Mexico Real Estate: How to Navigate Mexican Tax Laws

Rental property purchase and ownerhsip strategies in Mexico

Mexico real estate is becoming increasingly more attractive to foreigners. It is considered an especially desirable location for retirement. In addition to retirees, many foreigners have come to Mexico as a result of job transfers. Others are looking to take advantage of electronic and wireless communications, and seek out delightful areas in which to live and work from their in-home offices and studios.

Many of these newcomers prefer to rent a house or an apartment while they look for the perfect location and home for purchase. The influx of foreigners has lead to increased demand for housing and has made the acquisition of rental properties an increasingly attractive investment. It is difficult to find a better and more secure income than can be found from renting a house or apartment complex, which can produce rental income for many years. Even better, it is most likely will increase in value at the same time.

Decide how to fund your purchase

Investors can pay all cash, use funds from a self-directed IRA account or even negotiate seller financing to establish solid long-tem gains. Institutional financing on Mexican properties is still not common. There are a few companies that offer some limited financing options. Availability of this type of financing is largely regional and inquiries should be made locally.

Decide how to take title

There are two ways to take title to property in Mexico:

  1. A Mexican corporation can be established to hold title to all NON-residential property. This includes apartments and houses which are used entirely for rental and/or commercial purposes. The expense involved in accounting and maintaining a Mexican corporation is considerable, and may be too expensive if the investor has only a few properties. For properties owned by the corporation, an IVA tax of 15% of the value of the construction is charged at the time of purchase in addition to the 2% acquisition tax. Corporate tax declarations must be filed monthly and estimated taxes paid monthly. Property taxes are charged at a commercial rate, not residential, as utilities will be. Corporate stock, if sold or transferred, is subject to an income tax (ISR) similar to the tax paid by an individual on the gain from the sale of a house.
  2. The alternative to a Mexican corporation is for the buyer to hold title in fee simple, or in trust (fideicomiso), if the property is located in the restricted zone. In fee simple, property must be registered with the Secretary of Foreign Relations, but has no additional annual title fee. In the fideicomiso, the annual cost of holding title is the trustee fee of $375 USD to $550 USD. Utilities and property taxes are generally charged at a residential rate, rather than a commercial rate.

In fee simple—where permitted—or in a fideicomiso, taxes and yearly maintenance fees for accounting and legal services for up to seven properties are generally less than the costs generated by properties held in a Mexican corporation.

Understand your tax liabilities

Mexico’s tax laws are patterned after those of the United States and Canada, and state that:

“Physical persons (individuals) and legal persons (companies) who are residents of Mexico and who receive income in this country,  are obligated to register with Hacienda, declare their income and pay their taxes, regardless of the source; and…Physical and legal persons who are residents in a foreign country (outside Mexico) must declare their income and pay their taxes on all income generated in Mexico…”

If the property is held in a Mexican corporation, a Mexican accountant will need to prepare the monthly declarations and estimated taxes to be paid. If the property is held in a fideicomiso, a Mexican accounting firm can perform all necessary tax and accounting services including the monthly filings and tax payments, and can also provide the foreign owner with accounting and documents for obtaining tax credits on their U.S. or Canadian taxes.

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