Tax & Financial Considerations for Buying and Renting Your Property in Mexico
As many of you know, I am purchasing a Lifestyle Investment Property in Mexico for myself and wanted to share the most useful discoveries with all of you. To help you gain a better understanding of the many intricacies for buying in Mexico, this unfortunately (or fortunately for new buyers!) had to be a longer blog.
Many people romanticize about owning a home in a vacation destination, but may not have considered the difference between what is involved in just owning a second home vs. what is involved in renting out their vacation home as well.
After reading the below information, it may appear that there is a lot to do to purchase and rent out a vacation home in Mexico, so that it becomes a Lifestyle property. However please remember, even buying Lifestyle Investment properties in Canada, and in many US states, and other countries around the world always involves a lot of detail, to comply with regulations.
Many governments around the world are focusing on, and monitoring vacation rental properties listed on platforms like AIRBNB, VRBO, FLIP-KEY, etc. to ensure there is compliance with the federal and local business and tax laws. By understanding what is involved, it will ensure that your property can provide income and allow you to enjoy the sun and lifestyle of Mexico!
Owning real estate in Mexico is certainly appealing to many seeking a lifestyle investment outside of our own locale including myself, because of the climate, proximity to Canada and the US, lifestyle, cost of living and comparative price of homes. Understanding the tax obligations is an incredibly integral part of your due diligence process before you purchase, so that you avoid potential trouble and expenses, especially if you plan to rent out your home part of the time.
This blog is to share what I learned so far about the various taxes and how they are applied from purchase, to rental, to selling as an overview. To be clear, I am neither an accountant nor a tax expert. Regulations can and do change, so I strongly recommend that you seek professional tax and legal advice for both in Mexico and in your home country to ensure that you understand the tax implications in both countries prior to purchasing.
The good thing about owning in Mexico, is when it comes to tax is you can avoid double taxation as there is a tax treaty between Mexico and Canada. Originally we had the NAFTA agreement but it was replaced in 2020 by the CUSMA (Canada) or the USMCA (USA).
Tax implications for Buying as a Foreigner
Remember as a foreigner buying a property within 50 Km of the coast, you must either buy it through a Mexican corporation or through a fideicomiso (bank trust). From everything I have read regarding buying a residential property, there are reasons to hold the property in a Mexican Corporation but it is more involved on an annual basis. There are also valid reasons for recommendations to own the property through a fideicomiso, even if you plan to rent it out. I can stress strongly enough to discuss your desired objectives with a Mexican Notario and a Mexican Accountant and have them in the conversation at the same time to ensure clarity before purchasing if possible. Both manners of holding the property carry tax implications which are noted in the following sections.
Let’s start with a quick review of the buying process as it has a bearing on what and when things occur.
- Find and decide on your desired Lifestyle Investment Property, whether that is a house, townhouse or condo and make an offer. Sometimes if it is a preconstruction property, there usually is a set price, and depending on the market and deposit circumstance you may be able to negotiate a price reduction.
- Sign the initial purchase agreement to buy. A 5%-10% or even up to 30% or more deposit is usually expected from the buyer for pre-construction, and 40% is the minimum for already built property. The legally binding contract is in Spanish and should be written by a Mexican lawyer. Some sellers, typically larger developers may have an English version or a contract with both languages side by side in the contract as a courtesy.
- Send your deposit via wire transfer, along with any other sequential payments as outlined in the terms of your sales contract.
- You will most likely need to travel to Mexico to set up a bank account in Mexico and it is wise to get some expert assistance with this from a Notario and or an Accountant in Mexico, so that it is done properly.
- Once you have paid for the property in full, the seller will contact you and your Mexican bank to start the trust application for your fideicomiso. This is usually the point where you’re able to take finally possession of the property but registration is not necessarily complete.
- You need to pay the closing costs, taxes, & fees. Closing costs can vary from state to state in Mexico.
- An important fact to note is that within 3 months of your closing date, the Public Registry issues the final deed (escritura) to your property and the property is officially yours.
Within the above steps, there are also a number of activities that need to be completed and timelines to be aware of, in order for things to go as smoothly as possible. Enlisting the service of an experienced accountant and notario in Mexico that speaks both Spanish and English and understands the policies that affect foreign buyers will and ensure the best outcome.
As a buyer and owner of a property in Mexico, you must pay certain taxes annually to the Tax Administration Service, in Spanish it is called El Servicio de Administración Tributaria, but better known as SAT. I am keeping the following points at a high level because I am not an accountant, and also tax laws and regulations often change.
