In Mexico, taxes are regulated by the Federal Tax Code, including the types of taxes and the application of each one of them. The Secretaría de Administración Tributaria (SAT) is a government agency in charge of making individuals and companies contribute the costs commensurate with taxes and customs disposals. The following article will focus on the most relevant taxes related to real estate.
Income tax in Mexico
If you are self-employed in Mexico, own a business, lease your own property, or have securities or an interest-bearing bank account, then you will have to pay income tax. In most cases, you will need to complete a tax return.
According to the Mexican Tax Code, Mexico taxes the income of its citizens and foreign residents worldwide; the same practice applies in the United States. If you own real estate in Mexico, you will be treated as a resident for tax purposes. If you own property in another country, you may also be considered a Mexican tax resident if Mexico is your center of interest. Under Mexican law, this parameter is defined as follows:
- More than half of its revenues per calendar year come from Mexico; or
- Mexico is the main destination for their commercial or professional interests.
For expatriates in Mexico, there has traditionally been a lax attitude towards the practical application of this rule on the taxation of income earned worldwide. But keep in mind that there is such a law and that Mexico’s policy towards expatriates may change at some point.
If you are a U.S. citizen, please note that the U.S. also taxes the income of citizens and permanent residents earned worldwide. In Canada, citizens’ income earned worldwide is taxable if they have not officially registered their residence outside Canada. Income earned in Mexico must be reported on your U.S. or Canadian tax return. However, you will receive a tax credit for taxes already paid in Mexico.
Property tax in Mexico
The ownership of real estate in Mexico is subject to the following taxes:
- Purchase tax 2%: payable upon purchase of real estate;
- Annual property tax (predial);
- Capital gains tax: payable on the sale of real estate.
Often in Mexico, the official “appraised” value is used as the tax base for these taxes, which is usually an understatement in relation to the actual market value of the property. Under Mexican law, it is illegal to understate the appraised value compared to the actual market value in order to minimize taxes. On the other hand, the property tax (predial) in Mexico is very low. It is 0.01% of the price of the property.
If you sell real estate, you must pay capital gains tax. In Mexico, it is calculated in two ways:
- You may pay 25% of the declared value of the transaction, or
- You can pay 30% of the net value, which is calculated as the difference between the appraised value of the property at the time of purchase and the appraised value of the property at the time of sale, taking into account the time of ownership of the property, renovation/modernization and other eligible costs. With the help of a notary or lawyer, you should calculate the tax in two ways and choose the smaller amount.
Generally, if you have a tourist visa or a temporary residence permit in Mexico, you will have to pay capital gains tax on profits from the sale of real estate in Mexico, and if you have a permanent residence permit in Mexico, you may qualify for an exemption from paying this tax on an equal basis with Mexican citizens. Consult your attorney or notary public on this matter.
Capital gains tax is also paid by corporations that own land and other real estate. Remember that legislation is changing and the help of a good tax attorney will be indispensable.
Rental of real estate in the taxation context
Foreigners who own residential property in Mexico have the same rights as Mexican citizens, including the right to rent their property for long and short term rental, in accordance with local law. This applies to both direct owners of real estate titles and beneficiaries of bank trusts (trust).
For example, if you become the happy owner of a villa on the coast of the Mayan Riviera through a fideicomiso (trust) operation, then you have the right to rent it out for long or short term rental for any period and at any time. However, under Mexican law, your rental income is subject to taxation and is very strict. Local hotel associations and other interested companies track foreigners who rent their properties and do not pay taxes as a factor of unfair competition.
If you rely on a bank acting as trustee to manage your property, it must be technologically savvy. Under Mexican law, the trustee of the trust must provide the beneficiaries (owners) with all invoices and lease documents, as well as make quarterly tax payments.
But in practice, this does not always work. Bank employees generally don’t like this work: it’s cumbersome and time-consuming, and payments from their trust bank are unlikely to cover the costs. In addition, some banks simply don’t have the workforce or infrastructure to do this job well. Consequently, forcing a bank to fully and timely comply with all tax requirements can be very problematic. Therefore, many trust law-abiding beneficiaries and direct owners of real estate receive their own tax identification number and then either register with the Mexican Treasury and pay taxes themselves, or sign a contract with an agent who does it for them.
