SAT is Verifying Compliance with Tax Requirements on Rental Income.

SAT, the Secretary of Attention to Taxpayers, the equivalent of the US – IRS, Internal Revenue Service, and Canada’s CRA Canadian Revenue Agency, is reviewing social media sites, including Air BnB and VRBO, to determine who is offering property for rent and who is receiving unreported income.


Evasion of tax is a criminal offense. Articles 150 to 178 of the Fiscal Code provide for imprisonment of up to six years for evasion of taxes. Not only is it a criminal offense but the taxpayer must pay the past due taxes and very substantial interest penalties which amount to 1.3% per month, compounded. Unless taxes and accrued penalties are paid in a timely manner the property can be seized and put up for auction. Additionally, in a reform of Article 118 of the Fiscal Code, no landlord may demand payment of past due rent in the courts without submitting proof of tax compliance.


The Mexican government has decreed that income generated from the rent of a Mexican property is due and payable in Mexico, regardless of where the income is received. And it is getting very serious in its efforts to collect this tax and to punish those who evade payment, whether through intention or ignorance. SAT has determined ignorance is not a legitimate excuse. This growing issue and omission now represents a glaring 1% of Mexico’s Gross Domestic Product. Mexican authorities are anxious to correct this shortfall.


There are programs in place for both Residents in Mexico and Non-Residents of Mexico, to declare and pay the lawful taxes which include both the tax on income (ISR) and, in the case of a unfurnished rental, the 16% added value tax (IVA). Realistically there is no way to legally avoid declaring and payment of these taxes. To continue to evade this responsibility will put the affected property at risk.


And the good news, due to Mexico’s tax treaties with 32 countries, double taxation is never an issue.

For details on how to clean up your tax obligation and proceed, please contact rentaltaxmexico@settlement-co.com Read more about the Mexican income and iva taxes on rental income at www.rentaltaxmexico.com If you wish to discuss your situation and how to resolve it with a US Attorney with expertise in Mexico taxes EMAIL US TAX ATTORNEY

PAY YOUR MEXICO TAX ON YOUR RENTAL INCOME OR THE PENALTIES MAY CAUSE YOUR FINANCIAL RUIN

An actual true story but the names and places have been changed to protect the guilty.

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 rentalincome 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.

If you want to pay the taxes Mexico imposes on rental income we can help.
Contact us at taxmeless@gmail.com We are US attorneys and CPAs and
can refer you to a firm in Mexico that can help with your Mexican taxes and
we can help with your US tax return on that income. Visit our website
at www.taxmeless.com for a a lot of useful information.

CONSEQUENCES FOR AMERICANS AND CANADIANS FAILURE TO PAY TAXES ON RENTAL INCOME ON MEXICAN PROPERTY

What are the consequences of failing to report the rental income in Mexico? You will be liable for not being enrolled as a taxpayer which can cost you from 2,740. to 8,230 pesos when assessed by the SAT.   The penalty for not making rental tax 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 your first violation.

Should you go back and pay in those taxes for past years when you failed to pay the rental income and VAT taxes?   If the Mexico tax authorities have not notified you are in violation of the tax code, you probably will not need to file back taxes (but there are no guarantees).   The important point is to begin paying now on your rental income from your Mexican properties and to be consistent in the future.

target="_ Remember also to pay your US taxes on that rental income. You can then claim a credit or deduction for the taxes you paid in Mexico on the same income so you are not double taxed. Have questions? Email us at ddnelson@gmail.com

Pay Your Mexican Taxes on Your Mexican Rental Income

Under Mexican law,  all income generated from properties located within Mexican territory is subject to taxation, even if the owners are foreigners and even if all funds are collected in accounts located outside Mexico.   For many years it has been a major issue for both Mexican tax authorities and individuals attempting to comply.  For years a Federal Taxpayer ID was required to file and pay the tax.   In order to obtain this tax ID one needed to be a resident of Mexico.    This was lose-lose for both the authorities and the foreigners who were willing to pay but baffled by the issues involved to “get legitimate”.

After more than five years of Settlement Company® dialogue with Mexican tax officials, a resolution was made in which the foreign property owner could appoint a Mexican company to pay his or her taxes and dispense with all other formalities.  This has become reality!   Mexican authorities are now looking seriously to collect this long-neglected source of tax revenue and foreigners not only are lining up to pay but also to receive the receipts for payment of the taxes which can then be credited against taxes paid in their native country under the terms of the NAFTA treaty.  Remember! no double taxation is permitted under the terms of the treaty!

