In Owning a Property in Mexico, it is a common misconception that foreigners cannot own real estate in Mexico, but the reality is that they can. It is perfectly legal for a foreigner or foreign corporation to acquire any type of real estate, holding the property as a direct owner, with the exception of properties located in the Restricted Zone.
The Mexican Constitution regulates the ownership of land and establishes that “… in a zone of 100 kilometers along the border or 50 kilometers along the coast, a foreigner cannot acquire direct ownership of the land”. These areas are known as the “Restricted Zones” or “Prohibited Zones”.
Nevertheless, the latest Mexican Foreign Investment Law, enacted December 28, 1993, provides a solution. Within the Restricted Zone, a foreigner or foreign corporation can obtain all the rights of ownership with a bank trust, known as a Fideicomiso.
Any foreigner or Mexican National can establish a Fideicomiso (the equivalent of an American beneficial trust) through a Mexican bank to purchase real estate anywhere in Mexico, including the Restricted Zone. For practical reasons, even in unrestricted zones, many foreigners and Mexican nationals prefer to hold their property under a Fideicomiso. To do so, the buyer requests a Mexican bank of his choice to act as a trustee on his behalf. The bank, as a matter of normal course, obtains the permit from the Ministry of Foreign Affairs to acquire the chosen property in trust.
The Fideicomiso can be established for a maximum term of 50 years and can be automatically renewed for another 50-year period. During these periods you have the right to transfer the title to any other party, including a member of your family. The bank becomes the legal owner of the property for the exclusive use of the buyer/beneficiary, who has all the benefits of a direct owner, including the possibility of leasing or transferring his rights to the property to a third party.
The trustee is responsible to the buyer/beneficiary to ensure precise fulfilment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary. Fideicomisos are not held by the trustee as an asset of the bank.
Another alternative is to purchase non-residential property through a Mexican corporation, which under certain conditions can be 100% foreign-owned, with a provision in its by-laws that the foreigners accept being subject to Mexican laws and agree not to invoke the laws of their own country. Also, they agree that the real estate acquired be registered with the Foreign Affairs Ministry and be used for non- residential activities. In other words, under these conditions foreigners can directly acquire properties destined for tourist, commercial and industrial use.
The Real Estate Industry:
The real estate industry in Mexico is similar in many ways to that of the United States, which is probably the most advanced in the world. It is developing quickly, taking advantage of today’s technology and the FLEXMLS; however, it seems to be paralleling the system as it exists in the US.
The Asociación Mexicana de Profesionales Inmobiliarios (Mexican Association of Real Estate Professionals), or AMPI, is a reputable national professional real estate organisation with many chapters throughout Mexico. This organization is similar to the National Association of Realtors (NAR) in the US, and in fact has a joint venture with the NAR, such that AMPI membership automatically confers membership in the NAR, as well. In the Banderas Bay Area, there are three AMPI chapters, AMPI Vallarta, AMPI Riviera Nayarita and AMPI Compostela. At this time, there are no government license laws regulating real estate brokerage and sales in Mexico. Anybody can, in effect, offer properties for sale. Therefore, caution should be taken to select an established and reputable real estate company. A potential buyer may want to have a look at http://www.vallartanayaritmls.com/ which is updated to show AMPI-member agencies in the area with access to the FLEX Multiple Listing Service.
Historically, due to lack of capital markets and high Mexican interest rates, most transactions were made in cash. That is changing rapidly, however, and many local and foreign banks are now offering financing options. Loan terms can vary significantly, so it pays to shop around a bit. It has just recently been announced by one of our mortgage brokers that foreigners can obtain Mexican financing via a Mexican Bank using their credit history and income from the United States or Canada.
Multiple Listing Service:
A few years ago the AMPI local real estate chapters decided to establish their own MLS system, FLEXMLS. As a part of the MLS only AMPI members have access and all of the listings entered into this system are verified to be able to be legally sold by the AMPI MLS Adminstration. This is great news because you as a buyer are assured that the property you wish to purchase has all of its paperwork in order and can be legally purchased. You as the seller will have to undergo this similar review so your AMPI agent will be asking you for various documents to prove your legal ownership of the property that you wish to sell.
Escrow, Title Insurance and Home Insurance:
It is always recommended that buyers use an escrow account for their real estate transactions. There are a few companies available, one of them being Stewart Title, Fidelity Title and several others that have offices in Mexico and are insured to hold your deposit funds. There is obviously a fee associated with the opening of an Escrow account, but they insure that your closing is complete and legal before funds are distributed to the seller.