Individual Tax Number (RFC)
Your tax identification number will be called RFC (Registro Federal de Contribuyentes) and you do not need to be a permanent resident of Mexico to obtain it. If you have a valid passport and an immigration document, your accountant can apply for it on the appropriate form and obtain a tax identification number for you. You can even do it yourself at SAT offices.
Once you have a tax identification number, you can declare your Mexican income as a resident or non-resident. If you are a resident, your accountant, your property management company or a tax payment service provider can do this on your behalf.
Resident income taxes
The maximum income tax rate, after all, allowable tax deductions, is 30%. If you declare your income as a resident, you have two options: categorize and document all tax deductions or file a blind withholding return.
Documented tax deductions for resident taxpayers
Allowable categories of documented tax deductions:
- Property tax, as well as local fees and taxes used to finance public works and renovations;
- Maintenance costs (not related to repairs and completion), as well as payments for water supply;
- Interest on a loan for a purchase, construction, or renovation;
- Salaries, commissions, contributions, taxes, and other payments to employees whose work is directly related to the leased property;
- Property insurance premiums;
- Investments in construction, including additions and repairs (depreciation 5% per year for construction and 10% for repairs).
The lessee pays a value-added tax (VAT) of 16%. It is then deducted from the VAT paid by the owner for goods and services. The difference is paid monthly or can be used as a tax credit on subsequent tax returns.
Under this scheme, you must apply for a conditional income tax and VAT refund based on quarterly income on the 17th of each month. Your annual refund is due on April 30: the difference between the advance payments and the total tax calculated is due on that date.
Note: Remember that you cannot claim tax deductions for services and materials without providing official receipts and checks, which in Mexico are called facturas. They must be printed in a government-approved format and have the RFC number of the company or individual issuing the check. If there is no check, there will be no tax deductions. Other supporting documents will not be accepted in the case of an audit or the calculation of capital gains tax on the sale of real estate.
Some companies and individuals may try to convince you that they cannot provide invoices to foreigners, or that they must add 16% tax to provide an invoice. This is ignorance of the law or tax evasion, and it is illegal. Foreigners have the same rights to receive invoices as Mexicans.
Tax deductions for residents
An alternative to itemizing all your tax deductions is a blind tax deduction. No documented tax deductions are allowed under this scheme. Therefore, invoices are also not required. If a blind tax deduction is applied, the tax on rental income will be up to 35%, depending on the size of the monthly income. You make monthly advance payments of 17.5% of your total expected return. The final tax is declared and paid on an annual tax return. VAT is levied on tenants and paid monthly directly to the IRS.
Paying taxes as a non-resident
If you wish to pay tax on rental income as a non-resident, you must have a contract with a real estate agent or broker who will work on your behalf. This agent will provide tenants with receipts, collect VAT, and the 2% tourist tax if applicable. Rental income tax is generally set at 25%.
- Interest income tax. If you have a Mexican bank account that charges interest, the financial institution will withhold a small portion of your interest income to pay taxes. If you are a non-resident, you will definitely have to pay this tax and will not need to complete a Mexican tax return. If you are a resident, you will normally be able to credit the amount of the withholding on your tax return.
- Values. Income earned by tax residents from the sale of securities on the Mexican Stock Exchange is not taxable in Mexico if no more than 10% of the total number of shares issued by the company have been sold. Shares of many well-known international companies are now traded in Mexico, and there are also investment funds that invest in securities. Non-residents who invest in the stock market pay an income tax of 25% of the amount of the transaction or 28% of the income, as the case may be.
- Vehicles. If you purchase a vehicle with Mexican numbers, you must pay an annual tax called tenencia. In general, the rate of this tax increases as the size and value of the car increases and can reach several hundred dollars per year, much more than a property tax. However, pickup trucks are classified as agricultural vehicles and are subject to very low taxes, even if they are expensive, high-profile vehicles such as a Porsche.
- VAT. In Mexico, value-added tax (called IVA or Impuesto al Valor Agregado) is levied on most goods and services. The rate of this tax is 16%.
Undoubtedly, there is a lot of information on the tax area in Mexico, but there are several solutions that allow you to keep your tax status healthy. Companies that require industrial real estate can be supported by VYNMSA to establish in Mexico, we have a presence in 36 industrial locations and we have about 20 industrial buildings for immediate availability. Being one of the leaders in industrial real estate we collaborate with strategic partners in the accounting area so you can bring your production to Mexico.