Pre-Construction
MEXICAN REAL PROPERTY LAW
Mexican real property law is largely based on Mexico's Constitution although state and
local laws apply. Mexico's Constitution gives the government control of land and the
transfer of ownership rights. Foreigners can, subject to certain restrictions, own land in
Mexico--except in the "restricted zone," generally defined as within 100 kilometers (62
miles) of the border or 50 kilometers (31 miles) from the coast. However, foreigners can
acquire property in the restricted zone through a "fideicomiso," or through a Mexican
corporation.
What is a fideicomiso? To encourage foreign investment, the Mexican government
created the fideicomiso, a real estate trust agreement (not a lease) between a Mexican
bank, a real estate seller and buyer. The process is:
THE TRANSACTION, PARTIES AND COSTS
Mexican real estate transactions ("operaciones") are different from those in the U.S. A
buyer should have professional assistance and, as brokers are not all legally licensed
in Mexico, cannot depend on many safeguards that apply in the U.S.
Making an Offer: The first step in purchasing property is usually an offer to purchase
("promesa de compra"), typically a letter of intent drafted by the parties with basic
information (property description, price, terms of payment, etc.).
Notarios
One important participant in the transaction is the "Notario Publico," a special lawyer with
quasi-judicial functions (not the same as a "Notary Public" in the U.S.) The Notario
Publico acts as government representatives with fiduciary responsibilities to both parties
and can do title searches, obtain "no lien" certificates, secure official appraisals, verify
that there are no unpaid taxes, and draft deeds.
Closing the Deal: Once the buyer accepts the promesa de compra, the closing process
that follows, which should include a thorough title search, usually takes 1-3 months
during which a purchase-sales agreement ("contrato de compraventa") is finalized.
Closing Costs: Closing costs are usually paid by the buyer and are generally higher in
Mexico than the U.S. However, property taxes, or "predial," are relatively low. Buyers
customarily pay a transfer tax (2-6% of the appraised value which is often less than the
sales price) and notario publico's fees (2-3% of appraised value) while the seller usually
pays an agent's commission.
Taxes in Mexico
On July 1st 1997 SAT was created as an independent fiscal authority by Secretaria de
Hacienda y Credito Publico. SAT has the necessary authority and power to create rules
for calculating and collecting federal taxes.
What is SAT?
In the past Mexico did not have the resources or political will to enforce its tax laws. In
fact, the country has one of the lowest tax collections as a percentage of its GDP in Latin
America and among the member nations of the Organization of Economic Co-operation
and Development.
Income Taxes
Mexico taxes residents on worldwide income but allows foreign tax credits for any taxes
paid outside of Mexico. The U.S. and Canada also allow foreign tax credits. In effect,
taxpayers pay taxes in both countries, but receive offsetting tax credits. The net result is
that taxpayers usually pay taxes equivalent to the highest tax bracket between both
countries.
If you have a bank account in Mexico that pays interest, the financial institution will
withhold a small percentage of your principal for income taxes. If you are not a resident,
this will be your only income tax and you will not need to file a Mexican tax return. If you
are a resident, you can generally credit this amount on your annual Mexican tax return.
Property Taxes
Property taxes on real estate in Mexico, called predial, are low compared to other parts of
the world. You may need to go to the local property tax office to request a bill.
Selling Property
Foreigners will face a capital gains bill when they sell Mexican real estate. If the property
is not a principal residence, the seller must pay taxes on the gain based on their
marginal tax bracket. The notario, will withhold a percentage of the gain and the taxpayer
must pay the difference, or apply for a credit on their annual tax return.
Homestead Tax Exemption
Owners of residential real estate in Mexico face steep capital gains taxes when they sell
if they fail to secure a tax exemption. The homestead exemption excludes the transfer of
certain properties from taxes. Confusion sometimes arises because some notarios
believe the homestead exclusion is available only to legal permanent residents, and
they make their tax liability determination on the basis of immigration law, not tax law.
If you do not qualify for tax exemption, request that your attorney or real estate agent help
you figure out which option is best for you. Your attorney should obtain an estimated tax
bill before you decide to list your property for sale. At closing, the notary issuing the deed
will also calculate and collect all applicable taxes, including transfer tax, property
registration tax and capital gains tax.