If you have a rental property in Mexico contact us for details.  ddnelson@hgmail.com

Taxes on Rental Properties in Mexico – Your Questions Answered

What are the taxes you must pay on your rental income in Mexico?

1. Value Added Tax IVA (excise tax)                         
   
2. Income Taxes paid to SAT on a monthly basis

When are these taxes payable?

• Monthly  filed electronically

What happens if you fail to pay these taxes on your rental income?

• Serious penalties and interest can be assessed by the SAT and other tax agencies as well criminal charges might be filed.  If you manage the property for the owner, you as the manager may have liability for failing to file and pay these taxes.

How can I pay these taxes as a nonresident of Mexico on my income from my Mexican real property?

• If you are a tax resident of Mexico you can use your resident tax ID number and you have your Mexican accountant use your taxpayer identification number (RFC) to file and pay these taxes. However, if you are a nonresident of Mexico it is necessary to contact a Mexican professional or Organization (such as the Settlement Company) to file and  pay these taxes. The Settlement Company in Baja Sur Mexico has developed  legal method where these taxes can be paid by nonresidents.

How are these taxes treated on my US tax return?

• You must report your rental income and expenses on your US tax return on Schedule E (if you are an individual taxpayer).  A Mexican rental is treated the same as US rental in most respects. You can as a rental expense deduct the  IVA tax and local lodging taxes. You can claim the Mexican income tax paid on your rental income as as credit directly offsetting your US tax on the same rental income dollar for dollar. You do not get double taxed on your US tax return

If you need assistance paying your Mexican income and value added taxes (IVA) on your Mexican rental property go to www.rentaltaxmexico.com for more information and assistance.

We can help you with you US tax planning and return filing requirements for your rental property in Mexico. If you fail to follow the best procedure and in many cases make a special US tax election, it can have adverse tax consequences.  Email us at ddnelson@gmail.com for more.

Best Mexican Corporate Forms for US Tax Purposes

Which Type of Mexican Corporation to use?

There are two types of Mexican corporations as listed below. When, as a US Taxpayer, you chose a type for your Mexican business or real estate, the US Tax Consequences can differ and have significant affect on your US taxes. Below we discuss the US income tax consequences of each type of corporation.


1. Sociedad Anonima (S. A.) and Sociedad Anonima De Capital Variable (S. A. De C. v.) are
negotiable stock corporations of two or more persons whose liabilities for acts of the corporation
are limited to their capital contribution.

This type of corporation will always be taxed as a foreign corporation.  The corporation will pay taxes in Mexico on its income and if it pays out dividends to you the owner, you will have to pay taxes again on those dividends on your US tax return.  Therefore its income  is subject to double taxation.  You as shareholder do not get to deduct is losses on your US income tax return or claim any foreign tax credits the taxes the corporation pays in Mexico to offset any of its income distributed to you.

If the corporation sells its business or assets, it will pay tax on that gain on its Mexican corporate tax return and when those funds are distributed to you, you will have to report that distribution as income on your US return and cannot claim any tax credits for taxes paid against that income in Mexico unless you make a Section 962 election which will allow you to claim the foreign tax credit, but will subject that income to taxes at the US corporation tax rates (which can be higher than your individual US income tax rate). Form 5471 may have to be filed for this entity depending your ownership percentage.


2. Sociedad De Responsabilidad Limitada (S. De R. L.) and the Sociedad De Responsabilidad
Limitada De Capital Variable (S. De R.L. De C.V.) are nonnegotiable stock limited liability
corporations of two or more persons whose liabilities for acts of the corporation are limited
to their capital contribution.

The tax consequences of this type of Mexican corporation are the same as stated above unless you make an election (which is only permitted for this type of corporation) to treat it for US tax purposes as a a disregarded entity(if you are the only shareholder) or a flow through partnership.  This election must be timely made with the IRS. Only a  S. De. R. L. can make this election.  Mexican attorneys have stated that it is possible to convert to this type of corporation if you erroneously incorporated as a S.A. de C.V.