Most real estate transactions are “opened” after a written purchase offer is accepted by the seller and when a purchase-sale agreement (promissory contract) is signed by both parties. Usually a deposit is required within 5 days after the acceptance of the offer by opening aforementioned Escrow account. (If the transaction is being conducted directly with the seller, it is highly recommended that a real estate broker or lawyer be consulted before signing any papers or handing over any money.) It is common practice to deliver to the seller, as an advance payment, the equivalent of 10% (including the initial deposit) of the total price upon signing the purchase-sale agreement, which should contain a penalty clause applicable in case there is a breach of contract by any of the parties. Normally, when signing the escritura (the official deed, which needs to be certified by a Public Notary) the balance is paid and the property is delivered. This should not take more than 45 days. It is recommended that an escrow account be used for all real estate transactions.
The Notary Public:
A Public Notary is a government-appointed lawyer who processes and certifies all real estate transactions, including the drawing and reviewing of all real estate closing documents, thus ensuring their proper transfer.
Furthermore, all powers of attorney, the formation of corporations, wills, official witnessing, etc. are handled and properly registered through the office of the Public Notary, who is responsible to the government for the collection of all taxes involved.
In connection with real estate transactions, the Public Notary, upon request, receives the following official documents, which are required by law for any transfer:
A non-lien certificate from the public property registry, based on a complete title search;
A statement from the treasury or municipality regarding property assessments, water bills and other pertinent taxes that might be due;
An appraisal of the property for tax purposes.
It is common practice that the buyer pays the transfer of acquisition tax and all other closing costs, including the Notary’s fees and expenses, while the seller pays his capital gains tax and the broker’s commission.
Previously, the real estate transfer tax was 2% nationally. But in 1996, the law changed, giving individual states the right to set this tax level. The range now varies from 1-4% of the tax appraisal value, which is generally less than the sales value.
The rest of the closing costs, which exclude the transfer cost mentioned above, vary from 3-5% or more of the appraised tax value, depending on the particular state. These percentages are applied to the highest value of the following:
The amount for which the property is sold,
The value of the official tax appraisal,
The value designated by the property assessment authorities
Cost of the Fideicomiso
Based on the present tariff, the bank charges the person desiring the Fideicomiso an initial fee ($400- 500 USD) for drawing up the agreement and establishing the trust, plus a percentage based on the value of the property. In addition, the bank charges an annual fee to cover its services as a trustee. In additional the Foreign Ministry requires a permit and that cost paid to the Federal Government is currently $1000.00 USD. Therefore a good estimate for the initial cost of a Fideicomiso is about $2000 USD and this is fixed part of your closing costs to be paid by you the buyer.
Real Estate Broker’s Commission:
AMPI real estate companies usually charge 8% commission (plus tax) for an exclusive listing, calculated on the actual sale price of the property. This commission is in no way fixed, so please contact your agent for more details.
Capital Gains Tax:
In Mexico, the concept of capital gains tax does not apply in the same way it is determined in the United States. Here, the gain from the sale of property is treated as normal income. To determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:
• The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes;
Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above;
Commissions paid to real estate brokers by the seller;
The closing costs, including all expenses, taxes and fees paid by the seller.
The Notary will retain the calculated gain after deductions, forwarding it to the Mexican tax authorities. The seller will then deduct this amount against his annual tax return, which can become an adjustable tax credit in the U.S.A.
Please be aware that there is Reverse Capital Gains Tax in Mexico. This means that if you make a purchase of property for less than 10% of the tax appraisal value, you as a foreigner are subject to a 25% Capital Gains Tax on the difference. Mexican nationals also can be subjected to this tax, however, their rate is 20%.
Capital Gains Tax (ISR) on the sale of homes in México
This is a subject that everyone wants to know about and everyone wants to find a way to legally avoid. In an effort to keep you up to date, the following is the “cliff note” version of what you need to understand. In 2007 the Mexican government modified the rules pertaining to the exemption of income tax obtained in the sale of primary residences. The reason they did this was principally to close loops holes that allowed the upper class to avoid paying taxes on any homes they owned.
In order to understand how the tax authority views a sale we must go through a few definitions:
Definition of “Sale”
For tax purposes a sale of real property occurs when this is:
a) A transfer of property, even those in which the selling party reserves the ownership of the property sold.
b) A transfer of trust (fideicomiso) rights, changing the beneficial rights of the trust.
Definition of “Fiscal Residence”
You are considered a fiscal resident of the country of Mexico when you have established your home in Mexico. However, when you have a home in another country, you will be considered as tax residents in Mexico if Mexico is where you have your “center of vital interests”.
Definition “Center of Vital Interest”
You will be considered to have a center of vital interests in Mexico when more of 50% of the total income comes from Mexico OR when you have set up in Mexico your “main center of your professional activities”.
Tax rule I. 2.1.3. states that you do not have a primary residence in Mexico when you temporarily inhabit a home with tourist, vacational or recreation finalities.
