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.
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