As in most countries, the U.S. tax regulations are complicated, especially when dealing with properties or assets set outside the United States. Not all accountants and tax advisors know the tax systems of other countries. For this reason and so you can understand taxes in Mexico Real Estate, we highly recommend that you consult with experts in these bi-national transactions.
If they own property in Mexico the U.S. government requires that the U.S. taxpayers submit certain reports. The same happens if they have a business in the country, or are shareholders in Mexican corporations. The IRS has implemented a voluntary disclosure program for those who may have omitted reporting in the past. They designed this program to help U.S. taxpayers avoid failure in making the required declarations.
Common Mistakes Committed by Foreigners in Taxes in Mexico Real Estate
To avoid mistakes when paying taxes in Mexico Real Estate, tax specialists, familiar with the law and reporting requirements in both the U.S. and Mexico can provide details. However, the most common issues that need to be addressed are the following:
Property owned in a Mexico Bank trust (fideicomiso)
Under Mexican law, any residential property in the restricted zone when foreigners are involved must be placed in a Mexican bank trust, fideicomiso. The restricted zone is an area 50 kilometers (approximately 30 miles) wide along all the Mexico real estate coastlines and 100 kilometers (approximately 60 miles) from the Mexico U.S. and Mexico-Belize borders
Shares of Stock or Interests in Mexican Corporations and/or partnerships
Generally, shareholders or partners with a 10% or greater interest in the partnership or corporation must inform the IRS of the same through Forms 5471 or 8865 Failure to file can be quite costly.
Bank and Financial Accounts
U.S. taxpayers must annually report a direct or indirect interest in an account with a financial institution in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000.00 USD at any time during the year.
The FBAR (Foreign Bank and Financial Accounts) report is known, and the penalty can be as high as the greater of $100,000. USD or 50% of the total balance of the foreign account if the failure is deliberate omission (Sec.31 U.S.C. 5321(a)(5) Nonwillful violations are subject to a civil penalty of not more than $10,000.00 USD.
Under the U.S. regulation section 6048 (b) Taxpayers must report ownership interest on Form 3520-A every year and on form 3520 at the beginning as well as if there are any modifications. If you fail to submit these information returns, the penalty will be five percent of the gross value of trust assets determined to be owned by the U.S. taxpayer.
Paying Taxes in Mexico
Any foreigner with real estate property or business income in Mexico must also plan to pay taxes in Mexico. But there is good news. You may deduct or credit some of these taxes in your country of tax residence, of course, you must pay and keep the proper receipts.
Taxes on business income
If you own a Mexican corporation or partnership, you must file a declaration every month for IVA taxes (Added Value Taxes) and for ISR which is kind of an income tax. It is recommendable that you hire a local accountant to make sure that the accounting procedures are correct and help you prepare and submit the declarations every month.
The tax payments you do every month are usually provisional. When you file your annual declaration you will find either a refund or a deduction. That is if you pay it with the proper receipts. Better news? These taxes can also be a credit or a deductible expense in your home country. It will only depend on how you established your company. Ask your tax advisor so you don’t pay double taxes.
Mexico Property Taxes
In Mexico’s real estate market every two months taxes are due and payable. However, you can pay them in an annual payment. If you pay within the first two months of the calendar year you will have a substantial discount. Property taxes are based on the value declared before the property tax office where the property is located. Compared with rates in the U.S. and Canada property taxes are relatively low.
ISR (Impuesto Sobre la Renta) or Capital Gains Tax
As a non-Mexican, there are two ways to calculate this tax. First, it is a fixed amount of the total gains. The second is calculating a percentage of the difference between the tax basis of the seller’s deed minus deductions and the price in which the property is offered.
The Notary Public should also provide the seller with a copy of the tax payment. Therefore they can submit it to the tax authorities in the tax residence country or domicilio fiscal of the seller.
When you receive income from a rental of Mexican property there is also an income tax or ISR:
In Mexico, all income that comes from Mexican property is taxable, regardless of the nationality of the owner. Hence, any foreigner who rents a home through a property manager needs to submit declarations in a monthly manner. Penalties are very high if you do not declare income. On the other hand, when taxes are paid, they may become deductions in your home country.