Congress Has Extended Tax Laws for 2015 and Beyond

Click on this Link to read some of the tax laws that were just extended by Congress that may effect you. Let us know when you need US tax help, planning and strategies.


TO DOWNLOAD A COMPLETE ITEMIZED LIST OF  ALL CHANGES CLICK HERE

SAT Mexico Tax Website

If you read Spanish or use Google chrome with automatic translations go to www.sat.gob.mx to find your Mexico tax info. This is the official "Hacienda" website of Mexico's taxing agency.

RETIRING OR THINKING OF RELOCATING IN MEXICO, BELIZE, PANAMA OR EUCADOR?

If you are retiring or thinking of relocating your business to Mexico, Belize, Panama or Eucador you will find answers to a lot of questions on living, taxes, shopping, etc. at Best Places in the World to Retire

MEXICO SCORES AS THIRD BEST COUNTRY TO RETIRE IN

Scoring all of the factors Mexico comes in third after Panama and Ecuador. Read more in this article from MEXICO NEWS DAILY.

EIGHT LITTLE KNOWN US TAX FACTS FOR GRINGOS IN MEXICO

By. Don D. Nelson, International Tax Attorney

• Though most foreign assets are reportable on various specialized forms filed with your US tax return,. If you own foreign real estate and title is in your own name (or a Fideicomiso) and do not rent out the property, there is no reporting required on your US tax return or for that matter any other reporting due the US Government.

• Foreign mutual funds (and most foreign money market funds) require filing of another special form with your tax return. If you do not file this form and make elections to report the income each year, you are penalized with higher taxes and interest when you finally sell your foreign mutual fund. These rules were put in many years when Congress was convinced by US Mutual Fund companies that there business would be hurt unless investment in foreign mutual funds was made unfavorable for tax purposes.

• The 2015 the $100,800 US foreign earned income exclusion applies to earned income (wages or self employment) income earned abroad if you meed the physical presence test or bonafide resident test. You can see if you qualify in IRS Publication 54. It is not automatic and can only be claimed on your US tax return. The IRS can deny this exclusion if you file your return more than 18 months late. This exclusion does not apply to rental income, dividends, interest or capital gains or any income other than earned income.

• You must report your rental net income in Mexico from your Mexican real estate on your US return and you also owe taxes on it in Mexico even if you are not a resident. In Mexico you must pay Mexican income taxes on it and also pay IVA tax. (read more on these rules at www.rentaltaxmexico.com )  If you are renting for only a short time, you may also owe local lodging excise taxes. The Mexican income tax can be claimed as a credit directly offseting any US income tax you owe on the rental income. The IVA and lodging taxes can be deducted on your US tax return as rental expenses.

• If you own 10% or more of a Mexican corporation you may have to file form 5471 with your US tax return if required by the rules governing that form. Failure to file that form in a timely manner may result in the IRS assessing a $10,000 US penalty for failure to file even if you owe no taxes.

• The US has a tax treaty with Mexico. It also has in the past year entered into an OECD agreement where the two countries have agreed to exchange income tax information with the other. At some point in the future what you do in Mexico will not stay in Mexico and visa versa.

• If as a US Citizen you have lived and worked in Mexico for a while and not filed your US tax return, the IRS currently has a “streamlined program” that may allow you to catch up by filing only the past 3 years US tax returns and past six year FBAR (foreign bank account reports). They will not penalize you under that program for failing to file FBAR forms or other foreign reporting forms. They have stated they may discontinue this program at any time. Now is the time to surface with the IRS and avoid potentially huge penalties.

• FBAR (foreign bank account reporting forms) must be filed each year with US Treasury if at any time during the calendar year your combined highest balances in your foreign financial accounts exceeds $10,000 US. This form must be filed on line. Foreign accounts include foreign pension plans, cash surrender value in foreign insurance, foreign brokers accounts, and even gold if held for you in a foreign country a custodian. Failure to file this form or filing it late can result in penalties of $10,000 US or more.

Don D. Nelson is a US tax attorney who has been assisting Americans in Mexico for over 25 years with their US tax returns and tax planning. He is also a partner in Kauffman Nelson LLP, Certified Public Accountants. His website is located at www.TaxMeLess.com. He has 2 tax blogs with the lastest tax developments of interest to those in Mexico located at www.usexpatrate.blogspot.com and www.us-mexicotax.blogspot.com His email address is ddnelson@gmail.com. He can be reached at his US phone number 949-480-1235.   Don spends about 7 months a year in Baja Sur, Mexico.

Mexican Taxes on Rental Income - What are those taxes? What are the penalties if you fail to pay those taxes?

If you rent your real estate in Mexico full time or part time when not using it the income you make is subject to several rental taxes in Mexico. This applies to owners who are residents and nonresidents. These taxes also apply to rental of your timeshare.  Failure to pay all applicable taxes can result in severe penalties. The following examples explain the taxes and penalties you will incur for ignoring Mexican tax laws:

Example 1.  Bill and his wife Sarah rent out their  condominium in San Jose for 5-6 months out of the year on a weekly or monthly basis to tourists.  Though they report their rental income and expenses on their US tax return, they have never paid any taxes on that rental income to the Mexican tax authorities.  Their neighbors have told them not to worry, since no one ever pays taxes on vacation rental income in Mexico and probably do not have to.    

Is this actually true?  No!  Definitely not!   Bill and his wife must pay taxes on their income which is generated in Mexico!

What kind of taxes should they be paying and how much?.  They must pay the ISR tax, a type of income tax, in the amount of 25% of the gross rents and, if the unit is furnished,  a 16% Value Added Tax (IVA).

