Considering Buying Mexican Real Estate?
Are you considering buying a property in Mexico? Did you know in order purchase a property, you must use the structure of a Fideicomiso (bank trust) or a Mexican Corporation? Here are all of the ins-and-outs of this critical decision.
Mexico’s beautiful landscapes, vibrant culture, and affordable real estate make it an appealing destination for foreigners looking to invest in property Many times, I have been asked about what the best way as a foreigner is to own a property in Mexico and what are the options.
Non-Mexican citizens are legally restricted from directly acquiring property in the country’s restricted zones, which include areas within 100 km of the Mexican border or 50 km from the coast but can directly own property outside the restricted zones. To overcome this obstacle in the restricted zones which are generally the most desired destination for so many, foreigners can consider two popular options: purchasing property through a Fideicomiso or setting up a Mexican corporation.
There are pros and cons to each method, and each presents certain limitation to be considered.
Will you be using it for you, your family, and friends’ vacations? Or will you be purchasing it as purely an investment with the plan of renting it out?
Knowing how you will use the property will help you determine what legal process you should use a fideicomiso (bank trust) or a Mexican Corporation. This article explores the pros and cons of each method to help you make an informed decision.
Fideicomiso (Bank Trust)
For foreign buyers, a fideicomiso is the most common method of purchasing real estate in Mexico.
When you have a fideicomiso, you are listed on the property deed as the beneficiary of the fideicomiso. The trustee, which is either a Mexican bank or an attorney specializing in trusts of the fidelity, actually holds title to your property and is responsible for carrying out your wishes as the beneficiary.
A Fideicomiso should be considered by foreigner buyers/owners who:
- Will use their property for personal use (will not be renting it out to receive rental income).
- Are considering obtaining Mexican residency.
- Will rent their property for income and also have Mexican residency.
Pros of a Fideicomiso (Bank Trust)
1) Legal Protection
The Fideicomiso provides a secure legal framework that safeguards the foreigner’s property rights, as it is established under Mexican law. The trust is administered by a Mexican bank, ensuring transparency and accountability in the property’s management.
2) Simple Acquisition Process
Obtaining a Fideicomiso is a relatively straightforward process, and many reputable banks in Mexico offer trust services for foreign buyers. It usually involves a one-time setup fee and annual maintenance fees.
3) Inheritance Planning
The trust allows for efficient inheritance planning, as the beneficiary of the trust can designate heirs without having to go through probate in Mexico. It is worth noting that discussing and working with a knowledgeable Notario to set up the trust with the anticipation of inheritance beneficiaries in advance can save a lot of money and grief in comparison to doing it after the fact.
4) Easy Resale
Selling a property held in a Fideicomiso is generally straightforward, as the trust can be easily transferred to the new buyer (assuming the buyers are also foreigners), reducing bureaucratic hurdles.
Cons of a Fideicomiso (Bank Trust)
1) Ongoing Costs
The Fideicomiso incurs annual maintenance fees, which can vary depending on the bank and the property’s value. These costs need to be factored into the overall investment. Also, the Fideicomiso must be renewed every 50 years.
2) Limited Control
Although the buyer maintains full control over the property’s use and occupancy, the trust structure means that the bank holds legal title to the property. Some buyers may find this lack of direct ownership a drawback. This may sound worse than it really is but as there are requirements and rules around alteration in structures and use, it is always advisable to consult professionals before undertaking any activities that could potentially impact the property.
3) Tax Implications
If you plan on renting your property for income, you need to consider your Mexican tax obligations. One of the requirements for anyone earning income in Mexico is that you must declare all income with the tax authorities. To declare taxes, you must register with the authorities and obtain a Mexican tax ID known as an RFC. RFCs are only available for foreigners with Mexican residency, Mexican citizens, or Mexican corporations.
Some property owners without residency who rent their properties on a short-term basis held in a bank trust do so, via online rental companies such as AIRBNB, VRBO, or the likes. However, without an RFC, the on-line rental companies are required to retain 36% in taxes. Note these online rental companies are not necessarily collecting and remitting the required rental accommodation taxes in all areas in Mexico, so it is wise to check with them.
A Mexican corporation is essentially a company created just to own property or assets for business purposes. You must set it up in Mexico, and you can use it to do business there or elsewhere. It is a legal entity that exists independently of its owners and investors, which are typically called and considered as shareholders. The corporation’s shares may be owned by individuals, corporations, or other Mexican corporations. Once the corporation is created and registered, it is and is considered a separate entity from its shareholders and managers.
When renting a property owned by a Mexican corporation, the corporation will be issued a Mexican tax ID (RFC) and make monthly income declarations. There is a lot more involved in owning a Mexican corporation, so it is important to discuss this option in detail with a qualified Mexican notario.
By creating a Mexican corporation, foreigners can avoid the fideicomiso process as the property would be purchased by the Mexican corporation. Mexican corporations should be considered by foreigners who:
- Plan to rent their Mexican property for income
- Plan to purchase more than one rental property
- Have no plans to obtain Mexican residency
Pros of Buying as a Mexican Corporation
1) Full Ownership
Setting up a Mexican corporation allows the foreign buyer to have direct ownership of the property, bypassing the need for a Fideicomiso. Setting up a Mexican corporation can be done much quicker than setting up a Fideicomiso. This provides more control over the property and eliminates the reliance on a bank.
2) Business Opportunities
A Mexican corporation can engage in business activities, which may present opportunities for income generation from the property.
3) Flexible Investment Structure
The Mexican corporation can hold multiple properties and assets under a single entity, making it an attractive option for buyers looking to invest in various real estate ventures.
4) Transfer of Ownership
Corporations can easily sell shares, making it easy for more than one person to hold title to the same property. Any number of people may own shares in the corporation, so this is a great option for buying a vacation home with others or transferring ownership through share transfer. Because there’s no minimum amount of time that the corporation must own the property, there’s no waiting period before selling.
Cons of Buying as a Mexican Corporation
1) Complex Legal Process
Establishing a Mexican corporation involves more paperwork and legal complexities in comparison to setting up a Fideicomiso. The buyer will need to hire legal counsel and navigate the local legal system, which may be challenging for those unfamiliar with Mexican laws.
2) Higher Costs
The initial setup and ongoing maintenance costs of a Mexican corporation can be significantly higher than a Fideicomiso. Additionally, annual tax obligations and accounting fees may apply. Mexican corporations must file monthly and annual corporate tax returns.
3) Limited Estate Planning
Inheritance and succession planning with a Mexican corporation can be more cumbersome and may require compliance with specific Mexican regulations, so once again it is crucial to consult a legal and tax professional when considering estate planning.
Deciding between a Fideicomiso and a Mexican corporation for the purchase of Mexican properties is a critical decision. The decision between the two depends on various factors, such as the buyer’s specific needs, long-term goals, and comfort with legal complexities. A Fideicomiso offers a straightforward and secure option, ideal for those seeking simplicity and ease of transferability. On the other hand, setting up a Mexican corporation offers direct ownership and business opportunities but comes with higher costs and legal intricacies.
Prospective buyers should carefully weigh the pros and cons of each method and seek both professional legal and tax advice to make the best choice that will align with their investment objectives and preferences. If you are considering investing in a property in Mexico, email me first and I can share some of my key contacts with you and make sure to get on my list of available lifestyle investment property opportunities!