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Mexico Real Estate

Mexican Property taxes
and Real Estate Transaction Expenses

By Thomas Lloyd

To get an excel spreadsheet to calculate your estimated closing costs.... clicking here

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 and updating all figures with a local Mexican Notary Public, Professional Accountants and Professional Lawyers to verify and ensure current figures and factors.

 

* Commercial Value

Our starting figure is the value amount of the real estate transaction. The "commercial value" that is captured on the title "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.

A. ATTORNEY FEES

We strongly recommend having Regional Mexican Legal Counsel for your Mexico real estate acquisition.  Fees for preparing or reviewing contracts may vary from $300 usd up to $5,000 usd depending on the complexity of the real estate transaction and the city of operation.

Contract preparation, reviews and analysis may have costs that range from $300 usd up to $2,000, again depending on the complexity of the operation.

A-2. ATTORNEY FEES FOR TITLE TRANSFER COORDINATION

Coordinating the bank trust officers, the notary public and the seller's documentation can be supervised by Mexican legal experts. These expenses can be quoted by your selected lawyer.

B. TITLE RESEARCH

A title research will generally cost $ 440.00 to $1,600.00 depending on the region. A search is recommended on lots and areas outside of main municipalities and will reveal any existing liens, history of the property, easements, and any other details pertinent to the property. The title research is an activity that is the responsibility of the Notary Public, although some people elect to have an additional analysis executed.

C. TITLE INSURANCE

Several American and Canadian companies are offering such services. Our team will have several options for your review. Title insurance generally will cost $6.00 to $9.00 per $1000.00 of the purchase price and is normally required by American institutional lenders.

C-2. ESCROW

Although a new tool for Mexico, the escrow account is slowly being introduced into the Mexican market. Costs for setting up these accounts range from $500 usd up to $1,250. Again this depends on the complexity of the operation and the dollar amount.

D. NATIONAL REGISTRY OF FOREIGN INVESTMENTS

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 approximately $ 380.00 dlls. and is required for all transfers of trust properties. These fees are normally included within package deals offered by the bank.

E. PERMIT FROM MINISTER OF FOREIGN AFFAIRS

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. The permit for 50 year trust is approximately $ 1,300.00 dlls. and increases slightly on the first day of January and the first day of July of each year. These fees may be included within package deals offered by the bank.

F. BANK TRUST / FIDEICOMISO

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.

The average set up fee for a trust is $800 up to $1,700 usd.

The normal annual trust fees are approximately $500 - $800 usd.

* please note some banks offer packages that include the set up and first year fees in one price

G. NOTARY PUBLIC


A Mexican Notary Public "notario" is an attorney who, after passing rigorous examinations, is commissioned by the government as a public notary. A notario 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 selects the notario of his choosing.

The Notario's responsibilities include:

  1. drafts legal documents
  2. verifies the facts therein
  3. 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.
  4. records the documents with the Public Registry
  5. withholds a number of fees and taxes

Notary Fees generally range between .05% 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 $1000. 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.

H. APPRAISAL FEE

The cost of these fees range from $ 150 dlls. to $800 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.

I. CERTIFICATE FREE OF LIENS NO ENCUMBRANCES

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. These are normally less than $50.00 usd.

J. CERTIFICATE OF NO PROPERTY TAX DUE

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.

K. REGISTRATION OF REAL ESTATE TRANSACTION WITH PUBLIC REGISTRY

These fees vary from state to state but range from .25% upto 2% of assessed value. In Quintana Roo 1% is the rate.

L. ACQUISITION TAX (I.S.A.I.) DUE BUYER

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. Quintana Roo charges 2% acquisition tax.

M. Expedition of Deed

In Quintana Roo, $500 pesos is the going rate.

 

N. Miscellaneous Expenses

Any extraordinary expenses

O. IVA VAT

The buyer pays this tax but only on commercial buildings and other structures non residential at the national rate of 15% of the purchase price.

P. Capital Gains Tax / Income Tax (I. S. R.) due Buyer

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, 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.

Q. Pro rata property taxes due Seller

Any past taxes due must be liquidated by the original owner.

R. Capital Gains Tax / Income Tax (I. S. R.) due by seller

Impuesto Sobre la Renta.

This tax may be exempt, read below EXTRA FOOT NOTES

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 or, the seller may elect to pay on a net basis taxation of 28% plus a state tax of approximately 2%. 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 closing costs during the purchase)
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.

S. Annual Property Taxes (Predial)

Known in Mexico as Predial. Taxes are paid annually, with the assessed value determined at the time of sale. With Mexico's rates less than 1%, these taxes are SUBSTATINALLY LESS than USA and Canadian expenses.

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%

T. Annual administrative expenses on BANK TRUST documentation)

If title to the property is in a bank trust there will be annual fees for the administration of the same. The normal annual trust fees are approximately $600 up to $900 usd.

U. Provisional Tax on Rents Impuesto Sobre la Renta Provisional)

Property purchased in Mexico can be used as rental property.

Individuals should 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

28% based on net profit

Government authorized invoiced (Facturas), are expenses allowed for deductions from revenues.

Filing a declaration on a month to month basis by the 17 th , is required.

The annual declaration is due no later than April 1 st the following year and the difference between provisional payments made and total tax due, is due with the annual return.

V. Maintenance Expenses

If your property is within a Condo Association, or within a community, monthly expenses may exist. These amounts are paid to cover activities such as garden, pool upkeep , security, paint and other miscellaneous. If you investing into a single family home, again you will incur various repair expenses throughout the house on a annual basis that should be contemplated within your analysis.

W. Insurance Expenses

Hurricane, Fire, Theft insurance can be obtained. Several multi-national companies exist who will offer these contracts to the Mexican property owner. Most external structure insurance is covered by the monthly maintenance fees, while the interior products are insured by the home owner. Avg. costs are from $400 upto $2,000 usd per year based on the quantity of electronics and furniture you wish to secure.

EXTRA FOOT NOTES:

* Responsabilities of the Fees and Taxes Due

Certain costs are most commonly borne by one party 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 (capital gains tax) and sales commissions which are normally owed by the seller.

* Transfer of Property and Capital Gains Tax


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.

* Exemption of Capital Gains tax if qualification for homestead status


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:

  1. FM-2 FM-3 visa
  2. RFC Mexican tax identification number
  3. Open a Mexican Bank account that pays interest
  4. Live in your Mexican home for at least 6 months
  5. Ensure that your utility bills are in the name of the person who holds title to the property or beneficiary.
  6. 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. In 2007, new guidelines where established for the collection of the capital gains tax on the sale of Mexico properties. Please read more at the following link.

          Capital Gains Tax 

A general outline of this tax includes:

* If the property being sold is less than approximately $550,000 usd, the property qualifies for 100% tax exemption.

* If the property being sold is more than approximately $550,000 usd, the property can be partially exempt.

* If the property being sold is more that $550,000 usd and the owner has held possession for over 5 years, again the property may be 100% exempt.

Consulting a public notary in your area for investment is recommended for exact interpretations of the law.

* Capital gains tax effects if "declared purchase value" is recorded in lower figures


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 or if the seller is able to obtain capital gains tax exemption. The risk free 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 2 Mexico Advisor