Own a property in Mexico? Have you been filing your taxes monthly? Learn about the different tax responsibilities you have and the risks of ignoring Mexican tax laws
Did you know that as a foreigner living or investing in Mexico, you are responsible for taxes if:
- You own property in Mexico
- You earn an income from renting your Mexican property
- You receive an income generated in Mexico
- You sell your investment property in Mexico
Impuestosobre la renta – ISR
For many years, foreign property owners have neglected to pay income tax (impuestosobre la renta) ISR, on their rental income in Mexico, assuming they did not need to pay tax as the funds were transferred directly to an out of country bank account. This is not true! Foreign owners are expected to follow the Mexican tax laws that come with owning investment properties in Mexico regardless of where the money is despoited. Any rental property in Mexico, whether it is just a room or a luxury condominium, whether it is rented out part-time or full time, properties held by fideicomiso or direct title is subject to income tax.
It is important to realize that the government has begun to take action and serve notice on those who own and rent property. It is not difficult to track this type of income thanks to today’s technology; most rentals are listed on Airbnb or Facebook. Property owners with unpaid taxes may be assessed taxes and penalties based on a perceived income by using the areas occupancy rate, which may be higher than the actual income.
The expenses of the property substantiated by a receipt/factura can be applied thereby reducing your tax liability. Deductibles may include management fees, property taxes, utilities, repairs, maintenance, strata fees, insurance, depreciation.
El Servicio de Administración Tributaria (SAT) is responsible for applying taxes for la Secretaría de Hacienda y Crédito Público and assesses the tax at 25% of the rental income, before deductions. The tax is due 15 days after the income is received, payments can be processed through a bank teller or online. If you are living abroad, you should have an accountant making the payments to SAT.
NAFTA countries share information about investments and income tax, so it is imperative to report your investment income or rental income in both countries. Although you include the revenue from the rental property in your US or Canadian income tax, you will not pay double tax since there is a Mexican tax treaty with the United States and Canada.
IVA Impuesto al Valor Agregado
Value Added Tax is 16% in the Riviera Maya. The IVA tax should be applied to the rent. If the tenant pays their rent through a trust company, the trust company will issue a receipt, and withhold the tax and pay it on the owner’s behalf.
Predial – Property Tax
Annual property taxes are known as predial in Mexico and are very low; the taxes are based on the location and size of your property. Property tax is due in January, and substantial discounts are available, if paid in advance.
Capital Gains Tax
When you sell your property, you may be liable for capital gains. The tax is based on the profit gained from selling the property. It is important to remember that even if you bought and sold your property in USD, the calculation for capital gains is done in Mexican pesos. This means that the purchase price and the sale price will be converted into Mexican pesos for the calculation and the exchange rate used will be based on the purchase date and the sale date. An accountant in Mexico can advise you on deductible expenses that will you avoid or reduce your capital gains tax.
Your accountant can discuss the pros and cons of forming a corporation in Mexico alongside your attorney to determine which is the best option for you as a property owner and landlord in Mexico. Your accountant can also educate you on the Mexican tax system and how to avoid penalties and get the most from tax deductions.
Please remember! Owners that do not comply with Mexican tax laws may lose their rights as the property owner, possibility face jail time, fines, interest charges, deportation and forced sale of the property.