I am considering purchasing (49yr. lease) a coastal vacation property
in Mexico. I've been told that to follow the tax laws in Mexico that
I should obtain a FM3 visa, declare rental income, deduct rental
property expenses, and file quarterly and annual Mexican taxes.
Sounds scary! Please provide more detail about this process (I'm a
US citizen living in US 54+ weeks/yr.).
1) Would my wife & I become a Mexican tax "entity" (e.g. corporation)?
2) What are typical income tax rates for a property that may generate
between $5K - $30K USD annually?
3) What are legit deductions?
4) How (if at all) would this affect my US income taxes?
5) General comments about the strictness of these rules, the hassle
factor, or anything else would be appreciated.
Thanks in advance.
-DW US Internal Revenue Service: hardwd::
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Good question. Technically (and I stress technically) only Mexican
nationals can own property within Mexico along the coast or on the
border. These two areas are known as "restricted zones". You, being
a gringo, are prohibited by the Mexican Constitution from owning
Mexican property in the restricted zone. Realizing that tourism is
their number two cash cow, after oil, the Mexican government has
provided for a mechanism that will allow you to own Mexican property.
This mechanism is called a "fideicomiso" or a trust. You will not
technically "own" the land, the bank will hold it in a trust, but for
all intents and purposes you will own it. Read below for more details
on the process.
I would HIGHLY recommend you think twice about doing this. You will
incur the expense of setting up the fideicomiso ($2,000 US) and you
will also have to retain a Mexican notary or attorney to complete your
Mexico taxes. DO NOT take the Mexican governemtn lightly or think
that you can "grease the wheels" of the local government to hide your
wayward taxes. Like the IRS, when, and I stress WHEN the Mexican
government finds out that you are non compliant with taxes, they WILL
seize your property. Hire a professional in Mexico to assist you with
tax compliance.
As far as the IRS goes, ALL income must be reported on your 1040 at
year end. This includes rental income from other countries. The
income will be added to your gross income, however you will be allowed
deductions on the taxed that you paid in Mexico to defray double
taxation. Rental income can be messy within the United States and
open to interpretation, so your Mexico property could cause some tax
issues.
My honest advice to you is DO NOT BUY, find a nice home or condo and
RENT for a long term. You can usually structure long term rentals to
be just as cheap or cheaper than owning the property in these resort
towns.
Any foreigner or Mexican National can constitute a Fideicomiso (the
equivalent to an American beneficial trust) through a Mexican bank in
order to purchase real estate anywhere in Mexico, including the
Restricted Zone. To do so, the buyer requests a Mexican bank of
his/her choice to act as a trustee on his/her 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/her rights to
the property to a third party or to a pre-appointed heir. During this
period, the foreigner is considered as a Mexican National.
The trustee is responsible to the buyer beneficiary to ensure precise
fulfillment 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 be
the trustee as an asset of the bank.
For practical purposes, even in unrestricted zones many foreigners and
Mexican Nationals, for that matter, prefer to hold their property
under a Fideicomiso.
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Process
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. In most cases, a
deposit is required by the broker in order to transmit the offer to
the seller. If the transaction is being conducted directly with the
seller, it is highly recommended that a real estate broker or a lawyer
be consulted before signing any papers or handing over any money.
In some areas it is common practice to deliver to the seller, as an
advance payment, the equivalent to a 20-50% (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 or official deed, which needs to
be certified by a Notario Publico or notary public, the balance is
paid and the property is delivered. This should not take more than 45
days. In certain resort areas the custom of using "escrows" is being
implemented.
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Notario Publico or Notary Public
The Notario Publico is a government appointed lawyer who processes and
certifies all real estate transactions, including the drawing and
review of all real estate closing documents, thus insuring their
proper transfer.
Furthermore, all powers of attorney, the formation of corporations,
wills, official witnessing, etc. are handled and duly registered
through the office of the Notario Publico, who is also responsible to
the government for the collection of all taxes involved.
In connection to real estate transactions, the Notario Publico, upon
request, receives the following official documents, which, by law, are
required for any transfer:
A nonlien 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.
Cost of the Fideicomiso
Based on a present tariff, the bank charges the person desiring the
Fideicomiso an initial fee (approximately $1000-2000 US) for the
drawing up of the agreement and establishment of the trust, plus a
percentage according to the value of the property. In addition the
bank charges an annual fee (depending on the value of the property) to
cover its services as a trustee. patrick.net Blog Archive Who is Patrick.net?::
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Purchase (49 yr. lease) rental property in Mexico - Tax issues