Tax Implications of Owning Property in Mexico

Owning property in Mexico may seem daunting for some people but it does not have to be, far from it. The purchase process is easier than many people think and operating your property as a short-term rental is relatively the same as owning a property in a different state or province. One of the other most common worries we get asked about is around tax consequences of owning a property in Mexico.

Whether you buy and hold property in Mexico, rent the property and earn income or sell the property, you are responsible for paying taxes in Mexico. While you may think that being a foreigner allows you to skip taxes in Mexico, this couldn’t be farther from the truth and you are required to pay taxes in Mexico. Because most countries tax their residents on their worldwide income, you will have to pay taxes in your home country as well. You will not be double taxed as long as there is a treaty for the avoidance of double taxation between your country of residence and Mexico. Make sure that the treaty covers the type of taxes that you owe though.

We have heard that some foreign property owners do not pay taxes in Mexico due to a lack of enforcement resources. Yet, there are hardly any advantages for not paying taxes in Mexico because it is likely that your country of residence taxes your worldwide income and at a higher rate than Mexico does. However, there are negative consequences if you don’t pay your taxes on your property in Mexico. You can face criminal charges, financial penalties or even having trouble traveling back and forth between countries. So it is better to be aware of them so that you can fulfill your tax obligations.

Mexican Acquisition Tax

When a real estate transaction takes place in Mexico, a 2% acquisition tax is payable by the buyer. This is usually included in the closing costs.

Mexican Property Tax

The annual property tax is due by all property holders. It is called predial. Compared to what you see in the United States or in Canada, the property tax in Mexico is extremely low. It is quite common to have annual property taxes of $100 or less, and they seldom run higher than about $300. The amount is based on the assessed value of the property. An interesting fact is that you will get a discount if you pay early. The earlier you pay, the bigger the discount, which can be up to 30% if you pay in January.

Mexican Rental Income Tax

Rental income is taxed at regular income tax rates for Mexican residents. For foreigners, the rental income tax will depend on the mode of detention. In this article Can Foreigners Own Property in Mexico, we discuss the modes of property detention foreigners can use.

If you own in your personal name or through a fideicomiso, you are subject to a 25% withholding tax on the gross income, which is due monthly.  The tax is due 17 days after the end of the month and can be processed through a bank teller or online. It may seem like a hassle to take care of but it is actually a very simple process if you go through a third party company to rent out your property (Airbnb, VRBO…). They are in charge of collecting the tax and paying it on your behalf. If you own through a Mexican corporation, you have to file a tax return and pay 30% on the net income.

Even though the costs of owning and operating a Mexican property are generally very low, the taxes will be lower through the corporate route thanks to the deductions. Yet, there are costs associated with opening and maintaining a corporation, whereby the general advice is to go for the corporation only if you own multiple properties to amortize the additional costs.

Even though we are discussing the international tax aspects below, let us mention that, for many people, it does not make any difference which avenue they choose if, as is often the case, their marginal tax rate at home is higher than the rate they pay Mexico on their rental income. Indeed, they will have to pay the difference between their higher domestic tax rate and Mexico’s tax rates anyway.

To be complete here, Mexico is working on a tax reform. The rumor has it that the corporations would be subject to the withholding tax as well if their income or net profit does not exceed a certain amount. This is totally understandable. Like in most countries, Mexico supports its businesses in order for them to be able to create jobs by applying a lower effective tax rate. That rate was not meant for corporations that are basically passive income vehicles for their foreign owners. Again, if your marginal tax rate is higher than Mexico’s tax rates, you will eventually pay the same total amount of taxes.

Mexican Capital Gains Tax

Capital gains tax is due on the sale of a property. There are two ways Mexico allows you to calculate your capital gains.

  • The first option is to pay 25% of the declared value.
  • The second option is to pay 35% of the net value which is the difference between the assessed values at the time the property was purchased and when it was sold, taking into consideration how long the property was held, any improvements made, any commissions paid, and other allowable expenses.

A Mexican representative you appoint will make the calculation for you.

In most situations, the net profit route will be the most advantageous just based on those percentages. Even if you buy and sell a property in US dollars, the taxes will be calculated based on the prices in Mexican pesos at the time of the purchase and the time of the sale.

Interesting fact

Foreigners often end up paying less capital gain taxes in Mexico than they would at home. In that case, they will end up crediting their Mexican taxes against their local taxes, whereby they will end up paying the same in total capital gains taxes as if the property was located in the US. While the capital gains taxes would be the same, the property taxes that you have to pay every year are so much lower in Mexico, where they are almost non-existent.

Taxes in Your Home Country

Most Countries

Most countries, including the US and Canada, tax their residents on their worldwide income. If you earn any income or capital gains in Mexico, they must be declared on your local tax return. You will get credit on your home taxes, however, for the taxes you have already paid in Mexico, provided that there is a tax treaty between your country of residence and Mexico for the kind of taxes that you owe.

US Only: 1031 Exchanges

A 1031 exchange (named after section 1031 of the U.S. Internal Revenue Code) is a way to postpone capital gains tax on the sale of a business or investment property by using the proceeds to buy a similar (“like-kind”) property. It is applicable to a property you own in Mexico as long as the new property you buy is located outside of the US again.

You are expected to report all taxable income and capital gains to Mexico and your home country. Under the USMCA treaty, Mexico, Canada and the United States have agreements in place to exchange information about investments and income tax. It is thus important to report capital gains or rental income in both countries. That will keep you away from trouble and allow you to avoid double taxation.

Conclusion

To conclude, while it may seem complicated at first, paying taxes becomes a straightforward process once you learn the basics about it and most importantly, you hire a cross border accountant that is familiar with the tax system of your own country as well as the Mexican one.

Bear in mind that we are not lawyers and do not provide legal advice. Any individual situation is unique. We therefore recommend that you get professional advice and consult with your lawyer for the latest and most accurate information.

If you want more information on this topic or any other topic pertaining to buying or investing in real estate in Mexico, reach out to us through the contact form.

Tax Implications of Owning Property in Mexico

Kevin started to invest in real estate a few years ago and his real estate journey took him through owning properties in Europe and North America.

Kevin

Kevin started to invest in real estate a few years ago and his real estate journey took him through owning properties in Europe and North America.

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