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Mexican Property Taxes and
Real Estate Transaction Expenses
- By Thomas L. Lloyd
An investment into Mexican real estate can have incredible returns and spectacular appreciations due in great part to today’s global economy and expanding international transactions. However, as in any business investment, an analysis of all expenses to be incurred versus revenues and appreciation should be studied by all potential and prudent buyers.
In the below attached spreadsheet examples, please find an introduction to various taxes and fees due on a simple real estate transaction. As in our previous articles, we recommend verifying all figures with a local Mexican Notary Public, Professional Accountants and Professional Lawyers to verify and ensure updated and current figures and factors.
Our starting figure is the value amount of the real estate transaction. The “declared value” that is captured on the “escrituras” is the basis for calculating most fees and taxes due. In our simple example, we will use a U. S. Dollar amount of $100,000.
By law, the declared value of the real property is considered the highest value of
These may vary from $1,000 usd up to $5,000 usd depending on the complexity of the real estate transaction and the city of operation.
A title search will generally cost $ 440.00 to $1,600.00 depending on the region. A search is recommended and will reveal any existing liens, history of the property, easements, and any other details pertinent to the property.
Several American and Canadian companies are offering such services. Your real estate agent should have several options for your review. Title insurance generally will cost $7.00 to $7.50 per $1000.00 of the purchase price and is normally required by institutional lenders.
Your Mexican Financial Institution is the organization which the Mexican Government has authorized as being a Trustee. These institutions include such banks as BANAMEX, BANCOMER, HSBC, SCOTIA BANK, BANORTE amongst others.
Banamex has just recently been purchased by the CITIBANK group.
Bancomer has recently been purchased by a financial institution from SPAIN
Bital has recently been purchased by the HSBC group.
Scotia Bank has recently been purchased by the Canadian Banks.
Banorte is one of the last remaining Mexican institutions.
The average set up fee for a trust is $1,000 up to $1,750 usd.
The normal annual trust fees are approximately $500 - $800 usd.
Any non-Mexican citizen will need to register their investments with this Mexican Government Registrar. If the property being purchased is in a Trust with a Mexican bank, and the seller has a beneficial interest in the property which has been registered under the trust, the buyer will pay only the costs for Assignment of those beneficial rights, bank transfer fees and registration in the Foreign Investment Registry. A permit will be required only if so stipulated in the Seller’s Trust. If not stipulated there is no charge for a permit. The charge for registration is the National Registry of Foreign Investments (RNIE) is currently approximately $ 350.00 dlls. and is required for all transfers of trust properties.
The permit to invest into a Mexican territory will incur an expense due.
If the property is not under a Trust, it will be necessary to acquire a permit from the Secretary of Foreign Relations to establish a trust. The application for the permit must indicate the proposed usage of the property. If the property is a vacant lot, the request should include a general development plan; the amount of money being invested and the time frame in which the investment will be made. A permit for a new 50 year trust is currently approximately $ 1,120.00 dlls. and increases slightly on the first day of January and the first day of July of each year.
A Mexican Notary Public “notario” is an attorney who, after passing rigorous examinations, is commissioned by the government as a public notary. A noatario holds high office for life, unless he or she is removed for cause. The notario fulfills a public function delegated by the government. Although licensed as an attorney, the noatario is not in a position to provide either of the parties with legal advice. The buyer normally hires the notario.
The notario´s responsibilities include:
drafts documents
verifies the facts therein
serves as an independent and neutral counsel to both the buyer and seller or lender, as to their respective rights and obligations, and ensures that they have taken all necessary steps to conclude a valid contract according to the mutual instructions of the parties.
records the documents with the Public Registry
withholds a number of fees and taxes
Notary Fees generally range between 1% and 2.5% of the value of the asset. However most fees are based upon a rate schedule and are tied to the amount declared in the property transfer. Fees can range from $500. to several thousand dollars depending upon the declared value of the property. Ask the Notary Public to provide you with an official Receipt for the fees he has charged for performing services for you.
The cost of these fees range from $ 150. dlls. to $1,000. dlls., per parcel, depending upon the value of the real estate. This cost includes both the fees (derechos) due to the property tax department for authorizing the appraisal, and the fees for performance of services by the appraiser. An appraisal must be made for each parcel as registered in the tax office. The appraisal is made by a government appointee, often an architect, who is called Perito Valuador, Official Appraiser.
The certificate of no encumbrance shows that there are no conflicting claims to the property. It also contains the chain of title and a description of the property.
A certificate of no tax liability. This certificate is used to prove that there are no outstanding property taxes nor other assessments on the property at the time of the agreement. If so this should be liquidated by the original owner of the property.
These fees vary from state to state but range from .05% upto .25% of assessed value
The buyer pays this tax but only on buildings and other structures a the national rate of 15% of the purchase price.
For sales of Land of any use either commercial or residential the VAT is exempt. All structures used for residential purposes as well will be exempt, and if only part of the structure is used for residence, this part will be exempt.
Impuesto Sobre la Renta. If in extraordinary cases when the buyer of real property, after the Mexican tax authority makes an appraisal (avaluo) of the property, and the value of the appraisal is greater than the purchase price by more than 10%, the buyer will be required to pay a 20% tax on the balance. Normally a second opinion on the appraised value is realized.
