Investing in Real Estate in Mexico : Market News Update 2015

by Eva Fairchild | Snell Real Estate

Mexico offers foreign investors an attractive investment opportunity in an economy that is undergoing dramatic improvement and growth. Following the country’s inability in 1982 to service its escalating foreign debt, Mexico introduced structural changes in its economy designed to move the country toward an open economy with more direct foreign investment.

Among the most significant changes were

(1) Mexico’s accession to the General Agreement on Tariffs and Trade

(2) a government willing to work with the International Monetary Fund and other sources to restructure the country’s foreign debt

(3) the liberalization of policies concerning foreign ownership of Mexican companies, and

(4) the encouragement of tourism development.

In an effort to promote foreign investment, including investment in real estate, Mexico enacted new regulations designed to relax the restriction on foreign investment, which formerly limited foreign ownership of Mexican companies to 49 percent.

Under the new regulations, foreign investor’s can now own up to 100 percent of a large number of enterprises, including hotel companies, development companies, etc. without prior authorization from the Foreign Investment Commission. Thus, foreign investors in these enterprises have been put on equal footing with local investors and are no longer required to engage a Mexican investment partner.

The Mexican Federal Corporate Income Tax ranges from 25 to 38 percent. Provisions in the income tax code have also been established to offset the detrimental effects of inflation on monetary assets and liabilities, inventories and depreciable assets.

Mexico will continue to offer foreign investors close proximity to the world’s largest market, a solid communications infrastructure, ample supplies of energy, low labor costs, and skilled and trainable labor resources.

The liberalization of the foreign investment rules is a clear indication of the very favorable attitude the government has taken towards foreign investment. The combination of a rapidly improving economy and stable profitable base foretell and excellent ongoing investment environment.

The Mexican government has stated that it aims to double the number of foreign tourist arrivals into Mexico, representing foreign exchange revenue of $5 billion plus annually.

A key to achieving the government’s goal of ten million visitors a year is to develop new tourist destinations with modern facilities and infrastructure. The Los Cabos region is a priority area for this targeted growth.

MEXICAN PROPERTY TRUSTS (FIDEICOMISO)

Foreign citizens who wish to buy property within designated regions of Mexico are required to obtain a “Fideicomiso” (fee-day-co-me-so), which functions as a Mexican Property Trust.

In 1994, amendments to the Constitution permitted foreigners to purchase and own real estate in Mexico located within the “restricted zone” which is all land within 60 miles of a national border and within 30 miles of the Mexican Coast, which includes all real estate in Los Cabos. This Law permitted ownership through a property trust or “Fideicomiso”.

The way the Fideicomiso works is the Mexican Government issues a permit to a Mexican Bank of your choice, allowing the bank to act as purchaser for the property. The bank acts as the “Trustee” for the Trust and you are the “Beneficiary” of the Trust. The “Beneficiary” rights are very similar to Living Wills or Estate Trusts in the U.S.

The bank, as trustee, takes instructions only from the beneficiary of the trust (the foreign purchaser). The beneficiary has the right to use, occupy and possess the property, including the right to build on it or otherwise improve it.

The beneficiary may also sell the rights and instruct the trustee to transfer title to a qualified owner. Many people refer to the trust arrangement in Mexico as a lease agreement… this is not true. The home or property that you buy will be put into a trust with you named as the beneficiary of the trust – you are not a lessee.

You have all the rights that an owner of property in the U.S. or Canada has, including the right to enjoy the property, sell the property, rent the property, improve the property, etc.

The initial term of the trust is 50 years. An investor can renew the trust for an additional period of 50 years within the last year of each 50-year period, and this process can be continued indefinitely, providing for long-term control of the asset.

CAPITAL GAINS IN MEXICO

Capital Gains Tax Capital gains tax law in Mexico states that tax is owed on the profit you receive when you sell your home or property. By law, you have two options when it comes to capital gains and you can use whichever is the better of the two options for you:

1. You pay 28 percent* of the net profit. (There are a variety of deductions included in this option.)

2. You pay 25 percent* of the gross sales amount with no deductions.

Although a 28 percent capital gains tax may seem high, Mexico does have several laws and procedures that will assist you in maximizing your cost basis, thereby reducing your net profit and lowering your capital gains.

The key is to understand these laws before you buy, not when you decide to sell.

*Percentages reflect the 2007 Tax Code.

Always record your true Purchase Price at closing.

In the past, some real estate companies have recorded values lower than the actual purchase price in an effort to “save” taxes for their client; they thought they could save money on the two percent acquisition tax. This is a major error. Never record a lower value than what you actually paid for the property. Doing so simply establishes a lower cost basis for the property, which increases your capital gains tax liability.

The first step in calculating your capital gains is to subtract the value you have recorded in your trust, or Fideicomiso (fee-day-co-me-so), from the sale price of your property.

An oversimplified example is: You wisely purchase a home site (lot) for $1 million, but unwisely record a value of $500,000.

In the eyes of Mexican tax law, your cost basis is now $500,000. If you sell the lot for $1.2 million, you see a profit of $200,000.

However, according to your recorded cost basis, Mexico sees a profit of $700,000 and your capital gains tax for Mexico will be 28 percent of $700,000 ($196,000) — a difference of $140,000 in profit.