An important point  The ISR TAX they pay can become a tax credit in the US, so double taxation is avoided.   The 16% IVA tax is generally paid by the tenant and is simply declared by the landlord.

What are the penalties, interest, etc. they might incur?  The penalty for not being enrolled as a taxpayer is 2,740. to 8,230 pesos.   The penalty for not making declarations as required range from 1,100. pesos to 13,720. pesos per month in addition to interest for not paying on time and as required is 1.13% per month.

Are there any other possible legal consequences for failing to pay taxes on rental income from their condominium?   If the tax authorities have not discovered the illegal rental income and notified the landlords, back interest and penalties may be waived..   It is important, however,  to begin declaring and paying prior to discovery.

Example 2.  Phil owns a home in Cabo San Lucas.   He leases it to a Timeshare salesperson on a yearly basis.  The renter pays the monthly rent directly to Phil's US bank account and no money is paid in Mexico. 

Does Phil have to pay taxes on that income in Mexico?. Absolutely!  Phil has an obligation to pay taxes on any income generated on property located in Mexico.

What are the taxes and when are they due?.  Phil must pay the ISR tax, a type of income tax, in the amount of 25% of the gross rents and, if the unit is furnished,  a 16% Value Added Tax (IVA).

What are the consequences of failing to report the rental income in Mexico? Much the same as Bill and his wife in the example above, Phil will be liable for not being enrolled as a taxpayer which can cost him 2,740. to 8,230 pesos.   The penalty for not making declarations as required range from 1,100. pesos to 13,720. pesos per month in addition to interest for not paying on time and as required is 1.13% per month.  The amount of the penalty may depend upon whether or not this is a first violation for Phil.

Should he go back and pay in those taxes for past years when he failed to pay the taxes?   If the Mexico tax authorities have not notified Phil he is in violation of the tax code, he probably will not need to file back taxes.   The important point is to begin and to be consistent in the future.

Since Phil is a nonresident and does not have a factura number, how can he pay taxes?  Phil must appoint a Mexican company or an individual to be responsible for the retention and the filing of these taxes.    His official representative will issue the correct invoice or factura.

Example 3.  The Smiths normally do not rent out their home in Todos Santos.  But since they are taking a 2 month tour of Europe they are renting it out for $3500 per month for two months.

Do they have an obligation to report this rental income to the SAT?  Yes, they have an obligation to report and pay taxes on any income generated from property located in Mexico.  

.  They are permanent residents of Mexico, and Canadian Citizens.  They also do not report any of their other income earned in Canada in Mexico.  It is now a year later and they have learned that rental income must be reported and taxes must be paid on it. 

How much tax will they owe?     Technically they owe $875. USD, plus 16% IVA.

What will be the penalties for failing to report that income on a timely basis?

Penalties could be as listed above.   

Want to know more about rental taxes in Mexico or locate an experienced rental tax service to handle those taxes for you? The Settlement Company in La Paz offers a service which files and pays these rental taxes for nonresidents on their Mexican rental income. Read more at www.rentaltaxmexico.com

IRS To Start Sharing Tax Data with Mexico

The Internal Revenue Service has kicked off a new program under which it shares large amounts of individuals’ financial-account information with certain foreign countries, the agency said Friday.  One of those countries is Mexico

If you are a permanent resident of Mexico, or dual citizen and your are not reporting all of your worldwide income on your Mexican tax return (if you file one), the Hacienda (SAT) may soon be at your door with their yellow tape and asking about all of  the income on your US return that you have not reported on your Mexican income tax return.  If  you are in Mexico more than 183 days you are considered a full time tax resident and must report and pay taxes on your worldwide income in Mexico. That is not as bad as it sounds since you do get a tax credit on your US return for monies earned in Mexico which offsets your US tax on the same income. .... and on your Mexican tax return you can get a tax credit for taxes you paid on income from the US.  It gets complicated. 

The IRS said it received digital information about U.S. taxpayers’ foreign accounts from governments and firms around the world, and it sent information on foreigners’ U.S. accounts to government authorities in as many as 34 countries. While governments have exchanged such information in the past, the sharing wasn’t automatic and the scope was often far narrower. The deadline for the exchange to begin was Sept. 30.  Read more  below  and see what countries are on the exchange list in the linked Wall Stree Journal article. 

http://www.wsj.com/articles/irs-begins-sending-individual-account-information-to-foreign-countries-1443810584

Only 1 (low) minimum wage in Mexico effective Oct. 1 of 70 pesos per day.

The minimum wage in Mexico is now 70 pesos per day nationwide!  That is about $5 US.  And the current presidents wants it to go up to 140 pesos per day by 2018.  Can the economy stand it?

IRS ESTIMATED TAXES BECOME MORE DIFFICULT - IRS NO LONG WILL ACCEPT $100MILLION CHECKS IN PAYMENT OF TAXES

So the IRS will stop accepting checks of more than $99,999,999 effective Jan. 1, 2016. After that date, you'll have to send in at least 2 checks to cover your big tax bill. This is really true!

Or, says the IRS, you can still send 1 large payment if you electronically wire it to the appropriate Federal Reserve bank.

In announcing the upcoming limit on big checks in the Sept. 7 Internal Revenue Bulletin, the IRS cited an earlier memo from the Treasury's Bureau of the Fiscal Service that noted the risks of manually processing checks of $100 million or more.

"Fraudulent activity, processing errors and uncollectible funds are more likely when checks over these amounts are accepted by TGA (Treasury General Account) depositaries," wrote David M. Metler, director, over-the-counter division of the Treasury Bureau of the Fiscal Service. "No check processing equipment can handle amounts over a million dollars."

