Rental taxes on foreign property owners in Mexico, municipal taxes, IVA, and Mexico Income Taxes

               According to some very sharp Mexican  rental tax accountants, foreigners renting a home or condo (or even two of them) should not be liable for the 3% hospitality tax.   It is a municipal tax designed to be paid by hotels and larger establishments who do business generated from tourism, not the little guy with a unit or two who rents periodically.  

AirBnB is currently negotiating with collecting  the  tax for local governments who love them by promising increasing income.  No tall vacation rental sites are doing this.

What they do not consider is the FEDERAL taxes that are all important and charged by SAT.  For the non-resident owner of a home or a condo who rents it out the tax is 25% of gross income and there is an additional obligation to collect the 16% IVA tax and send it to the SAT authorities.   Additionally it is necessary for the non-resident foreign owner to appoint a Mexican company or individual to collect and pay their taxes for them.

All these payments are then deductible or can be taken as credits on that same rental income as required to be reported on their US federal and state tax returns. Therefore there is no double taxation

Failure to declare and pay Mexico's FEDERAL taxes can result in heavy fines or even loss of the property.  The same can be said for failure to report to the IRS.

If you need information on the US tax consequences of your foreign rental property and how to reflect it on your return email: ddnelson@gmail.com

Better Pay your Mexico Taxes on Your Mexico Rental Property or Else

The Facts:

Bill and his wife Sarah rent out their  condominium in San Jose Del Cabo for 5-6 months out of the year on a

weekly or monthly basis to tourists.  They never paid any Mexico rental taxes. 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 it True that you do not have to pay Mexico Taxes on your Rental Income?  No!  Definitely not!   Bill and his wife must pay taxes on their income which is generated in Mexico!

If Bill and Sarah are NON-RESIDENTS of 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.

And  what about Phil? …………..another NON-RESIDENT with property in Mexico.

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 as required..

THE ABOVE IS FOR NON-RESIDENTS.   IF A FOREIGNER IS A RESIDENT OF MEXICO,  OR A MEXICAN CITIZEN, TAX TREATMENT IS DIFFERENT:

I.          RESIDENTS in MEXICO can obtain their taxpayer identification number, electronic signatures and file taxes monthly using a blind deduction of 35% of income and paying tax on the remainder.   No receipts are required for this tax payer status.   An annual declaration must be filed in addition to monthly declarations.

II.         RESIDENTS in MEXICO can obtain their taxpayer identification number, electronic signatures and file taxes monthly declaring all income and providing receipts for certain allowable deductions.  Tax on a sliding scale is assessed on the profit.  .   An annual declaration must be filed in addition to monthly declarations.

NO DOUBLE TAXATION:  Income taxes paid in Mexico are eligible for US tax credits against the US income tax on the same income. That is a dollar for dollar offset.  You can deduct IVA as an expense on your US tax return.

US TAXES ARE ALSO DUE:  Many Americans do not report their rental property on their US tax return.  It must be reported or you will incur severe penalties.  You may also have to file special forms if you have a foreign bank account , have a foreign corporation, or have significant foreign financial assets. The penalties for not filing these special foreign reporting forms are also large. Often $10,000 or more. There are techniques available to surface with the IRS with your Mexican property and other foreign assets and avoid penalties. We can help.

Want to learn more about paying rental taxes in Mexico and handling the rental on your US tax return. Contact us a ddnelson@gmail.com or phone US 949-480-1235.

Excellent Mexican Tax and Accounting Professionals in Los Cabos

L and S Accounting and Tax Consulting is a full service accounting, tax and auditing family
firm based in Cabo San Lucas, Mexico with decades of US and Mexico experience in
accounting and taxation.The partners are Sarahi Niederhaus a licensed Contadora Publica
(Mexico CPA) with ten years experience and Lance Niederhaus an inactive California
CPA with Big Six firm, cross the border, and multinational experience for over 25 years.

The Firm provides  the following Mexico services at competitive rates for individuals,
partnerships, corporations, etc:

- Accounting Services

- Fiscal Compliance Filing

- Annual tax  Declarations

- Bank Account Opening and Management

- Operational Performance Reporting

- Administrative Services

- Consulting Services (including mini consultations)

- Projections, Estimates and other Business Analysis

- Coordination with local attorneys, notaries, etc.

