Purchasing properties as an investment is an increasingly popular business in Mexico. Over the last decade or so, the leasing and rental property market has exploded. As a result, SAT (the Mexican tax authority) has created a new tax filing regimen related to property owners who wish to rent their properties long-term.
If you own property such as a house, building, apartment, commercial property, land, or warehouse that you rent for income, you must pay taxes according to the new filing regimen. The new regimen is intended for individuals residing in Mexico who have an RFC (tax ID). A company or a foreigner without an RFC cannot file under this regimen.
The leasing regimen simplifies the tax return process and establishes very specific conditions under which companies and individuals are able to file. The tax rate (ISR) varies from 2% to 35%, depending on the amount of income received monthly.
People who rent real estate must perform the following:
- Accumulate income
- Deduct expenses
- Comply with tax obligations
Income is that which is obtained from leasing property: offices, homes, warehouses, land, etc. Only the income taxes that are collected will be calculated and paid (Cash Flow).
For those who are enrolled in the leasing regimen, there are two options to deduct expenses. You can only choose 1 per year:
- You can only deduct expenses that are directly related to the properties you rent:
a. Property tax
b. Maintenance expenses
c. Insurance premiums
d. Salaries, commissions or fees paid for specialized services: accountant, laborers, gardeners, painters, etc.
e. Investments and property improvements
2. Deduct 35% of income, without deductions
- To be registered with an RFC
- To issue invoices (facturas) for the income received
- To keep electronic accounting
- File tax returns on time and make tax payments
Additionally, you must pay the Value Added Tax (VAT). According to the law, real estate leasing is a commercial activity that generates 16% tax paid by the renter and must be reflected in the invoices you issue for the service.
Whether you own rental property or are interested in learning more about the tax implications of rental property investment in Mexico, contact the experienced and professional team of accountants at Mextax today for more information.