Although the manual processing kicks in at $1 million, the IRS still will take checks up to $99,999,999 million, for now.

Read more: http://www.bankrate.com/financing/taxes/irs-limits-100-million-tax-payments/#ixzz3lLZYZjgJ

Mexico Tax Law Highlights 2015 by Deloitte

Click to Download Mexico tax law pdf file  Use free adobe acrobat reader to view and print.

Survey Shows Mexico is Almost Top Choice for US Expats

US Expats Can Vote From Mexico - Learn How... it might make a difference!

The following US State Department site has all rules and forms to register to vote when you live abroad.  There is still time....over 500 days before the next Presidential election.

US State Department Link to Learn How to Vote Abroad

Mediation of Disputes in Mexico in Lieu of Litigation or Arbitration

If you want to dramatically cut costs and waiting for a resolution, consider using Mediation to resolve  your  legal disputes in Mexico.

Mediation is an informal process where an impartial third-party, the mediator, helps the disputing parties find a mutually satisfactory solution to their issue. The mediator guides the parties toward a mutually agreeable settlement by helping them clarify their underlying interests and concerns, and encouraging compromise and trade-offs based on the relative importance of each item to each party.

Mediators cannot impose a resolution upon the parties since they are not able to make legally binding decisions. Any settlement reached, if in fact one is reached, is simply an agreement signed by the parties just like any other contract. The settlement does not have the same legal force as an Award which results from arbitration.

Mediation is usually well-suited to disputing parties who still have a somewhat amicable relationship, who are still able to negotiate, and who do not want a third-party to make final decision.  Statistically mediation has historically been successful somewhere between 40 to 50 percent of the times it has been used.

What do you need to do?  Put a written arbitration and mediation clause into all contracts you enter into in Mexico.  It will save you many years in Mexican courts and untold legal fees.

Email us at ddnelson@gmail.com if you want to learn more about mediation in Mexico and using it to resolve  your legal disputes.

Taxes in Mexico on Rental Properties - How to Get Into Compliance?

If you own a rental property in Mexico, the income and expenses from that property are reportable on your US tax return and in Mexico.  The tax reporting in the US is very much the same as a rental property located in the US, but you must depreciate the property over a 40 year period.

Over one-half of the Canadians and Americans who rent their Mexican properties are not paying their Mexican taxes on that income. What are those taxes you owe?

• IVA which is 16 % of your gross rental income (deductible on US return)
• Local Lodging Taxes (if it applies) in the City where the property is located (deductible on US return)
• Mexican income tax on rental income (can be credited against US tax on this income)

These Mexican taxes must be reported and paid monthly to the Hacienda and other applicable local taxing agencies.  Most of this is done on line on the internet.  Failure to do so can result in penalties and potential criminal prosecution.

In some areas of Mexico the taxing agencies search the internet for properties for rent, locate the properties and check to see if the taxes are all being paid on the rental income.  This technique is likely to spread to other areas of Mexico as time passes.

If you are not a resident of Mexico, there are additional rules and complications paying these taxes. If you wish to get into compliance, please email us at ddnelson@gmail.com and we can guide  you to an excellent service the will file all tax report and pay the taxes for you.  Best to get into compliance with these Mexican tax laws before it is too late!  Further delay may be costly.

The Settlement Company offers the service of filing and paying rental taxes on Mexican rentals for nonresident owners. Read more at www.RentalTax Mexico.com 

Arbitration Works in Mexico and it is Much Faster Than Court System

Mexico has  excellent arbitration laws.  If you live and work in Mexico, you should consider putting an arbitration clause in your next contract or agreement. Such a clause in the event of a dispute may save you untold amounts of legal fees and time.  It is a fact that in many parts of Mexico the courts are so backlogged that  can take 5 to 18 years to get a decision and during the entire period attorneys are charging additional fees.

If you have an arbitration clause in your agreement you can usually get a decision within 6 months to a year and have that arbitration decision entered with the court as a judgment very quickly.  It is also possible to remove legal disputes from the Mexican Courts and have them resolved with arbitration if both parties agree.  The parties may agree just so they both get a quicker decision and possibly a more knowledgeable decision.

When parties arbitrate they can pick the arbitrator with experience in the particular area of law governing the dispute. Often when disputes are litigated in Court, the judge has little or no background in the governing law and therefore the final decision can be arbitrary and not predictable.

Arbitration decisions in most situations cannot be appealed. But if you have chose a knowledgeable arbitrator (1 or 3 arbitrators can be used ), and it saves you waiting 5,10 or more years for a decision, that disadvantage may be worth ignoring

In lieu of arbitration of disputes, consider mediation.  When parties mediate a neutral mediator with experience in the applicable laws works with the two opposing parties to help them reach a mutually satisfactory resolution.  Statistics show that mediation has a 30 to 50 percent chance of success and it is significantly less expensive than arbitration or litigation in Court.

Want to know more about Arbitration or Mediation in Mexico?  Want the proper provisions included in your legal agreements and  wish to know how to arbitrate your legal dispute in Mexico?  To learn more email us at ddnelson@gmail.com.   Don D. Nelson, Attorney at Law, CPA.