Building a Case for an Exemption
Notarios review a sellers "fact pattern" before deciding if the seller qualifies for a
homestead tax exemption when selling a Mexican residence. To increase your chances
of obtaining a homestead exemption:
Vehicle Taxes
The tax on vehicles with Mexican plates, tenencia, is often more than the real estate
property tax bill! Depending on where you live, you may need to go to the corresponding
local office to ask for the bill.
This is a yearly payment, but if your vehicle its more than 10 years old, you are exempt
from paying this tax.
Sales
Mexico has a value added tax that is applied to most products and services. It is 15
percent in most of the country and 10 percent in border areas.
Rental Income
Rental income generated in Mexico is taxed at regular income tax rates, after deducting
actual expenses or a blind deduction of 35 percent, whichever is greater. This provision
applies to residents. Non-residents pay a flat 25 percent on the gross income. Both
residents and non-residents may be required to charge valued added taxes and may
also need to charge a 2 percent hotel tax, depending on the circumstances. While it has
been relatively easy to avoid taxes on Mexican rental income, some jurisdictions are
cracking down on those who are not paying income taxes on rental revenues.
Mexican real property law is largely based on Mexico's Constitution although state and
local laws apply. Mexico's Constitution gives the government control of land and the
transfer of ownership rights. Foreigners can, subject to certain restrictions, own land in
Mexico--except in the "restricted zone," generally defined as within 100 kilometers (62
miles) of the border or 50 kilometers (31 miles) from the coast. However, foreigners can
acquire property in the restricted zone through a "fideicomiso," or through a Mexican
corporation.
What is a fideicomiso? To encourage foreign investment, the Mexican government
created the fideicomiso, a real estate trust agreement (not a lease) between a Mexican
bank, a real estate seller and buyer. The process is:
- · The bank, acting as trustee for the buyer (also called the "beneficiary"),
purchases the property and holds the title, - · The buyer gets the basic rights of ownership, including benefits from the use
and sale of the property, - · Trusts usually last 50 years and are renewable.
- Creating a fideicomiso is relatively straightforward. The requirements are:
- · An initial fee, based on the property value,
- · An annual trustee fee, and
- · A permit from the Ministry of Foreign Affairs--usually arranged by the
trustee/bank when the fideicomiso is established.
THE TRANSACTION, PARTIES AND COSTS
Mexican real estate transactions ("operaciones") are different from those in the U.S. A
buyer should have professional assistance and, as brokers are not all legally licensed
in Mexico, cannot depend on many safeguards that apply in the U.S.
Making an Offer: The first step in purchasing property is usually an offer to purchase
("promesa de compra"), typically a letter of intent drafted by the parties with basic
information (property description, price, terms of payment, etc.).
Notarios
One important participant in the transaction is the "Notario Publico," a special lawyer with
quasi-judicial functions (not the same as a "Notary Public" in the U.S.) The Notario
Publico acts as government representatives with fiduciary responsibilities to both parties
and can do title searches, obtain "no lien" certificates, secure official appraisals, verify
that there are no unpaid taxes, and draft deeds.
Closing the Deal: Once the buyer accepts the promesa de compra, the closing process
that follows, which should include a thorough title search, usually takes 1-3 months
during which a purchase-sales agreement ("contrato de compraventa") is finalized.
Closing Costs: Closing costs are usually paid by the buyer and are generally higher in
Mexico than the U.S. However, property taxes, or "predial," are relatively low. Buyers
customarily pay a transfer tax (2-6% of the appraised value which is often less than the
sales price) and notario publico's fees (2-3% of appraised value) while the seller usually
pays an agent's commission.
Taxes in Mexico
On July 1st 1997 SAT was created as an independent fiscal authority by Secretaria de
Hacienda y Credito Publico. SAT has the necessary authority and power to create rules
for calculating and collecting federal taxes.
What is SAT?
In the past Mexico did not have the resources or political will to enforce its tax laws. In
fact, the country has one of the lowest tax collections as a percentage of its GDP in Latin
America and among the member nations of the Organization of Economic Co-operation
and Development.
Income Taxes
Mexico taxes residents on worldwide income but allows foreign tax credits for any taxes
paid outside of Mexico. The U.S. and Canada also allow foreign tax credits. In effect,
taxpayers pay taxes in both countries, but receive offsetting tax credits. The net result is
that taxpayers usually pay taxes equivalent to the highest tax bracket between both
countries.
