There’s no question that Mexican real estate is a popular, low-risk and profitable investment. And despite restrictions in the past, it is now easier than ever for foreign investors to purchase real estate in prime locations. Riviera Maya is currently the top tourist destination in Mexico and many investors are taking advantage of this by profiting from a strong vacation rental market.
However, it’s important to understand the implications of owning property abroad. Investors are still subject to Mexican laws when it comes to purchasing and finally renting out their property. In the past, many property owners have chosen to fly under the radar when it comes to income made via investment or vacation rentals. While this has worked for some time, the Mexican government is clamping down on tax evasion for vacation rental owners. Evading tax in Mexico can put your property at risk, so it’s important to understand the responsibilities of owning a vacation rental.
Who Pays Taxes in Mexico?
As an expat or foreign investor, the tax you pay will depend on your situation. If you own a property in Mexico, you will pay property taxes. If you choose to rent out that property, run a business, have a job or hold an interest bearing bank account in Mexico, you’ll pay income tax.
Like most countries, Mexico’s income tax rate varies greatly. Individual income tax rates start at 1.92% and go up to 35%. Non-residents pay 15%-30% and Mexico’s corporate tax rate is 30% flat.
Property Taxes in Mexico
Investors in Mexican real estate will pay three different kinds of tax during their ownership. Thankfully, unlike the US or Canada, property taxes in Mexico are fairly low.
The first tax to be paid will be an Acquisition Tax at 2% which will be paid upon closing. This is collected on behalf of the municipality in which your new property resides. You will then pay a
or Annual Property Tax, which is also owed to your local municipality. The
rate is set by the municipality and generally does not exceed a few hundred dollars per annum. Finally, property owners are subject to paying a Capital Gains Tax or
on the sale of their property. You can either pay 20% of the declared value or 28-30% of the net gain (after deductibles). While Capital Gains Tax can often be complex, Notaries Public will aid you in the calculations. And, you can choose the more favourable sum to pay between the two options.
Mexican Tax Laws for Rental Properties
Despite whether you choose to rent your Mexican property full-time, part-time or occasionally, you are still subject to Mexican tax laws concerning property investments and rentals.
Tax concerning foreign property investments can be considered by some as a grey area because rental income is often paid to a bank account in the owner’s home country. However the fact is that any vacation rental in Mexico must abide by Mexican tax laws, regardless of where payment is made to.
In recent years, the Federal government has cracked down on tax avoidance in this area. Governmental bodies have developed procedures to ensure that foreign investors pay the correct amount of tax.
El Servicio de Administración Tributaria (SAT) is responsible for applying taxes for la Secretaría de Hacienda y Crédito Público. They state that the tax rate for income on a rental property is 25% before deductions and this must be paid within 15 days of receipt of payment. Of course, expenses can be deducted if all correct receipts are provided. These can include management fees, property taxes, utility bills as well as general maintenance and upkeep. On top of this, IVA , (Value Added Tax) is also due on the gross amount of rent charged. This is 16% in the Riviera Maya and can be charged to the renter.
Safeguard Yourself and Your Property
The best way to safeguard yourself against any tax issues is to consult a tax attorney in Mexico. The easiest way to stay on-top of tax payments is to have a Mexican accountant pay your tax to the SAT on your behalf. Or, if the renters pay through a trust company, the trust company will withhold the correct amount for tax. They will then pay on your behalf and issue you with a receipt.
However it’s also important to consider that, as your income from your rental property should also be declared in your home country, there’s no need to pay double tax in Mexico. Mexico has tax treaties with the US and Canada. So to avoid being double taxed, provide the Mexican government with proof of residency in a treaty partner country via a copy of your tax residence certificate or your most recently filed income tax. Do keep in mind that NAFTA countries shares information regarding income tax and investments. So be sure to declare your rental income in both countries.
Above all, don’t jeopardise the success of your investment by choosing to ignore Mexican tax laws. Consequences can be severe and will ultimately put your ownership of the property at risk. Navigating the Mexican tax system can work to your benefit. A Mexican tax attorney will ensure that you receive all deductibles and discounts available. whilst also protecting your rights as a property owner.