Unlike many Mexico accounting firms L & S understands US taxation and accounting
and can coordinate with the US rules very efficiently.

Contact them for further information and with questions at:

Mex Cell (L): +52 (624) 147-5149

Mex Cell (S): +52 (624) 128-3700

US Google Voice: +1 (949) 436-7737

Email: lanceniederhaus@icloud.com

Skype: cabolance

Our US CPA firm has worked closing with L & S with our clients in Mexico and the clients have benefited tremendously. If you have US tax question on expatriate, international or nonresident taxes please email us at: ddnelson@gmail.com. Visit our website awww.taxmeless.com

What Are the Closing Costs on Sale of Real Estate in Mexico

Purchasing real estate in Mexico is a little more costly than the USA.  The various closing costs and fees  are high. The Settlement Company has a calulator on their website which will help you calculate a projection of your estimated closing costs.  See how much they will be HERE

Buyer and selling real property be it your home or a rental or business property does have significant US tax income tax and reporting consequences as well as Mexican tax ramifications. If you wish to learn mroe please contact Don D. Nelson, International Tax Attorney at ddnelson@gmail.com. His US number is 949-480-1235 and his Mexico number is 52-624-131-5228.  Planning for costs, taxes and legal matters ahead of your purchase or sale can save you money.

Estate Planning for US Expatriates Living In Mexico for US assets

Most do not realize that the US legal system does not work well when it comes to transferring assets to deceased owners.  Probate in most states takes one to two years and costs a lot of money in attorneys fees. It also is cumbersome and all information about your estate is public.

If you have assets in the US you should set up a Living Trust which will pass your assets without probate and keep your bequests and value of your estate absolutely confidential.   Without a living trust most states require probate if your US assets values exceed certain minimal amounts.  Living trusts do not required court supervision and keep attorneys fees at a minimum.

Also you cannot count on your Mexican will since it will require probate in the US and may cause other problems and even not be recognized by some states.

A living trust is a document that during your lifetime gives you total control of your US based assets. Upon your death a successor trustee takes over and distributes the assets in any manner you have stated in the Trust. The successor trustee can be a bank or family members or other individuals whether US residents or foreign citizens.

Though you are living in Mexico, if you do have valuable US assets, setting up a US Living Trust is the only solution for fast and inexpensive transfer upon your death. Living trusts used to be used to reduce estate taxes, but now that US estate taxes only apply if the value of each individuals estate exceeds 11 million dollars that is not a consideration.

Want to learn more about living trusts, and US estate planning including US wills, US powers of attorney (much different than those used in Mexico) and health care directives email Don D . Nelson, Attorney at Law at ddnelson@gmail.com and visit our website at www.taxmeless.com 

FACTURAS AND US TAXES- FACTURAS ARE NOT REQUIRED TO DEDUCT AN EXPENSE ON YOUR US INCOME TAX RETURN

Though in Mexico you need a factura in order to get a deduction for most business expenses, that is not the rule for your US tax return.  If you get a valid  provable receipt from the vendor or service provider, you can still deduct the expense on your US tax return thought not allowed on your Mexico return.  The IRS does not require facturas though the SAT does.

Want more information on US or Mexican taxes, email us at ddnelson@gmail.com. We work closely with several Mexican accountants who can help you achieve the best results here in Mexico. Often by coordinating the Mexican  tax rules with the US rules you can achieve the best result.

MEXICO IS SECOND MOST WELCOMING COUNTRY FOR EXPATS IN WORLD

READ THE LIST AND LEARN WHY.
https://amp.businessinsider.com/ranked-10-countries-that-are-most-welcoming-to-expats-2018-3

Want to be Paul Manaforts Cell Mate - Still Time to Save Yourself

By Don D Nelson, International Tax Attorney

One of the criminal charges against Paul Manafort involves his failure to report foreign bank
and financial accounts he controlled.  All such foreign accounts must be reported to the US
Treasury each year onform 114 (FBAR) if the combined highest balances in those accounts
are $10,000US or more. Paul Manafort appears to have never filed that form and answered
the yes or no question on his tax return asking if he had foreign bank accounts “no.”