Get Latest Mexico News Via Email in English

Do you want to keep up with the latest daily news in Mexico in English.  If so, you should subscribe to the MEXICAN DAILY NEWS to receive their daily paper by email.  It also  contains  the latest financial, tax and other information from all parts of Mexico

Everything You Need to Know About Purchasing Real Estate in Mexico

Over sixty informative articles on every subject from experts in each subject matter - http://www.mlsinbajasur.com/real-estate-articles.html

IF YOU OWN MORE 10% OR MORE OF A FOREIGN MEXICAN CORP - THERE IS NOW NEW FORM TO FILE BY 6/30/15 TO AVOID PENALTIES

US individuals and businesses may be required to disclose their foreign investments by filing a BE-10, Benchmark Survey of US Direct Investment Report Abroad (BE-10) with the US Commerce Department’s Bureau of Economic Analysis (BEA), depending on their reporting requirements. The BEA prepares official US economic statistics on investment in, and by, US companies based on data that it collects through mandatory surveys. The BE-10, a five-year benchmark survey, is a non-tax form (i.e., not an IRS form).  

When are BE-10s due?

The deadline to file the BE-10 has been extended to June 30 from May 29 for US businesses with fewer than fifty foreign affiliates, for all new filers. The deadline for businesses with more than fifty affiliates is June 30. The BEA will generally grant reasonable requests for extensions if it receives such requests prior to the original deadline.

Who is required to file a BE-10?

All US persons that owned, directly or indirectly, 10 percent or more of the voting stock of a foreign corporation, or an equivalent interest in an unincorporated foreign business enterprise (e.g. a partnership), at any time during the 2014 fiscal year, are required to file a BE-10. For this purpose the term “US person” includes any individual, branch, partnership, association, estate, trust, corporation, or other organization that resides in, or is subject to the jurisdiction of, the United States.

Penalties for failure to file range from $2,500 to $25,000, plus an additional $10,000 penalty if failure to file is willful; penalty for a willful failure to file could also involve imprisonment for up to one year.

More information regarding the BE-10 report and the BE-10 instructions can be found on the BEA website.

US Businesses (both Corporate and Individuals) Must Report Receipt of Cash to IRS to avoid Criminal Time

The Internal Revenue Service is reminding businesses and individuals in U.S. and US  territories that they need to file Form 8300 if they engage in cash transactions of $10,000 or more. READ MORE HERE

All About Mexican Taxes (All types) for Gringos living, working and owning real estate in Mexico

By Linda Neil

Whether a property owner or just the occasional visitor on a beautiful beach in Mexico, everyone pays taxes, natives and foreigners. Some of the taxes are hidden and others are not. The purpose of this article is to touch on some of the important taxes levied and paid in Mexico.

Who Collects the Tax

The SAT (Servicio de Administracion Tributaria), also known as Hacienda, is the federal tax collector. It collects all federal taxes such as the ISR (Income or Capital Gains) tax, the IVA (Added Value) tax, the IDE (Tax on ,Deposits) and the IEPS (Special Tax on Production and Services). Each state government has its own taxes such as the 2 to 3 percent tax on lodgings and tourism. The municipal governments assess and levy taxes on real and personal properties.

IVA TAX: This is the Value Added Tax which is charged on goods and services. The only exemptions are medicines and food. Often this tax is INCLUDED in the price of food served in a restaurant, legal services, and the items purchased in a department or clothing store. The business owner and tax resident is obligated to file a monthly declaration with Hacienda and pay the tax on earnings. Credited against this tax are IVA taxes paid on goods and services acquired.                 

There is no IVA tax on the sale of vacant land or on the sale of residential dwellings. The tax is levied on all commercial construction when it is sold or transferred, at the rate of 16% of the value of construction, regardless of where the property is located.

IVA tax is charged on lodgings, hotel rooms and furnished homes which are rented.

The IVA tax is 16% in the interior of the country and 11% in the border zones EXCEPT for commercial construction which is charged at the rate of 16% throughout the entire country.

IEPS TAX: This is the Special Tax on Products and Services which is a new tax for 2010. It will cover certain internet and cable TV services, alcohol, cigarettes, and gaming.

IETU TAX: The Unique Rate Business Tax (Impuesto Empresarial de Tasa Unica) is a tax on income obtained for the transfer of goods, independent services and for granting the use or temporal benefit of goods. The rate is currently 16.5%of income, less deductions.

PROPERTY TAX; This is a municipal tax with assessments on properties generally being made annually. The tax can be paid in six installments (every two months) but probably should be paid in full within the first two months of the calendar year to obtain a discount. Rates vary from area to area but are often far lower than U.S. or Canadian property taxes.

ISR TAX; Literally the Tax on Rents has been described as both an income tax and a capital gains tax. It is complex and a subject of confusion.

ON INCOME. Any income generated from sources within Mexico, is taxable. From business or salary, the rates are variable depending upon the amount of income received.

On the sale of a primary residence

No primary residence is exempt from tax UNLESS the taxpayer has resided in the home for the previous five years. Proof of residency is in the form of taxpayer identification number (RFC), voter’s registration with the property address, bank statements and utility bills.
For those who have sold or transferred a primary residence within the past five years and have not declared an exemption previously, an exemption of up to 1,500 UDIs or approximately 6,500,000. Mexican pesos, is available.
This applies to nationals and to those foreigners who have established a tax residency in Mexico (obtained their tax identification numbers) and make declarations on world wide income. They must also provide documents that the property being transferred is a primary residence.

On the sale of a vacation home or rental property

No exemptions are permitted.

The tax on non-exempted transactions is 30% of the difference between the value declared in the deed and the value of the new sale, less allowable deductions or 25% of the entire amount of the transaction, whichever is less. It is very important when acquiring property to insist upon having the full amount of the sale declared in the deed, in order to avoid overpaying taxes upon sale.

Enforcement of the ISR tax on transfers is the obligation of the Notary Public formalizing the transfer. He has the obligation to enter the seller’s name and data on the internet and to check status of prior transfers.

ON RENTAL INCOME: There are several ways to calculate tax on rental income:

1. The blind deduction of 35% of total income, without deductions with tax of 35% paid on the remaining amount;
2. A 30% tax on income, less allowable deductions which include property tax, maintenance, interest on loans for construction expenses, insurance, salaries of employees and commissions paid to rental agents and property managers.
3. A 25% tax on the gross income, no deductions.
Hacienda is paying more attention to internet advertising and is beginning to inquire into the income of those who are renting their homes. It makes sense to become legal since penalties for non-compliance can be considerable. Methods one and two above require the RFC (taxpayer identification number) which can be challenging for a foreigner to obtain. Method three outlined above does not require residency or official status.

IDE TAX This is a Tax on Cash deposited into banks. In the year 2009, it was applicable on any combination of deposits made in a month totaling 25,000.00 pesos, or more. Tax was 2% of the excess. Now the tax is triggered by monthly cash deposits in excess of $15,000. pesos and the tax is 3%. This tax is thought to discourage the informal economy (the street vendors).

STATE HOSPITALITY TAX. This is charged by hotels and on furnished short-term rentals. Money generated from this tax is used for promotion of tourism in the state and varies from state to state but is generally two to three percent of the per night cost of lodging.

It is important to understand the difference between Tax Resident and Non-resident for tax purposes.

The Tax Resident is the person, citizen or non-citizen, who has acquired his Federal Taxpayer Identification Number and who files and declares taxes in Mexico on his world-wide income. Any party receiving income from Mexican sources, such as from rental or from the sale of real properties, or from business activities, is required to file. No distinction is made between citizens of Mexico and non-citizens as to tax rates.

Tax authorities in the U.S., Canada and Mexico are working together and share information. Everyday there is more cooperation between the countries due to tax treaties. It is no longer possible to own a property in one country, enjoy income from that property, and not report it in BOTH the country where the property is located, and the country where the owner lives. Failure to comply means the owner is subject to double taxation and heavy penalties when the omission to file and declare is discovered.

DIGITAL FISCAL INVOICES. As of January 2011, taxpayers must use invoices produced by Hacienda (SAT) on internet. Hopefully this will simplify the “factura” situation which at present is challenging for the tax payer attempting to obtain receipts for deductible items. .

This is an overview of the tax situation in Mexico and may vary in individual cases. For additional information and consultations, please contact the author. at www.lindaneil.com   Article is excerpted from the BAJA INSIDER at http://www.bajainsider.com/

Even  though you live in Mexico, you still must file a US tax return each year reporting your worldwide income and worldwide financial assets. Go to www.TaxMeLess.com to learn more about your US taxes.

Tax Benefits For Expats Sending Their Children to College

There are credits and deductions for many expatriates and residents if they go to college or send their

children to college. Do not overlook these possible tax credits and deductions when doing your return.

READ MORE ABOUT COLLEGE EDUCATION BENEFITS FOR EXPATS AND THEIR CHILDREN HERE 

ALMOST EVERYTHING YOU NEED TO KNOW ABOUT YOUR US TAXES AND THE OWNERSHIP OF REAL PROPERTY IN MEXICO

by Don D. Nelson, Attorney, CPA, International Tax Expert

If you own real estate in Baja Sur, almost everything you need to know about the US IRS tax reporting rules on that Mexican real estate are reported in this article.  The rules are complex, but if you plan ahead, your Mexican real estate can benefit you on your US tax return.

Owning a Full time residence in Baja Sur

The US tax rules are the same on your US return whether your primary residence is located in the US or in Mexico.  You can deduct the interest on the mortgage you incur to purchase the property on up to a 1.1 million dollar mortgage and you can deduct the property taxes you pay on the property.  Both of these are deducted on Schedule A as itemized deductions.  When you ultimately sell the property up to $500,000 of gain on the sale will be exempt from US taxes if it was your primary residence for 2 out of the 5 years prior to sale.  Your gain on sale may also be exempt from Mexican taxes if you fill all of Mexican tax law’s criteria.  You should consult a Mexican CPA to determine the Hacienda’s criteria.

Part time residence

Again the rules are the same as for a second home in the US.  You can deduct property taxes and interest (subject to the limitation of the amount for deductible interest on your first and second home under US tax law) on Schedule A as an itemized deduction.

Rental Property

Mexican rental property held through a Fideicomiso or in your individual name is treated the same as a rental property in the US and reported on Schedule E.  The only primary difference is that you must depreciate the property over a 40 year period versus 27.5 year period for a US residential rental property.  Of course if you pay Mexican income taxes on the net rental income  (and you are required to pay Mexican income tax on that income!)  you can take it as a credit offsetting any US federal  tax on the same income dollar for dollar.  Most states do not allow foreign tax credits.  You can also deduct IVA tax you are required to pay on rental income in Mexico on your US return also

If your Mexican property is used part time by you and is rented out part time as a vacation rental, the US tax vacation rental limits may reduce the amount of deductions you can take on the property.  Read more about Vacation Rental rules and limitations  in IRS publication 527.

IRS Disclosure

Though there are special forms which must be filed with the IRS to report on foreign bank accounts and foreign financial assets (form 8938) real estate held in your own name (or through a fideicomiso) is not required to be reported anywhere on your tax return.  If the real estate is held by a Mexican partnership or corporation that entity may have to be reported on the foreign financial assets form.   The fact that there is no required IRS reporting may account for many of the very expensives homes in Baja Sur that seem to be used very rarely.