Snell Real Estate’s approach to ownership in Mexico, specifically the trust process, has been established to protect you and provide you with the legal means to safeguard your investment.

Recording your authentic purchase price with proper documentation is the only way to maximize your potential profits. The bottom line is to always secure your property trust for the true value of your purchase as quickly as possible. Never allow anyone to convince you to record a lower value than what you have actually paid for your property, or you will assume the Seller’s capital gains tax liability.

Recording a lower value today can cost you, should you decide to sell in the coming years.

If a Seller can convince a Purchaser to record a lower value, the tax liability is simply passed along, and eventually someone will have to pay. Don’t let anyone tell you, “That’s how we do it here.” Mexico is like everywhere else — the capital gains tax is the responsibility of the Seller.

Fact: Recording a property’s true value benefits you and establishes your cost basis in the eyes of Mexico.

Fact: The amount you pay for a property has no impact on your yearly property taxes.

Fact: Capital gains taxes you pay in Mexico can be applied to your U.S. taxes.

How do I know if my value is recorded correctly?

Snell Real Estate’s closing officer oversees the creation and completion of your trust. We review the documents with you to make certain everything is in order, and we are present when you sign your trust. You can verify the value yourself by examining your trust and noting the amount written in text, which is indicated in U.S. dollars or Mexican pesos and includes the exchange rate of that day. (We will provide a certified translation of your Spanish trust.)

Simply divide the current exchange rate into the peso amount and make sure the result reflects the actual dollar amount you have paid. If you would like to review an old trust, simply determine the peso rate for the day and year the trust was executed. We can assist you in finding the exchange rate, as can the bank and the Internet.

What is inflationary credit?

As soon as you pay your two percent acquisition tax to receive your trust, you are eligible to receive an inflationary credit from the Mexican government for each year you own the property. This credit is added to your cost basis when you decide to sell your property. The credit is based on consumer index adjustments (inflation) and can be quite significant.

In the past when inflation was higher, we have seen credits in excess of 15 percent per year applied to a cost basis when you acquired your property some years ago. On a million-dollar property, this can be as much as $150,000 USD per year added to your cost basis, significantly reducing your capital gains tax should you decide to sell in the coming years.

Fact: You are not eligible to receive the inflationary credit unless you have paid your two percent acquisition tax.

What about the primary residence capital gains exclusion?

Mexico, as well as the U.S., provides its residents a capital gains tax incentive for their primary home. The tax incentive in Mexico states that if you sell your “primary residence,” you pay no capital gains.

This law is in place for “residents” (Mexican nationals or foreigners) of Mexico only, and there are several items required to establish residency status.

In order to claim your home as your primary residence in Mexico, you must be able to prove that it really was your primary residence for a period of five years.

At closing, you will be required to provide the Notary with a residence visa or working permit (FM2), as well as a bank account, water, phone and electric bills, paid tax receipts and your Trust — all in your name, all with the address of the home, and all in place for more than five years. In some circumstances, a tax ID number may be necessary.

Please keep in mind that this is just a guideline of the requirements. It is necessary to communicate with the Notary prior to closing your transaction in order to know if you are eligible for exemption.

*Based on the 2007 Tax Code.

Fact: You cannot have two primary residences at the same time.

Therefore, if you claim the home in Mexico as your primary residence, you give up your primary residency status in the U.S.

Fact: The capital gains tax exclusion is intended for residents of Mexico, not for persons owning second homes or vacation homes.

Just as there are no shortcuts or legal ways around taxes in the U.S. or Canada, there are no shortcuts around taxes in Mexico. Your home is a sizable investment and following proper legal steps will ensure a safe and enjoyable experience in Mexico.

If someone says, “This is Mexico, and that’s the way we do it here,” then beware. Seek another agent or Broker.

If you plan on building a home or doing a major remodel to an existing home, please read our brochure, “Manifesting Your Construction,” to make certain all your expenses are added to your cost basis.

If you are considering a real estate purchase in Baja, make certain everything is done right. Allow Snell Real Estate to put our knowledge and experience to work for you. We are an independent brokerage, assuring our only interest is representing you in a safe, solid and secure real estate transaction.

Helpful Hint: When you sign your new trust, ask the Notary to jot down the exchange rate on the document itself. This will be useful in the future.

MANIFESTING YOUR CONSTRUCTION

What is manifesting?

Manifesting is simply recording the amount of money spent on a home’s construction or remodel, in order to add it to the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax. Proper documentation and manifesting your construction are vital to building your new home.

Why do I need to manifest my construction?

When you sell your home, the manifested cost plus the cost of your lot stated in your trust (title), will be used to determine the basis for capital gains tax. If you have not manifested your construction, Mexican tax law will not recognize your construction costs and you will not be able to use them as a deductible expense. All of your receipts, cancelled checks and bank statements will not help unless you have completed your manifestation.

Before you begin construction, decide how to structure your financial arrangements with your contractor.

The two main choices are Cost Plus and a Fixed Bid.

Source:
http://evafairchild.blogspot.mx/2015/08/investing-in-real-estate-in-mexico.html

Eva Fairchild | Luxury Estates | Development Properties Snell Real Estate | Engel & Volkers

DIRECT: (011 521) 612.200.8781

Offices:San Jose’ del Cabo – The Shoppes at PalmillaTodos Santos – Calle Benito Juarez