If you are like Manafort you too can spend five years in jail and pay a criminal fine of $500,000.
There are also civil fines that can go up to ½ of the balances you maintained in your foreign
bank and financial accounts.

There are several programs that will allow you to catch up with past unfiled foreign assets
reporting forms due the IRS which will reduce or eliminate your financial and criminal
exposure for failing to file the Form 114.  However, like Manafort, if the IRS for FBI discovers
your failure to file before you do try to catch up, you will be exposed to huge monetary
penalties and possible felony charges. Most foreign banks and financial institutions are
reporting your foreign balances to the IRS.  Best to take action now before you get to
know Paul better.

----------------------------------------------------

Don D. Nelson, is a US tax attorney who has been assisting Americans in Mexico
with their taxes for over 25 years. He offers his clients the absolute privacy provided
by “Attorney client privilege.” His firm has assisted over a hundred expats in Mexico
catch up with their FBAR filings and regular returns If you have questions or wish
to meet with him email him at ddnelson@gmail.com or his Los Cabos
phone number is 624 131 5228. US phone number 949-480-1235

Expatriates and US Citizens Abroad - Voting in 2018 Elections

Your vote counts!  Did you know that many U.S. elections for house and senate seats have been decided by a margin smaller than the number of ballots cast by absentee voters?  All states are required to count every absentee ballot as long as it is valid and reaches local election officials by the absentee ballot receipt deadline.

Follow a few simple steps to make sure that you can vote in the 2018 U.S. elections:

1.     Request Your Ballot:  Complete a new Federal Post Card Application (FPCA).  You must complete a new FPCAafter January 1, 2018 to ensure you receive your ballot for the 2018 elections.  The completion of the FPCA allows you to request absentee ballots for all elections for federal offices (President, U.S. Senate, and U.S. House of Representatives) including primaries and special elections during the calendar year in which it is submitted.  The FPCAis accepted by all local election officials in all U.S. states and territories. 

You can complete the FPCA online at www.FVAP.gov.  The online voting assistant will ask you questions specific to your state.  We encourage you to ask your local election officials to deliver your blank ballots to you electronically (by email, internet download, or fax, depending on your state).  Include your email address on your FPCA to take advantage of the electronic ballot delivery option.  Return the FPCA per the instructions on the website.  FVAP.gov will tell you if your state allows the FPCA to be returned electronically or if you must submit a paper copy with original signature.  If you must return a paper version, please see below for mailing options.

2.     Receive and Complete Your Ballot:  States are required to send out ballots 45 days before a regular election for federal office and states generally send out ballots at least 30 days before primary elections.  For most states, you can confirm your registration and ballot delivery online.

3.     Return Your Completed Ballot:  Some states allow you to return your completed ballot by email or fax.  If your state requires you to return paper voting forms or ballots to local election officials, you can use international mail, a courier service such as FedEx or DHL, or you may also drop off completed voting materials during regular business hours at the U.S. Consulate General in Tijuana.  Place your materials in a postage paid return envelope (available under “Downloadable Election Materials” on the FVAP homepage) or in an envelope bearing sufficient domestic U.S. postage, and address it to the relevant local election officials.

4.  New this year – email to fax service by FVAP! - the Federal Voting Assistance Program (FVAP) will provide an email-to-fax conversion service for voters who have difficulty sending election materials to States that do not accept emailed documents.  Get more information here.

Researching the Candidates and Issues:  Online Resources.  Check out the FVAP links page for helpful resources that will aid your research of candidates and issues.  Non-partisan information about candidates, their voting records, and their positions on issues are widely available and easy to obtain online.  You can also read national and hometown newspapers online, or search the internet to locate articles and information.  For information about election dates and deadlines, subscribe to FVAP's Voting Alerts (vote@fvap.gov).  FVAP also shares Voting Alerts via Facebookand Twitter.

Learn more at the Federal Voting Assistance Program's (FVAP) website, FVAP.gov.  If you have any questions about registering to vote overseas, please contact U.S. Consulate General in Tijuana's Voting Assistance Officer at VoteTIJUANA@state.gov.

