McMahon made 18 appearances for the Seasiders during the second half of last season, and the former Sheffield United full-back is keen to kick on after an enjoyable six months in the North-West.
The 28-year-old told the club's official website: "I enjoyed my time last season. I'd like to think that I did well.
"I did have an offer from another club in the Championship but I chose Blackpool."
McMahon will play under new boss Jose Riga, who joined the club earlier this month.