Form 3520A for Panama Fundation owning an apartment where I live

[PanamaTrust]

I am a US citizens, founder and beneficiary of a Panama Foundation (grantor trust) who just own an apartment in Panama where I lived in 2025 without paying rent.
Indeed I paid personally Panamanian property taxes for the apartment ($1,000) and HOA ($2,000) because the Foundation didn’t have a bank account for almost all 2025.
The Foundation has no revenues, I just wired $500 to its bank account in December.
FMV of the rent (uncompensated use of property) would be $1,000 a month ($12,000 for the entire 2025)
I am compiling form 3520A (substitute) and I have some questions:

Part II
Line 10a (foreign taxes) should I write $1,000 even if I paid those taxes for the Foundation?
Line 14 (other expenses) should I write $2,000 even if I paid those expenses for the Foundation?
Line 17A (FMV distribution uncompensated use of property) should I write $12,000? (Indeed I paid property taxes and HOA)
As date for the distribution, should I write January 1st 2025 or December 31st 2025?

General question: if each year I contribute money to the trust ($500 in 2025) how is this money to be considered? Income for the Foundation, partial payment for free rent, or what else?
Thank you for your kind response.

[DaveF1006 · Accepted solution]

Here is how to handle those specific line items based on the "substance over form" principle that the IRS typically follows. Here are the answers to your Form 3520A questions.

Part II: Financial Information

Because you are the grantor and the trust is transparent for US tax purposes, the expenses you paid personally on behalf of the trust are generally treated as constructive contributions to the trust, which the trust then "spent."

Line 10a (Foreign Taxes)

Yes, enter $1,000. Even though the money didn't flow through a Foundation bank account, you paid a debt legally owed by the Foundation (property taxes). In the eyes of the IRS, you effectively gave the Foundation $1,000, and it immediately paid the Panamanian tax authorities.

Line 14 (Other Expenses)

Enter $2,000 here. Like taxes, HOA fees are an expense for the property owned by the trust, so report them in this section. For clarity, consider attaching a brief note to explain that these expenses were paid directly by the grantor for the trust.

Part III: Distributions and Use of Property

This is the most critical part of your filing due to Internal Revenue Code Section 643(i), which deals with the uncompensated use of foreign trust property.

Line 17a (FMV of Distribution)

Yes, enter $12,000. Under IRS rules, if a US person uses property owned by a foreign trust without paying Fair Market Value (FMV) rent, the FMV of that use is treated as a distribution to you.

Note on Offsets: Generally, the IRS expects the "rent" to be paid to the trust. Since you paid the expenses ($3,000 total) directly to third parties, you have technically received a $12,000 benefit. You should report the full $12,000 to remain compliant with the "uncompensated use" rules.

 

Distribution Date

Use December 31, 2025. Since the "distribution" (the use of the home) occurred continuously throughout the year, it is standard practice to report the aggregate value as of the last day of the trust's tax year.

The $500 Contribution & General Strategy

Regarding your $500 wire and the $3,000 in expenses you paid:

1. Classification: These are Contributions to Trust Corpus. They are not "income" to the Foundation (trusts aren't businesses); they are additions to the principal by the grantor.
2. Relationship to Rent: You cannot easily "reclassify" these as rent payments after the fact to offset the $12,000 unless there was a formal lease agreement in place. Without a lease, the IRS views these as you simply funding your trust's obligations.

Form 3520 (The "Sister" Form): Don't forget that as the individual grantor, you must also file Form 3520. The $500 wire and the $3,000 in paid expenses must be reported in Part I (Transfers by U.S. Persons to Foreign Trusts), while the $12,000 use of property is reported in Part III (Distributions).

Important: Because the IRS treats "uncompensated use of property" with high scrutiny and potential penalties, ensure your Form 3520 (Part III) matches the $12,000 distribution you are reporting on the 3520-A.

[PanamaTrust]

Thank you very much for your professional and prompt reply. Additional question about Part III Foreign Trust Balance Sheet of Form 3520A:

The trust started 2025 with contribution to trust corpus (line 17) with the value of the apartment $300,000 (that was bought in 2024).

Because in 2025 I paid $3,000 in paid expenses and I wired $500.00, how much should write in line 17 contribution to trust corpus as End of Tax Year 2025?

If I add $3,500.00 to the Total Net Worth of the trust it would be $303,500.00, but actually at the end of the year the trust just owns the apartment ($300,000) and the bank account $500.00, so total $300,500.

Can you please clarify how I should proceed?

Thank you,

[DaveF1006]

In the 3520A, Line 17 should show the total investment made into the trust. This includes the opening balance of $300,000 plus the 2025 contributions of $3,500 ($500 wire and $3,000 in expenses you paid). The total for Line 17 is $303,500.

Now for line 18. Because the Foundation "spent" $3,000 on taxes and HOA fees but had $0 in revenue, it has a net loss for the year. Enter: ($3,000) (as a negative number).   

By doing it this way, your Part II (Income Statement), where you listed the $3,000 in expenses, perfectly matches the Part III (Balance Sheet). The IRS wants to see that the "Loss" reported on the income statement is reflected in the reduction of the trust's net worth on the balance sheet.

When you fill out your personal Form 3520, Part I, make sure you report the total transfer to the trust as $3,500.

The IRS considers your personal payment of the Foundation's bills ($3,000) to be a "constructive transfer" of cash to the trust.