Individual or companies purchasing real estate, consisting of land, or land and its improvements in Mexico, are subject to an Acquisition Tax (Impuesto Sobre Acquisicion de Inmuebles). The rate is 2% - 3% of the value of the property depending on the state. Every individual or company is responsible to realize this tax payment for all transactions including purchase and sale agreement, trust, donation, assignment, mergers of companies, split-off, or payment in kind.
Any past taxes due must be liquidated by the original owner.
Impuesto Sobre la Renta.
If a non-Mexican individual or company is the seller, the sale of Mexican real estate will be subject to a 20% Capital Gains Tax on the gross proceeds from the sale without any deduction. However, taxpayers with Mexican residence may elect net basis taxation at 35%. The gain is calculated by deducting from the gross proceeds.
Gross Proceeds
less: original cost of acquisition
less: cost of improvements
less: notary expenses and other costs of sale
less: commissions
The original cost of acquisition is further separated by dividing the cost of Land from the cost of structures, with a minimum of 20% or more, allocated to Land.
The cost figure of the land is increased on an annual basis according to the Mexican national consumer price index.
The structure assets and any improvements upon, can be depreciated on a basis of 3% per year for a maximum deduction of 20% of original costs.
Known in Mexico as Predial. Taxes are paid annually, with the assessed value determined at the time of sale. The rates are quite low compared to rates in USA and Canada amongst other countries.
|
Mexico |
.06% - .10% |
|
New Hampshire |
4% |
|
New Jersey |
3.7% |
|
New York |
3.4% |
|
Michigan |
3.2% |
|
Wisconsin |
2.9% |
|
Texas |
2.5% |
|
Conn. |
2.5% |
If title to the property is in a bank trust there will be annual fees for the administration of same. The normal annual trust fees are approximately $200 up to $700 usd.
Property purchased in Mexico can be used as rental property, providing that you register with Mexico´Federal Tax Agency, establish residency and obtain an FM3, and that you acquire permission from the Minister of Foreign Affairs to do so. The language in your trust must include this permission.
Individuals must make provisional payments on their Tax Rents for income generated from cash deposits, credits, exchanges coming from rents or sub-rentals.
Your Mexican accountant can advise on choosing either method:
1%(based on state) of gross amount received during a 3 month period
or
35% based on net profit
Government authorized invoiced (Facturas), are expense allowed for deductions from revenues.
Filing a declaration on a month to month basis by the 17th, is required.
The annual declaration is due no later than April 1st the following year and the difference between provisional payments made and total tax due, is due with the annual return.
Certain costs are most commonly borne by on eparty or another, but the parties are free to negotiate who will pay each cost. Customarily the buyer pays all transaction expenses, except the income tax owed by the seller.
The Mexican law considers that a transfer of property has occurred when a trust is created, if the grantor designates or agrees to designate a beneficiary different from such grantor and does not reserve the right to repurchase the property placed in trust, or when the beneficiary loses the right to reacquire the property from the trustee. When a non-Mexican acquires beneficiary rights through a trust, and then sells or assigns them, the non-Mexican will be subject to the payment of capital gains tax.
Mexican nationals and foreign owners of a residence in Mexico may be entitled to certain tax exemptions on the capital gains tax if their real estate is a primary residence. A non-Mexican may qualify as a “resident” of Mexico for Mexican tax purposes if some of the following examples describes your situation:
Is your primary residence in Mexico?
Is more than 50% of your total income generated or earned in Mexico?
Is your main business operation located in Mexican Territory?
Do you have an FM2 immigration document (residents of Mexico)?
*temporary visitors on an FM-3 or on a tourist visa are not considered permanent legal residents although some Notarios will except such document (please consult your local Mexican Notary for details)
If these examples describes your situation you may be entitled to these exemptions.
Also obtain and file the following to build a good case for exemption:
FM-2 visa
RFC Mexican tax identification number
Open a Mexican Bank account that pays interest
Live in your Mexican home for at least 6 months
Ensure that your utility bills are in the name of the person who holds title to the property or beneficiary.
Ensure the address on the FM2 or FM3 are those of the real estate
Before the year 2002, permanent residents and Mexican nationals needed to demonstrate living within the residence for a period of 2 years or more. After 2002, the law was amended to eliminate the 2 year holding period with proof of documents demonstrating the residence being primary. Some states in Mexico are restricting this exemption to any properties held in Fideicomiso. Consulting a notario in your area of investment is recommended for exact interpretations of the law.
If the original seller does not declare the total purchase price at the time of transactions, the new owner could face increased capital gains tax liability when selling his real estate and declaring actual sales figures. This is usually done to avoid or lessen taxes for the seller’s capital gains tax, and the buyers acquisition taxes, notary fees, and VAT if due. Any taxes avoided at the beginning stage will eventually have to be paid via capital gains tax when the property is resold, unless the new owner continues to give the property an unnaturally low value. One solution to this obstacle is to declare actual purchase price in the purchase of all real estate.
We wish these articles to be helpful and practical in discovering new options and opportunities for all of your businesses, offices, and clients.
Sincerely
Thomas L. Lloyd
Retiring in Mexico Advisor
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