Those are the three definitions and one rule you really need to understand BEFORE we can talk about taxes on the sales of homes and allowable exemptions.
Exemptions on the Sale of a Home for “Fiscal Residents”
• Case 1
When the amount of the sale does not exceed a million five hundred thousand investment units (approx: $550,000 USD), the sale is exempt of Income Tax if you are a “Fiscal Resident” of that property. (go back to the definition.)
• Case 2
If you are a “Fiscal Resident”, when the amount of the sale exceeds the above amount, you will pay tax on the amount that exceed such amount (550,000 USD) “proportional to the amount that results from dividing the amount that exceeds by the total amount of the sale.”
What????? Let’s look at an example:
Purchase price $ 300,000 dollars
Sales price $ 1,000,000 dollars
Calculate $ 1,000,000 minus $ 550,000 (exemption amount) equals $ 450,000 (taxable income), which represents 45% of the total sales price. For your cost you can only apply 45% of your purchase price (this would be 45% of $ 300,000) or $ 135,000.
$ 450,000 (taxable income) minus $ 135,000 (Cost) equals $ 315,000. This $ 315,000 is the amount over which your tax will be calculated.
The exemptions herein mentioned only apply to the sale of one home per year.
1.- Exemptions only apply to construction and on land only “up to 3 times the area covered by the construction.” In order to do this calculation the value of the construction and land need to be separated if the land area is over 3 times the “foot print” of the construction. This is an existing tax rule but we have seen that this rule can be fought and won, making the entire sale exempt. We recommend getting an opinion on this if it is an issue.
2.- Even though you are exempt from this tax, you must declare income on your Mexican annual filing for any residential sale that is over $500,000 pesos.
Who Calculates the Taxes, How do you Pay it and What Documents do they Ask for to Prove “Fiscal Residence.”
The notary is the person responsible for calculating, withholding and paying the tax on the sale of homes that belong to physical persons (not corporate entities). In our experience most notaries have “tax advisors” assist them with the calculation of taxes. We strongly advise that you get an independent advisor to do your own calculation of this tax. While notaries have very competent advisors, other experience counsel can sometimes save you tens of thousands of dollars of tax.
In order to prove “Fiscal Residence” you will have to accredit before the public notary that the property object of an operation is your residence with any of the following documents:
I. The voting ID, sent by the Electoral Federal Institute of Mexico.
II. Electrical or telephone receipt.
III. A recognized bank or investment fund statement.
The documentation must be in the name of the tax payer, his or her spouse or father, mother, or children.
How are These Taxes Calculated?
The basic formula is: Income – Cost – Deductions = Capital Gain
1. Income is the value of the sale. If no value is given, the amount will be determined by an authorized fiscal appraiser.
2. Cost on Real Property is the verified cost of purchase adjusted up for inflation.
3. Cost of Construction- From the cost of purchase you subtract the cost of the land and the result will be the cost of construction. When this separation cannot be done you need to consider as cost of the land 20% of the total cost.
Notes and Special Rules Pertaining to Cost of Construction:
When you cannot separate the verified cost of purchase (the part that corresponds to the land and the construction) you are able to consider the proportion that appears in the appraisal at the time of purchase.
The construction costs depreciate 3% a year and cannot be below 20% of the initial cost. The resulting cost will be adjusted up for inflation.
The improvements that imply deductible investments will be subject to the same depreciation treatment, and must be count with its respective documental support (Facturas in seller’s name).
Maintenance is not a deductible expense.
Estimation of construction cost. When for any reason the seller cannot verify the cost of the investments in constructions, improvements and extensions done to a building, they will be able to consider as cost 80% of the value of appraisal of the constructions at the time of its conclusion. In order to register this value a procedures needs to be conducted before the municipal authority.
Several other rules apply to cost of construction and we recommend that you have an advisor go over these with you.
Notary fees and expenses by deeds of acquisition or selling.
Local tax by the income by immovable disposition of property, paid by the alienating one.
Payments made on the appraisal of the property.
The commissions paid in the sale or purchase of the property.
All the above deductions must have the proper documentary support and should be adjusted up for inflation.
Capital Gains Amount and Calculation:
As we mentioned above, the calculation, withholding and provisional payment of this tax will be done by the public notary. The payment of this tax is determined on a scale that starts at 6.4% and goes to 28%.
Capital Gains on the Sale of a Home Owned by “Non Fiscal Residents” in Mexico.
If you are considered a Non-Fiscal Resident of a home you will pay the following taxes on the sale of a home. You have the option to pay:
25% over total sale amount WITHOUT ANY DEDUCTIONS, or
30% over capital gain. Formula: Income – Cost – Deductions = Capital Gain.