After the election is filed this type of Mexican corporation is treated for US tax purposes very similar to a  US partnership or LLC.  All income or losses of the Mexican corporation flow through to your US income tax return and are taxed on it. Any Mexican income taxes paid by the entity can be claimed as foreign tax credits against the US tax on the income that you are taxed on.  If it has capital gains, those capital gains will be taxed on your US return the same as US capital gains.  The clear possibility of double taxation is avoided when this election is made.

The S. De R.L. often works out best if the corporation owns Mexican real estate that will generate losses while rented out and capital gains when sold.  It also works out well when an Mexican operating business will generate losses its  early years and  later when profits are made the owner expects to pull them all out from the corporation for his personal use.

The income or loss after the election is filed is included on your personal return if you are the sole shareholder or if there are several US shareholders, the income is reported by filing form 8865. We know Mexican tax law and how to best structure your Mexican business or real estate ownership to achieve he optimum US income tax benefits. www.taxmeless.com 

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MEXICO RENTAL INCOME…………….PAYING TAX IS NOW EASIER THAN EVER AND WITH STATESIDE BENEFITS!!

by Linda Jones Neil

Those who have rental properties in Mexico can now rest easy. SAT, Mexico’s Uncle Sam, has provided a straightforward and relatively simple way to declare and pay taxes on rental income for those foreigners who have long wished to be in compliance but did not know the way to do so.

As of February 2010, SAT eliminated the requirement for a taxpayer identification number (RFC) which had previously been obtained only through extreme efforts,

Now the foreign taxpayer has two options: One to obtain the taxpayer identification number (RFC), file monthly declarations whether there is income or not, and enjoy a deduction of expenses. This is Option One.

Option Two provides for the taxpayer to make a declaration when income is received, pay a flat tax and obtain a receipt to take to the tax authorities in his/her tax residence, for credit or deduction of taxes in the home country.

On any rental the owner, or his/her property managers, are responsible for collecting the IVA tax (the added value tax) which is 11% on the Baja Peninsula and the Yucatan peninsula and 16% elsewhere. Owner or property manager must also collect the state hospitality tax which is 2 to 4% of the rental amount. These taxes must be delivered to the federal and local governments, as applicable.

It is important for the foreign person with rental property in Mexico to make arrangements for payment of these taxes since penalties can be high in Mexico for non-payment and, additionally, these same tax payments and expenses can be deducted or credited against income in taxpayer’s home country.

The next part of the equation for the US taxpayer has been deciding how to declare this income and enjoy the deductions in their US returns.

Don Nelson, Attorney and Certified Public Accountant located in California reports the following regarding tax treatment for U.S. taxpayers:

• If the Mexican rental property owned in an individuals name or through a Fideicomiso, all rental income and expenses are reported on Schedule E of the form 1040.
• Allowable rental expenses are the same as for a US property.
• Management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance…ALL are deductible!
• Depreciation on a Mexican property is 40 years straight line
• Taxpayer can take a Foreign Tax Credit against the US income tax paid on the net rental income for income taxes paid in Mexico on that income.
• IVA (added value tax) collected from the renter must be included in rental income, but then deducted out so no double taxation.
• The special Vacation Home rules applicable to US rental property occupied part time by the owner is also apply to Mexican rental property.
• IN A SALE OF THE PROPERTY, net gain is taxed in the US at the applicable lower capital gains rates and Mexican ISR paid is a credit against that US tax on that profit.

For further information on the Rental Payment Program for Mexican properties, please contact: Lic. Quirino Parra: quirino.parra@settlement-co.com.

For further information on the payment of US taxes when Mexican income is involved, please contact attorney and CPA Don D. Nelson: ddnelson@gmail.com . His website is at www.taxmeless.com.

Author Linda Neil is the founder of The Settlement Company. It is the first escrow company in Mexico, and is dedicated to counseling buyers and sellers, processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located ANYWHERE in Mexico and, now, for payment of taxes on rental income for foreigners with properties in Mexico.. Ms. Neil is also licensed as a Real Estate Broker in California, is an Accredited Buyer Representative through NAR, and has over thirty five years of hands on experience in all aspects of Mexican real estate. She holds membership in AMPI, NAR and FIABCI and PROFECO Certificate 00063/96.

E-Mail; linda.neil@settlement-co.com Web Site: http://www.settlement-co.com.

copyright 2011, Consultores Phoenix, S.C., reproduction prohibited without permission.