THE INTERNATIONAL TAX ADVISOR
by: Douglas J. Kingston, CPA/MBA • Mailing Address:
Taxes Other Than Income
It is important for
Under Mexican law, foreigners may acquire direct ownership of real estate
in the interior of
This article summarizes the Mexican tax consequences of
acquisition, operation and disposition of real property located in
Mexican taxation of rental
income follows the general rule that a foreign owner’s income is subject to
tax on a gross basis (i.e., without deduction of expenses). Rental income
from property located in
Under the Mexico-U.S. tax treaty, a
Allowable rental deductions include ordinary and necessary expenses
such as property tax, interest, management and maintenance expenses, as well
as depreciation on building and improvements (computed on a straight line
basis over 20 years for buildings and 10 years for furniture and equipment,
adjusted for inflation). All deductible expenses must be properly documented
and any withholding taxes relating to the payment of deductible items must be
paid to the appropriate tax authorities. In lieu of itemizing actual
expenses, taxpayers may elect to deduct a fixed percentage of gross rents:
50% for residential property or 35% for commercial property.
Mexican Taxation of Disposition Gain
A foreign individual or corporation selling Mexican real estate is
subject to a 25% Mexican tax levied on the gross sales proceeds.
Alternatively, the taxpayer may elect to be taxed on inflation-adjusted net
gain at a flat rate of 30% (provided the sale is properly recorded, a return
is filed and a fiscal representative is appointed - the representative must
either be resident in Mexico or resident abroad with a permanent
establishment in Mexico).
Mexican Taxation of Disposition Gain (cont’d)
Gain on the sale of an interest in a Mexican corporation is subject to tax if Mexican real estate accounts for more than 50% of the company's book value, or if the seller directly or indirectly owned at least 25% of the company’s capital during the prior 12-month period.
If the net gain election is made, and if the property is
sold to a buyer resident in
Mexican law makes no provision
for tax-deferred arrangements common in the
Taxes Other Than Income
Although income and most other taxes are levied only by the federal government, each Mexican state has jurisdiction to impose a real property transfer tax. Transfer tax is paid by the person acquiring property and rates very among the states from 2% to 3.3% of the property’s market value – a notary fee of approximately 1% of the value of the property may also apply. Taxable transactions typically include transfers that occur by reason of purchase and sale, donation, death, or contribution to, distribution from or reorganization of a legal entity.
The Mexican states also impose annual property tax based on the property’s assessed value at rates ranging between 0.4% to 1%.
Mortgage interest paid to a
An investor in Mexican real estate is well advised to seek reliable tax planning assistance and properly structure the investment in order to minimize both U.S. and Mexican taxes (for example, by ensuring deduction of costs in both countries and maximizing utilization of foreign tax credits). In addition to matters of taxation, investors should consider the significant costs of setting up and maintaining any required bank trust and obtaining adequate title insurance and a Mexican notario, as well as other issues such as the impact of foreign currency fluctuations and political risk.
Douglas J. Kingston is an Arizona certified public accountant (CPA) specializing in international tax planning and compliance for U.S., Canadian, European, Latin American and Asian business and individual clients and may be reached by: