Purchasing properties as an investment has become an increasingly popular business in Mexico. Over the last decade, digital platforms such as Airbnb and VRBO have been a cornerstone of the vacation rental market in Mexico. However, if you want to explore different options to generate profits from your property, a long-term rental might be more suitable for your current situation.
It’s important to understand that you may need to change your tax regime or request your accountant to do so if you have not been properly registered. If you do not yet have an RFC (tax ID), you will need to obtain one first. Once you have it, the next step is to register under the leasing tax regime in Mexico.
Seeking expert advice from a trustworthy accountant and legal support to ensure a proper leasing contract can yield numerous benefits during this transition. First, let’s clarify the distinctions between a digital platform tax regime and a long-term income regime.
The leasing regimen simplifies the tax return process and establishes very specific conditions under which companies and individuals can file.
Tax Implications for Short-Term vs. Long-Term Rentals
1.Short-Term Rentals (Airbnb): Short-term rentals are typically defined as stays shorter than 30 days. Income from these rentals is subject to a range of taxes, including:
- Value Added Tax (VAT): A 16% VAT is applied to the rental income.
- Income Tax (ISR): Income from short-term rentals is considered business income, subject to progressive rates based on the taxpayer’s total income.
- Digital Platform Tax: If using platforms like Airbnb, and you registered properly your RFC, the withholding amount would be fixed 8% VAT and 4% for ISR, only when not exceeding the amount of $300,000 Mexican pesos yearly. In cases where the tax-user of the platforms is not registered in the RFC, the ISR withholding is 20%, while the VAT withholding is 100%.
2. Long-Term Rentals: Defined as stays of more than 30 days, are subject to different tax rules:
- Exemption from VAT: Long-term rental income is not subject to VAT if the property is not fully furnished, providing significant tax relief. However, if the property is fully furnished, you must declare and pay VAT at a rate of 16%.
- Income Tax (ISR): Rental income is still subject to ISR, but the rates and applicable deductions can differ from those of short-term rentals. The tax rate (ISR) varies from 2% to 35%, depending on the amount of income received monthly.
Key Accounting Considerations
- Reporting Requirements: Property owners must accurately report rental income, regardless of the length of the lease. For long-term leases, it’s critical to ensure that lease agreements and payment receipts are properly documented and reported (duration of the contract, amount of the monthly payment, currency, etc..)
- Deductions and Expenses: Long-term rental property owners can deduct certain expenses from their taxable income, including maintenance costs, property management fees, and depreciation. It’s essential to keep detailed records of all expenses to maximize deductions.
- Tax Withholding Obligations: When moving to long-term rentals, landlords should be aware of the different tax withholding obligations. Individuals renting to corporations should include VAT and/or ISR withholdings to be withheld by the corporation in the invoice.
- Compliance with Local Regulations: Different states in Mexico may have specific regulations and requirements for long-term rentals. Property owners should stay informed about local laws to ensure compliance and avoid potential penalties.
Steps for Compliance in the Leasing Regimen
People who rent real estate must perform the following:
- Accumulate Income: Income is obtained from leasing property such as offices, homes, warehouses, land, etc. Only the income taxes that are collected will be calculated and paid (Cash Flow).
- Deduct Expenses: For those enrolled in the leasing regimen, there are two options to deduct expenses. You can only choose one per year:
- Deduct expenses directly related to the properties you rent:
- Property tax
- Maintenance expenses
- Insurance premiums
- Salaries, commissions, or fees paid for specialized services such as accountants, laborers, gardeners, painters, etc.
- Investments and property improvements
- Deduct 35% of income, without itemized deductions.
- Comply with Tax Obligations:
- Be registered with an RFC.
- Issue invoices (facturas) for the income received.
- 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 a 16% tax paid by the renter and must be reflected in the invoices you issue for the service.
Strategic Benefits of Long Term Rentals
- Steady Income Stream: Long-term rentals provide a more predictable and steady income stream compared to the fluctuating nature of short-term rentals.
- Reduced Turnover Costs: With long-term tenants, property owners save on the costs associated with frequent turnover, such as cleaning, advertising, and maintenance.
- Lower Management Effort: Managing long-term rentals typically requires less time and effort compared to the continuous demands of short-term vacation rentals.
Conclusion
Transitioning from short-term to long-term rentals in Mexico offers tax benefits and stable income. Understanding and adhering to the specific tax and accounting requirements of Mexico is essential. Stay updated on tax laws and keep detailed records to ensure compliance and optimize income. For expert advice, contact the Mextax accounting team for personalized tax planning strategies.
It is important that you protect your real estate investments in Mexico with an appropriate and correct contract, so that you can have peace of mind when renting your property to third parties.
