BajaNomad

Buying a Baja property held in a US LLC

Riom - 3-23-2010 at 07:09 PM

I'm looking into buying a lot in San Felipe which has a fideicomiso, and that fideicomiso is owned by a single-purpose Arizona Limited Liability Company.

I've been trying to buy it the normal way, a cesion de derechos on the existing fideicomiso but it's proving very hard to find anybody in San Felipe who can handle that efficiently (a complication is the appraised value is very different from the purchase price). Looks like that is about to collapse, I've had enough.

So rather than giving up I'm looking into the option of just buying the Arizona LLC, and carry on owning it that way. (I'm quite happy to pay the BC transfer tax, not trying to avoid it, just looking for a more effcient transfer process, some way to bypass the lack of any closing professionals).

Does anybody own their property in an LLC? Any advantages? I can see plenty of downsides (apposiled and notarized stuff to do anything on behalf of the company, annual running costs, etc).

Has any brought a property in Baja by buying the holding LLC? Or sold their holding LLC containing a Baja property?

Donjulio - 3-23-2010 at 07:22 PM

Riom - couple questions if you don't mind. Where is the property (development) and why does the owner have a fidi held by a LLC? Also the appraised value and purchase price might be an issue for you on the acquisition tax and then again on capital gains when you sell it. If you would like u2u and I can help you figure it out. There is also a San Felipe attorney who could help you with this if you need to go that route.

[Edited on 3-24-2010 by Donjulio]


edited cause I can't see tonight for some reason

[Edited on 3-24-2010 by Donjulio]

BAJA.DESERT.RAT - 3-23-2010 at 07:47 PM

Hola Riom, i read a post on this site that if you buy a property being a corporation, you cannot use it as a residence ? just a heads up and i am not quite sure. something to ask an attorney or a notario.

BIEN SALUD, DA RAT

Riom - 3-23-2010 at 08:06 PM

Quote:
Originally posted by Donjulio
couple questions if you don't mind.


U2U sent. Thanks.
Quote:
Originally posted by Donjulio
edited cause I can't see tonight for some reason


Maybe it was cloudy day today... really unusual!
Quote:
Originally posted by BAJA.DESERT.RAT
Hola Riom, i read a post on this site that if you buy a property being a corporation, you cannot use it as a residence ?


That is certainly the case with a Mexican corporation, although it's a lot less clear if it owned by a foreign corporation (in this case, one from Arizona). It's that sort of uncertainty (e.g. do I pay commercial electric rates?) that did make me rule out buying the LLC initially. It's still the last resort but after so much messing around with just transferring the fideicomiso (process hasn't even got started properly) I'm looking into it again.

Holding investment property in a corporation is normal in most countries, and holding it via a non-resident (often offshore) company is normal in parts of Europe. The purpose is mainly to bypass local transfer taxes on a sale, and sometimes just to make a sale more efficient, and (in the case of the US) to limit liablity. There must be a good reason (probably tax) why it's not common in Baja!

Rob

Diver - 3-23-2010 at 08:30 PM

There is no problem with a US licensed corporation owning residential property under a Fideicomiso in Mexico. A US Corp is not licensed to do "business" in Mexico.
A Mexican Corp cannot hold property under its Corp for private residential use of the Corp owners. A residential property can be held by a Mex Corp if the purpose is to rent or lease the property for profit/business.

BAJA.DESERT.RAT - 3-23-2010 at 08:51 PM

Hola Diver, you seem to be very well versed in corporate law. question: if a corporation does in fact purchase a residential property, can it rent/lease it to one of the corporate members/employees for a reasonable profit ?

i thank you in advance.

BIEN SALUD, DA RAT

Why NOT buy the LLC?

Dave - 3-23-2010 at 09:31 PM

1. An LLC is not a corporation. It is a Limited Liability Company and was probably set up specifically to facilitate the easy transfer of this property.

2. Check with the LLC owner. If the fideicomiso does not list a 'personal guarantor' then you're home free. In essence, you're buying the business, not the property. No transfer tax, capital gains, notario fees...nada.

Of course, and at some point, capital gains will bite someone in the a$$. Just make sure it isn't you. ;D

Diver - 3-23-2010 at 10:16 PM

Dave makes a good point regarding capital gains; don't pay too little now as YOU will be the one stuck with the capital gains later.

If you are asking about a US Corp renting/leasing the property for profit, this would not be legal as the US corp (or company) does not have the right to do business (make money) in Mexico.
Although lot's of folks with Fidei's do it, you are supposed to have a Mexican Corp or business to make money from your property in Mexico.

[Edited on 3-24-2010 by Diver]

Riom - 3-24-2010 at 12:15 AM

Quote:
Originally posted by Dave
Why NOT buy the LLC?


Good question. I do agree that in theory it should make the transfer so much simpler, as soon as I saw that there was an LLC owning it I though "great!", until I looked into it.

Here's the reasons that have put me off buying the LLC. Anybody feel free to shoot them down, preferably backed up by facts...

1. From a Mexican viewpoint, it looks like a way of avoiding the transfer tax. Maybe that will cause problems later, once it is realised the LLC no longer has the same owners. Sometimes it doesn't matter if it's legal, if a government decides otherwise. If (for example) I get a bill for a previous transfer when I'm trying to sell it, I'll have to pay it to sell, no real choice. Same might happen with the fideicomiso holder. So maybe storing up a problem for later.