The property purchase tax in Mexico is known as Property Acquisition Tax (ISAI). The tax rates differ from state to state in Mexico, but they range from 2% to 5% of the value of the property. This tax will be paid at the time of completion of the sale.
Closing costs for buying a property in Mexico Tax
Here is a high level breakdown of the estimated potential closing costs one could experience when purchasing a Mexican property. Please bear in mind some fees and taxes will vary between each Mexican state and may or may not be always applicable due to each state’s regulations.
|Item||Price or rate||Comment|
|Property Acquisition Tax – State Tax||2% -5%||Progressive incremental rates|
|Trust Permit –$1,000 Department of Foreign Affairs||~.$1,000||USD Annual|
|Department of Foreign Investment||.5%-1%||One time|
|Trustee Bank Acceptance Fee||~$550||One time each trust|
|Trustee Bank First Year’s Trust Fee||~$1,100||USD One time|
|Appraisal for Future Tax Assessment||~0.08%|
|Non-Encumbrance Certificate – LRO||~$15||USD One time|
|Preventative Notice Advice from the LRO||~30||USD One time|
|Registration Fees Land Registry Office (LRO)||.02%-1.82%|
|Notary’s Fee||.075%-1.125%||Property value dependent|
|Title Insurance||.5%-.7%||US Title Insurance Company|
|Total Agent’s fee 3%-6% + 16% Value Added Tax||1.13%-4.69%||<-Potential on Buyer’s side|
Table Sources: https://bit.ly/3M2Pfbz and https://bit.ly/3EcPRc2
Annual Property Taxes
Annual property taxes are also a requirement, known as Impuesto Predial. This tax is quite low, and it must be paid prior to March 31st each year. The amount of the Impuesto Predial is calculated based on the assessed value of the property. The tax rate ranges from 0.05% to 1.2%, again depending on the property location as each state has a different tax rate.
I found this useful tip in my research:
Tip: If you plan to pay the property tax between January and February, the government will give you a percentage discount. The discount depends on the state of the country in which your property is located. It can vary between 6 and 10%.
Most of us want to own a self-sustaining lifestyle investment property, which means that we are earning income in Mexico. For a long time, many foreign homeowners in Mexico, whether intentionally or through lack of awareness, have not been complying with the Mexican tax laws.
Whether the rental income is paid to the owner`s home country bank account or paid into a Mexican bank account, any rental income earned from a rental property located in Mexico is subject to tax in Mexico, no matter which country or bank account the rent is paid to.
The Mexican tax laws have become more regimented over the years and the Mexican government has put procedures in place to deal with those who do not report the rental income earned from their Mexican properties. There has recently been a crackdown on this type of reporting and tax avoidance. I understand that many vacation rental property homeowners have received notice to ensure they are registered as rentals and are to report the income they are receiving. It is so easy now for the government officials to discover those homeowners not properly reporting, because most vacation rental properties owners list their properties on social media, private rental property websites, VRBO, or Airbnb. To not report your income is a risky business practice as a foreign homeowner in Mexico or anywhere for that matter.
Legal Landlord Steps
A key fact to understand as a foreigner homeowner is that if you want to legally rent out your property in Mexico, without any problems you need to do the following.
Apply for a temporary or permanent residency (like a green card in the US) in Mexico. To apply, you need to complete an application form in the Mexican Consulate in your home city. Once you get the approval/authorization from the Mexican Consulate in your home city, you have 180 days to go to Mexico, and once you are in Mexico you have 30 days to activate your temporary or permanent (usually obtained after 3-5 years) residency at the closest Mexican Immigration Authority Office. Many foreigners will seek assistance from a Mexican immigration lawyer in their home city and one in Mexico to navigate this process.
Once you have completed your temporary residency status, it is wise to hire a Mexican accountant to obtain legal authorization to conduct business activities (including renting out your home). In order to conduct business in Mexico you need to obtain an R.F.C. number (Registro Federal de Contribuyentes) which is a Mexican tax id number. Once you have you R.F.C. #, there is one more step, which is to go back to the Immigration Authority Office to apply for a Temporary or Permanent Residency for Lucrative Activity. This is a very important step, as your accountant will help you get Facturas which are official tax invoices for your clients. You will also collect facturas for all your tax deductible expenses. Lastly, your accountant will file taxes by the 17th of each month, and the annual tax declaration for your net rental income.
