the name of your fideicomiso is generally reported the same on your US tax return as a property located in the USA. You still get the same deductions as permitted US property (even though you might not get all of these deductions on your Mexico return). The main difference is the purchase price of the structure and improvements is depreciated over a 40 year straight line basis whereas residential rental property in the US is depreciated over a 27.5 year period. You cannot depreciate the entire purchase price because you must make a fair market value allocation of part of the purchase price to that allocable to the land value. You cannot depreciate the value of the land.

Why do I have to report my rental activities in Mexico on my US return when I am paying taxes on it in Mexico?
The USA is requires you report your worldwide income on your US tax return. This applies no matter where you live in the world and also applies if you are a dual citizen ( of the US and another country) or a US green card holder. It makes not difference if you are paying your taxes in the country in which the property is located or in your foreign country of residence. You go
not get doubled taxed because the IRS does allow you a foreign tax credit where foreign income taxes paid can be used to offset your US tax on the same income. That credit is dollar for dollar (based on the then current exchange rate).

If I sell my full time personal residence in Los Cabos, what income taxes will I have to pay in the USA.
The IRS treats your personal residence the same as a residence in the US. If you live in it for at least 2 full years out of the past five years, as your main residence (this means actual physical occupancy and not just in theory) you can exclude $250,000 of gain on the sale from your US IRS taxes if single and $500,000 if married filing jointly. Any excess gain above those amounts is taxed at the then current capital gain rate (which is currently 15%). The rules for claiming an exclusion for the sale of a personal residence on your Mexican taxes are much more complex and often seem to have varying interpretations. You should consult your Mexican accountant for those rules.

 
Don D. Nelson is a US Attorney at Law (and retired CPA) who has been assisting Americans with their US taxes in Los Cabos for over 25 years. Website:  www.TaxMeLess.com. Email: ddnelson@gmail.com. Mexico Phone 624-131-5228. US Phone 949-480-1235. If you live in Los Cabos your US 2016 return is due 6/15/17.