2. Added paperwork to do anything in Mexico, as the company will need to always act through a representative (me), often with aposilled documents. For example it is unlikely to be able to open a peso bank account (so I have to pay things and claim them back after giving the LLC the money to pay me), maybe the electric is at commercial rates.

3. Previously the lack of a capital gains tax exemption would have been a factor, but with the new rules since January making it very hard to get an exemption as a private person it's not so important now...

4. Not being able to do business in Mexico (what was the point of NAFTA??) would be a problem if I was to try renting anything I build. Would even building a house on the lot being considered doing business? (I expect it would be allowed to do business, as a branch, but then would fall within Mexican corporate tax rules?)

5. Annual running costs for the company, like a registered agent, filing fees and so on. Not a big deal on a major property but this is a just a cheap lot, does add to the overheads and even more paperwork.

The least of my worries is capital gains. The appraised price in the fideicomiso (which would be my basis for any gain) is a lot larger than the current appraisal and even larger than what I'm paying (in other words, the seller is making a loss). It's a strong plus for buying the company, keeps the higher initial price.

So, does anybody hold their Baja property via a US company (or indeed an offshore one), or has anybody sold (or help buy/sell) a property held this way?

Rob

bajabeachbabe - 3-24-2010 at 08:57 AM

I think one of the biggest issues you might face is not on the Mexican side of the transaction, but on the US side. If you acquire the LLC, there should not be any impact on the fideicomiso, as the owner of the land is the LLC not the individual members of the LLC. As far is the trust is concerned, the ownership has not changed.

On the US side, the members (owners) of the LLC have changed and will require additional filings in the US. Depending on what business was conducted by the LLC in the US, you might face liability issues for any transactions conducted by the LLC. An LLC is treated as a partnership and any income/loss flows through to the members on their tax returns through the K-1 they receive from the LLC.

As the owner of an LLC, the additional work that you will need to do is the filing of the tax return for the LLC every year, including the forms required to be filed for the ownership of the foreign trust (Form 3520). (Hopefully the US LLC has been filing the 3520 forms, as this would leave you open to fines for non-filing.) If they haven't been filing, the potential fines should make you run rather than walk away from acquiring the LLC. The other costs would be any state annual filing fees and the cost of having a registered agent, but these should be under $200 per year, depending on the state the LLC is registered in.

I have a US LLC, but the property we have in Mexico is being held in a Mexican corporation as we intend to have a business on the property. I agree that the LLC should be the easiest way to transfer the property, but since it sounds like you might want to use the property for business, you might just be better off creating a Mexican corporation and have it hold the property and cancel the fideicomiso. With either arrangement you will have additional IRS forms to file each year.

bonanzapilot - 3-24-2010 at 10:22 AM

Not a direct parallel, but I can tell you about my sale of property, held in a Mexican corporation. I built and operated Casa Granada in Mulege for about 6 years. When a buyer became active, I used my Mexican Notario
(more power than a regular lawyer) who organized the corporation to handle the transfer. There was quite a bit of tax to pay, even though the profit was small. I transfered the assets of the corporation, including contents of the casa, and a 4-Runner, to the new owner as a stock transfer. I found that having competent professional Mexican help, as a good Accountant and the Notario, made this quite simple. I never got into the nuts and bolts, just paid my taxes and went my way as a seller.

arrowhead - 3-24-2010 at 10:40 AM

Quote:
Originally posted by bajabeachbabe
I think one of the biggest issues you might face is not on the Mexican side of the transaction, but on the US side. If you acquire the LLC, there should not be any impact on the fideicomiso, as the owner of the land is the LLC not the individual members of the LLC. As far is the trust is concerned, the ownership has not changed.


This is a very naive understanding of the laws of Mexico and basically, it is totally incorrect. The legal ownership of the land is in the name of the bank which is a party to the fideicomiso. There WILL BE an impact on the fideicomiso because the beneficiary of the fideicomiso, the LLC, has changed ownership. New signatories must be authorized. People need to understand, an Arizona LLC is a legal entity in Arizona. Mexico may choose to recognize the LLC as a foreign corporation, as a foreign LLC, or ignore it entirely and treat the owner of the LLC as the direct beneficiary of the fideicomiso. This is probably why Riom is having so much trouble getting the paperwork started. I doubt anybody in Mexico knows what to do.
Quote:
Originally posted by bajabeachbabe
On the US side, the members (owners) of the LLC have changed and will require additional filings in the US. Depending on what business was conducted by the LLC in the US, you might face liability issues for any transactions conducted by the LLC. An LLC is treated as a partnership and any income/loss flows through to the members on their tax returns through the K-1 they receive from the LLC.


An LLC in the US is a check-the-box entity. It can choose to be treated as a partnership or a corporation. There is insufficient information to determine how the LLC is being treated for tax purposes. However, you are correct in that there could be a lot of unknown liabilities tagging along. I would recommend to never purchase somebody else's legal entity. I wouldn't touch one with a 10-foot pole. Just buy the land directly from the LLC. If nobody can figure out how to do it, have your seller transfer the land to himself and then do a sale.

Riom - 3-24-2010 at 03:40 PM

Quote:
Originally posted by arrowhead
I doubt anybody in Mexico knows what to do.
... I would recommend to never purchase somebody else's legal entity.


Many thanks for all the comments, including the above. I think that does sum it up for me.

I'll do this deal as a straight transfer of the fideicomiso (from the LLC to me), or not at all.

Rob

[Edited on 2010-3-24 by Riom]