Option 2 only applies when: a) The seller has a legal representative in Mexico, or b) the transaction is formalized via a public deed (before a Notary).
Mexico has created new rules and closed “loop holes” that previously existed in the tax rules pertaining to the sale of homes. This coupled with the difficulty in determining the tax and the lack of a true taxpaying “culture” in Mexico has cause notaries to run into situations such as:
The above information should put you in a position to have a general and correct understanding of how this tax is calculated. If someone is telling you something different, more often than not, they do not have a correct or complete understanding of the current tax laws and you should look for other counsel. No one wants to pay taxes, but we have to. Looking for the legal manner to pay the least amount of taxes is what you should do. Take the time and get the right advice. You could save tens of thousands of dollars.
The present article is a general explanation of current tax issues valid at the moment of this publication. For each specific case we recommend that you acquire a written opinion of your actual tax liability.
Closing Cost for Buyer & Seller:
This trust is administered by a Mexican bank and has its own cost. A buyer may consider a new trust for 50 years, renewable, or assume an existing trust.
The notary gives the estimate of closing costs for the trust and associated fees. It is customary for the buyer to select the notary. The costs are given in pesos at a conversion rate selected by the notary or requested by the buyer. The rate is adjusted closer to closing, when the final payment is made. Customarily, the buyer pays a deposit of 50% of the estimated costs, so that the notary can start the application for ownership and order the appraisal. The appraisal is not a market appraisal, but one from which the city computes the property taxes.
The seller should know before closing if he has capital gains costs. However, many times this information is learned upon the written agreement of a sale, when the seller’s documentation is taken to the notary.
If the seller has an existing trust, the bank charges a fee to cancel it, if the new buyer is not assuming it. The seller can also be responsible for the payment of the real estate commission, including I.V.A. or sales tax.
The seller should pay also, the proper portion of property taxes, his current trust fees, utilities until date of closing, condo fees and assessments, contributions to city services being charged to his neighborhood, and what other costs are negotiated between buyer and seller.
The buyer will work off the estimated statement from the notary, and when the final 50% is paid, should receive a formal paid receipt.
The Closing Cost Estimate from the notaries all follows a common format:
The Property Value of Sales price is given in Dollars and the selected exchange rate. The Property Value is then given in Mexican Pesos.
The notary’s fee is a percentage of the sales price in pesos and averages from .007-.01 percent. This includes the professional fee, a charge for office supplies, and I.V.A. The notary’s fee is sometimes negotiated.
The transfer or acquisition tax is approximately 2% of the appraisal value. The notary will order the appraisal to be done by an authorized appraiser. This value will also establish the basis for the yearly property tax. The law changed in 2002, whereby the transfer tax is charged on the appraised value instead of the sales price.
Additionally, there is the cost to apply or register the trust in Mexico City. Foreigner ownership of real estate is recorded at the Foreign Affairs Registry in Mexico City. The buyer pays for the cost of certificates to show that there are no liens of record prior to sale and that the property tax has been paid. An additional certificate will show that the water bill (Seapal) has been paid, if the property has this city service.
The bank will also charge a set-up fee or assumption of the trust, plus the first year administration fee in advance. There is a yearly fee for administration of the trust, due on the anniversary date of the formation of the trust. These fees currently run from $350 USD to $700 USD a year, depending on the bank.
The costs for closing for the buyer who has a trust, average 4-7% of the sales price. The sellers in this area consider the transfer tax and trust cost to be the responsibility of the buyer. A Mexican citizen does not have the cost of a bank trust, but pays the other normal fees charged by the notary.
For many first-time buyers, it is a shock to realize that closing costs are more than is typically paid in the US and Canada. It is important to budget for this expense when you are determining the overall cost of the purchase.
If a bank or title company escrow account is used to hold the purchase funds, there is an additional one-time charge averaging $500US. Currently, no Mexican companies offer title insurance.
If you are building in an area that is overseen by an environmental impact agency, there is a cost for an ecological study before a permit to build will be issued.
Additionally, if you have an attorney working for you, you will have the cost of his fees as well.
Although closing costs for the buyer can be substantial, I recommend that you not try to take a short cut. To protect your purchase, you need to have the trust and public deed. To do this, you must go through the proper channels with a notary.
The majority of pre-existing homes for sale, whether they are villas or condominiums, are offered furnished. There is no large discount in price to exclude the furniture.
If your purchase is adjacent to a federal zone, such as the ocean, a river or a federal highway, you should have the concession researched. If you want the private use of the federal zone, you enter into a lease agreement and pay an annual fee. By paying for the concession, you have the use of the federal zone under certain guidelines. Many homes have terraces, beach palapas, pools or landscaping on the federal zone. Construction of part of a permanent structure, such as a room of the house, is not permitted in the federal zone.