Mexican Corporations

If you own commercial property and it is in the restricted zone (which is a large part of Baja Sur) and you follow Mexican law you must as a foreigner own it through a Mexican Corporation.  You are required to file form 5471 and sometimes form  926 reporting that ownership with your US tax return and capital contributions made to that corporation..

It may be to your benefit to make sure the Corporation is a  Sociedad de Responsabilidad Limitada, S. de R.L.  Only with this type of  Mexican corporation can you make an election for US tax purposes to treat the corporation’s net profit or loss  as a flow through to your US tax return which gives you several benefits including  (a) claiming foreign tax credits on your US return for Mexican income taxes paid by the corporation; (b) deducting losses from the corporations rentals on your US return to offset other income; and (c)  avoid double taxation of the gain on sale (or deducting a loss) when the corporation ultimately sells the property.

Mexican and other foreign  Bank & Financial Accounts

You may in connection with your real estate ownership in Baja Sur open a Mexican Bank account or account with a money exchange company. If the combined balances in those accounts at any time during a calendar year are $10,000 US you must file form 114 (filed on line and separate from your tax return) to report those accounts. Failure to file this form can result in a penalty of $10,000 or more.  The form must be filed by June 30th following the end of the calendar year and cannot be extended.  The Mexican banks are reporting your balances to the IRS.

____________________________________

About the Author:

Don has been preparing US Tax Returns and providing US tax planning for US Citizens living in Baja Sur for 25 years.  He offers his clients the absolute privacy of “attorney-client privilege.”  He has assisted numerous Baja residents with the procedures necessary to catch up with past unfiled US tax returns and Foreign Financial Account Disclosure (FBAR and FATCA).  His website is at www.TaxMeLess.com  and his email  is at ddnelson@gmail.com.   Phone him in Mexico at 624-131-5228 and in the US at 949-480-1235 .

DIRECTIONS FOR FILING FBAR (FORM 114) FOREIGN FINANCIAL ACCOUNT REPORT ON LINE - THIS IS DUE 6/30/15 FOR 2014

You can download step by step directions for filing the Form 114 (FBAR) to report your foreign financial accounts HERE   If you need help filing this form or want a CPA/Attorney  to file the form for you email us at ddnelson@gmail.com.   Also if you have questions on whether or not you should file the form or need to file ones for past years (the statute of limitations is six years which means if you are required to file the form you should file the past six years) please contact us. www.expatattorneycpa.com 

This means if you had combined highest balances in your Mexican Bank and Stock accounts of $10,000 US (when converted from Pesos) or more in 2014 you must file this form.  This includes accounts you own and those you just sign on but do not have any interest in!  Penalty for not filing this form is $10,000 or more per year and possible criminal penalties up to five years in prison.

Mexico's New Tax Laws on Real Estate Purchases and Improvements

By Cheryl T. Miller, Broker, Baja Realty and Invesment

A few years ago, the Mexican IRS, known as the Hacienda or SAT, made sweeping changes in their tax system.  The system they created became geared to electronic filings and the use of computers/internet for all acceptable documents, reports and files. Since then, many changes have occurred.  Among them is the requirement for all taxpayers to have electronic signatures, an RFC or Taxpayer ID number, to pay all taxes through the internet (cash at a bank is no longer allowed), to receive electronic official receipts for purchases of goods and services in order for them to be allowed as possible deductions from  income tax or capital gains tax, when a property is sold.. 

​This past July another change, without pomp, circumstance or notification, was passed that became effective September 1st of this year.  This change affects ALL real estate purchases, and ALL buyers and sellers who are foreign or national. READ MORE

IRS Tax Tip 2015-57: Ways to Pay Your Tax Liability

IRS Tax Tip 2015-57: Ways to Pay Your Tax Liability

Individual Tax Rules Including Allowable Deductions to Use on your Mexican tax filings for 2014

In the prior post we included a graphic showing the various rules in spanish which apply to your Mexican individual tax return for 2014.  It appears many of our friends and clients in Mexico are not that good with Spanish. We have therefore provided the following information on the Mexican income tax rules very roughly translated into English:

If you are from those taxpayers who this month must submit its annual statement to avoid problems with the Mexican IRS, lose fear, as there are tools to help in the process, and may even apply their personal allowances and, where appropriate, get a refund.

Aristotle Nunez Sanchez, head of the Tax Administration Service (SAT), explained that until April 30 taxpayers, individuals enrolled in the register of causes are required to submit their annual return; otherwise, will be entitled to a fine.

The obligors to fulfill this responsibility are all natural, except Incorporation Fiscal Regime (RIF) people; those receiving income from fees, leasing, business, sale and purchase of goods, dividends, premiums and other revenues, and employees who earned revenues of 400,000 pesos, as well as additional income earners salary.

He recalled his right as a taxpayer to make personal deductions. He explained that from this year individuals can deduct their personal expenses up to 10% of their income or four high minimum wages per year (up to 98.243 pesos), whichever is less.

Applications that facilitate the process

To facilitate compliance, Aristotle Núñez said you can use the applications available on the website of the SAT.

In case of an individual who receives income from wages can only access the application within the minisite Employees Annual Statement. To enter only requires RFC, password and personal deductions.

While if it is registered as an individual whose income comes from leasing, interest, business, and does not belong to the tax regime Incorporation must be submitted through the DeclaraSAT application, available on the same site. In this case, you should have on hand the RFC, password, personal deductions and monthly statements to date (in case you have any pending, you must file before making your annual statement).