If you have a bank account in Mexico that pays interest, the financial institution will
withhold a small percentage of your principal for income taxes. If you are not a resident,
this will be your only income tax and you will not need to file a Mexican tax return. If you
are a resident, you can generally credit this amount on your annual Mexican tax return.
Property Taxes
Property taxes on real estate in Mexico, called predial, are low compared to other parts of
the world. You may need to go to the local property tax office to request a bill.
Selling Property
Foreigners will face a capital gains bill when they sell Mexican real estate. If the property
is not a principal residence, the seller must pay taxes on the gain based on their
marginal tax bracket. The notario, will withhold a percentage of the gain and the taxpayer
must pay the difference, or apply for a credit on their annual tax return.
Homestead Tax Exemption
Owners of residential real estate in Mexico face steep capital gains taxes when they sell
if they fail to secure a tax exemption. The homestead exemption excludes the transfer of
certain properties from taxes. Confusion sometimes arises because some notarios
believe the homestead exclusion is available only to legal permanent residents, and
they make their tax liability determination on the basis of immigration law, not tax law.
If you do not qualify for tax exemption, request that your attorney or real estate agent help
you figure out which option is best for you. Your attorney should obtain an estimated tax
bill before you decide to list your property for sale. At closing, the notary issuing the deed
will also calculate and collect all applicable taxes, including transfer tax, property
registration tax and capital gains tax.
Building a Case for an Exemption
Notarios review a sellers "fact pattern" before deciding if the seller qualifies for a
homestead tax exemption when selling a Mexican residence. To increase your chances
of obtaining a homestead exemption:
- Obtain an FM-2 visa to establish legal and permanent residence. Some notarios
will grant holders of an FM-3 visa a homestead exemption but you will gain more
credibility as a legal resident with the FM-2. Most notarios will allow the tax
exemption if you hold an FM-2. - Obtain a Mexican tax identification number, known as RFC, to show that you take
your tax responsibilities seriously. - Open a Mexican bank account that pays interest. The bank will withhold income
taxes on your behalf, making you a taxpayer. - Live in your home for at least six months. While there is no time requirement to
establish tax residence, often notarios will want to see at least six months of
continued residence at the house. - Make sure utility bills are in the name of the person who holds title to the property.
If the property is owned jointly, try to obtain at least one utility bill in both names.
Gather at least six months of these utility bills as documentation. - Make sure that the address of the property is exactly the same as the address
listed on your FM-3 or FM-2.
Vehicle Taxes
The tax on vehicles with Mexican plates, tenencia, is often more than the real estate
property tax bill! Depending on where you live, you may need to go to the corresponding
local office to ask for the bill.
This is a yearly payment, but if your vehicle its more than 10 years old, you are exempt
from paying this tax.
Sales
Mexico has a value added tax that is applied to most products and services. It is 15
percent in most of the country and 10 percent in border areas.
Rental Income
Rental income generated in Mexico is taxed at regular income tax rates, after deducting
actual expenses or a blind deduction of 35 percent, whichever is greater. This provision
applies to residents. Non-residents pay a flat 25 percent on the gross income. Both
residents and non-residents may be required to charge valued added taxes and may
also need to charge a 2 percent hotel tax, depending on the circumstances. While it has
been relatively easy to avoid taxes on Mexican rental income, some jurisdictions are
cracking down on those who are not paying income taxes on rental revenues.
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Through a trust(fideicomiso)the only legal instrument and the most advantageous available,foreigners can acquire land in Mexico for residential or touristic purposes, having the samerights and obligations that a full ownership property gives.
In Mexico, a Trust Institution is that banking institution which is authorized to open fiduciary accounts and conduct trust operations. The Trustee (bank institution) holds legal title to the real estate property during the term of the trust.
In the trust deed, the present owner of the land would appear as the settler or trustor (fideicomitente) and would thereby deliver title of the real estate to the trustee (you)who would hold the property during the life of the trust, 50 years.
As the Trust Beneficiary, you will have the use and possession of the property, that is, you also have the capacity to instruct the Trustee on mortgaging the real estate, renting , selling,or transferring .
According to article 13 of this Law,; the Foreign Affairs Ministry shall allow the renewal of trusts over the restricted zones upon expiration of their term (up to 50 years)
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