NEW US TAX LAW MAY CAUSE YOU TO PAY ADDITIONAL TAX ON INCOME ACCUMULATED IN YOUR MEXICAN CORPORATION

Under pre-Act law, U.S. citizens, resident individuals, and domestic corporations generally are taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign subsidiary of a U.S. corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. corporation.

New law. Under the Act, U.S. shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary’s last tax year beginning before 2018, the shareholder’s pro rata share of the accumulated post-’86 historical E&P of the foreign subsidiary as of the ‘‘measurement date’’ to the extent such E&P has not been previously subject to U.S. tax. The ‘‘measurement date’’ is Nov. 2, 2017, or Dec. 31, 2017, whichever date produces a greater result.

The portion of the E&P comprising cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%.

At the election of the U.S. shareholder, the tax liability is payable over a period of up to eight years The payments for each of the first five years equals 8% of the net tax liability. The amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and the remaining balance of 25% in the eighth year.

The Act provides a special rule for S corporations. Their shareholders are allowed to elect to maintain deferral on such foreign income until the S corporation changes its status, sells substantially all its assets, ceases to conduct business, or the electing shareholder transfers its S corporation stock.

The Act excludes the post-’86 historical E&P from the REIT gross income tests. In addition, REITs are permitted to elect to meet their distribution requirement to REIT shareholders with respect to the accumulated deferred foreign income over an 8-year period under the same installment percentages as apply to U.S. shareholders who elect to pay the net tax liability resulting from the mandatory inclusion of pre-effective-date undistributed CFC earnings in eight installments. (Code Sec. 965, as amended by Act Sec. 14103)

NEW US TAX LAWS CONCERNING PERSONAL REAL ESTATE FOR 2018

New tax laws concerning personal real estate for 2018 and beyond under the New US tax laws.

Deductible interest on personal residences and second homes is limited to that interest paid on loans secured by those properties up to $750,000 in loan amounts.

Deductions for personal home and second home  property taxes and state income taxes are limited to $10,000 per year.

You get a standard deduction of  $ 24,000  if filing jointly and $ 12,000  if filing separately. Therefore, you mortgage interest, and property taxes and state income tax, as well as medical expenses, and other allowable itemized deductions must exceed these amounts before you get any benefit from personal mortgage interest and property taxes.

These new rules for many taxpayers reduce the benefits of personal real estate ownership including personal residences and second or vacation homes.

It is also important to note that the deductions for dependents and the taxpayers have been eliminated and replaced with only the standard deduction set forth above.

THE ENTITY CLASSIFICATION (“CHECK THE BOX”) ELECTION FOR MEXICO CORPORATIONS

An eligible entity (i.e., an entity that is not on the list of entities prohibited from electing their status) may affirmatively elect its classification by filing Form 8832 with the IRS.  iN Mexico the only type of corporation that can make this election is know as a Socidada Limitada (SRL de CV) This election effectively overrides the entity’s default classification as a corporation for US tax purposes only. It does not effect the classification as a corporation in Mexico. The election is commonly referred to as a “check the box” election, because you put a check in the box on the form next to the entity classification you have chosen for your company.

It’s important to note that the election, if not made to correspond with the company’s incorporation or creation date, can trigger U.S. tax implications. A tax advisor should be consulted if you are considering tax planning that involves a check the box election.

A foreign entity that is required to file a federal tax or information return for the taxable year for which an election is made (e.g., the company has taxable activities within the U.S.) must attach a copy of the Form 8832 to its return. If the entity is not required to file, a copy of the Form 8832 generally must be attached to the return of an owner of the entity. The failure to comply with these filing rules does not invalidate the election, but may trigger penalties.

The advantage of this election for US tax purposes is:

• All of the corporations net income flows through to the US owners and is taxed on their personal return.
• If the corporation pays Mexican income taxes the US owners can claim those taxes as a tax credit on their US return.
• It avoids double taxation of the gain on the sale of any assets of the corporation.
• Will avoid the Mexican corporation from become a personal holding company.

Email us if you have questions. ddnelson@gmail.com