The head of the SAT noted that applications are preloaded data identification, income and deductions in the case of wages, plus interest income to the information provided by financial institutions.

No income individuals also have obligations

Finally, he said, if you are discharged in the RFC for any of the above items, but not received income during the year, you need to report this situation, presenting the annual return to zero. This it can do online or call Infosat (01 800 46 36 721).

The SAT advised

To avoid complications with his fiscal SAT recommended:

• Fill each and every one of the fields of the statement.
• Declare all income which have been collected in the year.
• In the case of being obliged to have the current interim payments in 2014.
• Check the validity of electronic signatures.
• Submit your annual statement as soon as possible and no later than April 30 to avoid penalties.

Expenses you can deduct

In order to obtain a credit balance you may file tax receipts of the following expenditures:

• Payments for educational services (school) with the following buffers.Preschool 14,200 pesos; Primary 12,900 pesos; secondary 19,900 pesos; professional technician 17,100 pesos, and baccalaureate or equivalent, 24,500 pesos.
• Medical and dental fees. Drugs are included in hospital bills, analysis and clinical studies. No vouchers are from pharmacies.
• Insurance premiums medical expenses.
• Funeral expenses. Only the amount not exceeding the minimum wage of the geographic area of ​​the taxpayer, raised annually.
• Donations granted to authorized institutions. The amount of donations deducted must not exceed 7% of the taxable income of the previous year to which it is declared.
• Actual interest paid on the mortgage of house room whenever the credit granted does not exceed 1 million Udis 500,000.
• Deposits in special personal accounts for savings, premiums for insurance contracts that are based pension plans and acquisition of shares of investment companies.
• Additional contributions for retirement. The amount of this deduction shall not exceed 10% of its taxable income for the year, without those contributions exceed the equivalent of five minimum wages of its high geographic area annually.
• School transport (mandatory) of children or grandchildren.
• Payments for educational services with the following buffers: Preschool 14,200 pesos; Primary 12,900 pesos; secondary 19,900 pesos; professional technician 17,100 pesos, and high school or equivalent, 24,500 pesos.

Helpful Advice on Your Mexican Income Taxes

If you live in Mexico full time you are suppose to be filing a Mexican return as well as your US tax return each year. Here is some helpful advice on your Mexican taxes.

When you need help with your US taxes while living and working in Mexico go to www.TaxMeLess.com.  We have been doing taxes for Gringos in Mexico for over 25 years. 

CAPITAL GAINS IN MEXICO/ and USA ON REAL ESTATE SALES

With the meteoric rise of real estate prices here in Cabo, there are many people realizing gains on their homes when they sell them. When you purchase and sell real estate in Mexico for a profit, you are responsible for certain capital gains tax. This information was prepared to keep you informed about the tax system in Mexico. We also recommend you to consult a notary and/or an experienced tax advisor. Capital gains tax is based on the profit you make when you sell your property in Mexico, when property changes hands, the notary withholds a certain percentage, based on the difference between the recorded value on the title (fideicomiso) and the sales price with a variety of deductions. New Rules for Capital Gains in Mexico Starting 2007 Mexico, as well as the United States, provides its residents a capital gains tax incentive for their primary home. The new tax incentive in Mexico states that if you sell your “primary residence” after five years, you pay no capital gains. This law is in place for residents (Mexicans or foreigners), and in order to provide proof that your house is primary residence you need can provide one of the following documents: 1) Phone Bill 2) Electricity Bill 3) Local Mexican Bank Statements The documentation above needs to be addressed to the property owner, his/her spouse, or his/her ascendants or descendants using the address of the property being sold. Another distinction made on your primary residence is that the land it resides on shall include no more than 3 times the total covered area of construction for the house. This is to prevent the qualification of the capital gains exemption when a land owner sells several acres of land with just a small house on it. Article 109 XV of the income tax law called “Ley del Impuesto sobre la Renta” was recently modified and now exempts from the tax any primary residence sold for an amount no exceeding one million five hundred thousand units of investment (UDIS) which is approximately $500,000 usd as of today. UDIS is a unit of investment calculated in respect to the rate of inflation. The value of a unit is established by the Banco de Mexico, which is published on the internet at www.sat.gob.mx/nuevo.html. If a homeowner sells his house before he has resided in it for 5 years, he will be responsible to paying the capital gains tax for an amount that exceeds the one million five hundred thousand UDIS. Please keep in mind too that the capital gains exemption for your primary residence is applicable only once per year. Hopefully, this information has proven helpful to you and gives you a better idea of what you will have to pay in terms of capital gains taxes once you do sell your home here in Cabo.

Happy House Hunting,

Nick

Los Cabos Agent Nick Fong 312-725-3664(Office) 624-157-3170(Other) 773-346-6444(Fax) Email Nick US TAX NOTE; Remember you can also claim on your US tax return a primary residence gain exemption if you qualify of $250,000 if single or $500,000 if married, if you live in the house full time for 2 full years out of the five years prior to sale.  If it is a vacation property it is not eligible for this US tax exemption, but you can take a foreign tax credit for the taxes you pay in Mexico on the gain which should in most situations offset the IRS tax on any capital gains on sale.  Most states however do not allow a foreign tax credit on state returns and therefore you may owe capital gains in your state of residency. Write us for more information: ddnelson@gmail.com

Highest and Lowest Tax Countries in the World

Expats C should all move to Bulgaria. Though if you are US expat it may make no difference. Definitely do not retire to Spain, France or Portugal. As a US Citizen you will end up paying a lot more taxes.