There are taxes due and payable each month for any rental income earned each month but the amounts and calculations are dependent on whether it is a long term rental (monthly basis) or a short term rental. Here is a brief breakdown of the differences between and within each category.
Long Term Rental
If you are renting your home for periods of more than a month, you are essentially entering into a specific term lease, for which you are earning income and are obligated pay the appropriate income tax which is commonly referred to as ISR (Impuesto Sobre la Renta) on it. ISR is taxed at a progressive rate like at home and married couples are taxed separately in Mexico. Generally, you are taxed at a 35% of your rental income, but you can with the right paperwork, deduct approved expenses related to renting out your property such as property taxes, utilities, maintenance fees, property management, repairs and maintenance, insurance, etc. The key thing to note here is that you will need to keep proper records and I strongly recommend discussing these things with your accountant before renting the property out to ensure compliance.
There is a new tax regime option that was introduced in 2020 and may work for you renting your property. It is known as the Technological Platforms Regime and is used for foreigners especial those that use platforms like Airbnb, VRBO, Flip-Key etc. even if you are renting for longer term leases. Again you would need to consult with your Mexican Accountant to ensure it will work for your situation, that you take the correct steps, and that it is in your best financial interest.
There is a simpler form where you don’t need to keep records but there is a flat 35% tax on the gross rent received that you would file and submit monthly.
Short Term Rental
If you are planning to rent your home out as short term rental there are more taxes applied as you are considered to be operating a “guest service” business.
The three taxes you need to be aware of are as follows:
- Income Tax (ISR) up to 35% as discussed above.
- Value Added Tax (VAT) is a flat 16% and based upon the nightly rate is applied to the accommodation price when a guest pays for their stay. It is charged when the accommodation payment is made and then remitted to the tax authorities.
- Guest or Lodging Tax (ISH) (Impuesto de hospideja) is a tax that varies from state to state. In Nayarit and Jalisco the tax is 3%, and is similar to VAT, since it is transferred to the client; that is, the guest is the one who pays the tax.
If you are planning to use a rental platform like Airbnb, VRBO, Flip-key, etc. for either short or long term rentals, please consult with those services as to whether they collect and remit the required guest taxes on your behalf. Please bear in mind that also varies from Mexican state to state. In any case you are best to obtain your R.F.C. or these platforms are required to withhold 20% of your rental income as taxes.
When you sell or property in Mexico, there is a capital gains tax you must consider in addition to the selling commissions paid out. The capital gains tax for selling your home is 25% on the gross proceeds, or 35% on the net gain, for non-residents, provided that it was set up properly from the beginning.
As you are at a distance, it is prohibitive to run and maintain your property when you are not in Mexico. It is highly recommended to hire a property manager that is going to look after the repairs and maintenance to ensure everything is in working order. They would also ensure the home is set up for a great guest experience, which usually includes maid service and cleaning, and the point of contact for the guests while there. When shopping for a property management company, ask others who they use to get good referrals and start with a 30 day trial period and then negotiate rates and terms from there before signing any long term contract. I understand from others that there is no set rate but I have heard around 20% fee or you can arrange a monthly flat fee but be open to extra costs for extra services.
I have already shared the importance of hiring an good accountant earlier in this blog and a good Notario in one of my previous blogs. Please note all real estate transactions in Mexico require the involvement of a Notario Público for all the paperwork and documentation requirements. These Notarios are not the same level as a Notary Public here in Canada or the USA but are at a higher level of experience and responsibility like an attorney here.
Final Thoughts and Considerations
I know that the information provided can be daunting and perhaps a little discouraging if you want to rent out your second home in Mexico, but many Canadian and US citizens are successful at doing so, without concerns, after getting assistance in taking the appropriate steps.
Property owners that do not comply with these laws that I have pointed out may lose their rights as the property owner, face possible jail time, fines, deportation from Mexico and forced sale of the property.
To avoid being double taxed, I understand that you may need to provide the Mexican government with a copy of your tax residence certificate or the most recently filed income tax, to prove you are a resident in the treaty partner country. Once again your Mexican accountant will guide you here.
As I stated at the beginning of this blog, I am working on purchasing my lifestyle investment property in Mexico, specifically Bucerias and I am happy to share with you the information I have with regards to this property, but this is not to be construed in any way as an offering that I am able sell. Please email me at [email protected] if you are interested to know more.