From the Wall Street Journal.   http://blogs.wsj.com/expat/2015/02/09/the-worlds-best-and-worst-tax-rules-for-expats/

Expats Living and/or Working in Mexico are Exempt from Health Care Law for 2014

Many  US taxpayers are exempt from Obama Care  (ACA) for 2014.   One exemption is expats who live and work abroad. See below:

Citizens living abroad and certain noncitizens - You are:

• A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12-month period;
• A U.S. citizen who was a bona fide resident of a foreign country or U.S. territory;
• A resident alien who was a citizen of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and you were a bona fide resident of a foreign country for the tax year; or
• Not a U.S. citizen, not a U.S. national, and not an alien lawfully present in the U.S.

To read about the other exemptions  from the US ACA health care law, and tax read the following link  http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/ACA-Individual-Shared-Responsibility-Provision-Exemptions

We are ready to help you with these complex rules. www.TaxMeLess.com   We offer a mini consultation to give you answers to all of your expat and international tax questions. We also offer a service to review self prepared expat returns or foreign tax forms which is much less costly than having us prepare the returns.  Email. ddnelson@gmail.com 

Deducting Mexican Hurricane Losses on Your US and Mexican Tax Returns

NOTHING GOOD ABOUT THE ODILE HURRICANE?  WELL THERE ARE AT LEAST SOME MEXICAN AND US TAX BENEFITS

By Don D. Nelson, US Attorney & CPA  and  Santiago Solorzano, Mexican International Tax Attorney

If you have had to spend a lot  of money after Odile to repair and fix up your personal or business real estate and other property in Baja Sur,  there are both US and Mexican tax benefits that might partially relieve the   pain with tax savings and other benefits.  A brief summary of those rules are provided here:

US Income Tax Deductions May Be Available:

If you are a US Citizen, on your 2014 tax return you may be able to get a deduction for the costs of repairs and replacements of the damages you incurred arising from  Odile. These are available if the damage was to your vacation home, permanent residence, rental, or business. The rules are different for personal use property versus business use property

Personal Losses on real estate, furniture, and other property on your US return

Using form 4864 attached to your 2014 form 1040 you can deducted the lesser of the reduction in fair market value to you hurricane ravaged property or its adjusted basis (cost minus any depreciation).  The reduction in fair market value is best determined by a professional  appraisal of the property’s value before and after the hurricane.  The IRS will  often, though not always, allow the reduction in fair market value to be determined by the cost of repairs and replacements to bring your property up to the same condition it was before the disaster.  You will need written receipts to prove these repair and replacement costs.

To arrive at the  final deductible personal casualty loss which is  deductible on your tax return you must deduct $100 from the cost of repairs and also deduct 10% of your adjusted gross income for 2014 (that is the bottom line of page 1 of your form 1040).  You must also reduce the tax  loss by any reimbursement received from your insurance company.  

Business Casualty Losses on Your US tax return

This  would include damages to  real and personal property used in your sole proprietorship business, or rental property in Mexico.  If you business is operated through a Mexican corporation this rule does not apply unless you have for US tax purposes elected with the US IRS  to treat it as a disregarded entity on your US tax return.  These also apply to rental properties held in Fideicomisos also.

Again, you can deduct the lesser the reduction in fair market value of the business property or your adjusted basis in the real or personal property (cost minus depreciation taken for tax. This purposes).  The final deduction is arrived at by reducing the total of this figue by $100 plus any amount you have received as insurance reimbursement for the damage.

If your insurance reimbursement exceeds the amount of loss, you must report the excess amount received as a capital gain on your tax return.  For both both business and personal casualty losses no deduction is allowed for any amounts used to make improvements to the property to a better condition than it was in prior the hurricane.

You must use take the casualty deduction on Schedule A and itemized your deductions to write of your losses  as determined from the formulas above.

You can additional information and instruction in IRS publication 547 which can be downloaded at www.irs.gov.

Mexican Tax Advantages and Tax Return Deductions

Within days after Hurricane "Odile" hit Baja California Sur, a number of tax incentives were published, both at the Mexican Federal and State level. At the Federal level, the most important were the deferral of the monthly income tax advance payments and withholding taxes on wages, the immediate deduction of certain investments -in force until 31st March, 2015- and the establishment of a streamlined procedure for Value Added Tax refund.

At the State level, exemptions of the Lodging Tax -August through to December, 2014- and the unpaid Tax on the Ownership or use of Vehicles were published, along with a deferral in the payment of the payroll tax.

As regards the writing off  of losses derived from hurricane "Odile", companies and individuals taxed under the "Entrepreneurial Activities" regime are allowed the deduction of the undepreciated portion of the lost assets, provided  the original investment fully complied with the Mexican tax laws and regulations at the time it was carried out. It should be noted, however, that all amounts recovered by the taxpayer as a result of insurance payments, should be included as taxable income in the tax year they are received"

Both the US and Mexican tax rules are complex. Therefore, to achieve the maximum tax benefits available a consult a  tax expert should.

__________________________________

Don D. Nelson, Attorney, CPA is a US Tax Attorney who has been preparing returns and assisting with US tax planning for Americans living in Baja Sur for over 23 years.  His website is at www.TaxMeLess.com.  His email address for questions is ddnelson@gmail.com.  US phone 949-480-1235  and Mexican Phone in Los Cabos 624-131-5228

Santiago Solorzano.International Tax Attorney, Master's Degree in Taxation, LL.M. In International Taxation (Vienna),  Ph. D. Candidate (Pompeu Fabr La University, Barcelona), Tax Partner at Lexadvisors.  Email: Santiago@lexadvisors.com.mx , Ph. 624 142 5453     www.lexadvisors.com.mx