3 Examples of How Taxes on Mexico Rental Properties Work

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.

Taxes You May Have to Pay as a Gringo in Mexico

There are some things about Mexican taxes you need to know if you are spending a lot of time anywhere in Mexico.

• If you spend over 183 days in Mexico you are considered a permanent resident under Mexican tax law and are liable for their income taxes on your worldwide income. The enforcement of this rule is lax in many areas of Mexico, but since Mr. Trump is causing Mexico problems they may start to enforce it.  Their tax rate is much higher than the USA.
• If you own property you rent out in Mexico even for a short time when you are no there, you owe VAT tax and income tax on your earnings. You are suppose to collect the VAT tax from the renter and pay income taxes on your rental income.  You can read more about the rules and how to pay these taxes if you do not have a Mexican tax ID number at: www.rentaltaxmexico.com
• If you sell real property in Mexico, it is the notary who handles the transfer that determines the amount of tax you pay on your gain.  How this is calculated does seem to vary.  If you are a permanent resident and you meet the criteria, and the property you are selling is your personal residence, that gain on sale may be exempt from tax.  See you Mexican accountant to learn the exact rules since the specifics as reported seem to be difficult to determine.
• If you have a commercial property or business, and wish to own or operate it in a Mexican Corporation, it is best to use the form of corporation that is a Sociedad de Responsibilidad Limitada (SRL), since you can make certain elections for US tax purposes that make it a flow through entity and thus you will not suffer double taxation on your US tax return and can claim tax credits for the income taxes it must pay in Mexico
• Email us if you need help with your US tax planning for Mexico.  ddnelson@gmail.com

Taxes on Real Estate Rental Income in Mexico / Frequently Asked Questions

FAQ..................,RENTAL TAXES- PAY THEM and BE LEGAL IN MEXICO OR FACE CONSEQUENCES

IS A TEMPORARY VISA REQUIRED?

I read an article on the internet about your services.  We have spoken to an accountant in PV about paying taxes on our rental income.  One accountant has told me I need to get my temp visa. This seems like a hassle when I am using the condo only a short time each year.   What is your take on this?

Ronnie from Puerto Vallarta

 

Hi Ronnie:

Thanks for your email.  Per Articles 158 and 159 of the Tax Code, a visa, other than a tourist visa when you visit Mexico, is NOT necessary.    As a non-resident you may rent your property and pay taxes in compliance with Mexican law.   Additionally, due to treaties, there is no double taxation and expenses of your property can be deducted in your country of residence

 

IS RENTING MEXICAN PROPERTY PROHIBITED?

I have been told that the standard bank trust wording for foreign individuals does not permit the rental of residential property at all.   How can you offer to pay taxes on income on a prohibited activity?

Jim from Playa del Carmen

Hi Jim.   I have seen only one trust document that prohibited the rental of trust Property and that was declared illegal. The foreign investment law specifically permits the beneficiary (foreigner) to rent, sell, modify their properties and to collect the profits therefrom.      Many trusts state that the bank must pay the taxes, but we know that will not happen.   It has been our experience that if the foreigner pays his/her taxes on rental income and has the receipts to prove it there is absolutely no quarrel with Mexican officials.  

            What can happen, however, is that your condominium administration may prohibit rentals in the complex, in order to satisfy owners who do not want a whole lot of rental traffic.   This is legal if the owners agree to put this clause into their own HOA rules.

 

 

OUR PROPERTY TITLE IS IN AN LLC.   HOW CAN WE PAY TAXES ON THE INCOME?

Marilyn from Cozumel

Hi Marilyn.   Thanks for your question!  We have copies of your documents translated and authorizations prepared in the name of the LLC and signed by the legal representative.  With this we can pay your taxes and provide you with receipts which will be accepted by the tax authorities in your country of residence.

 

IS THE FIDEICOMISO THE PROPERTY DEED?   

June from Michigan with property in Ixtapa.
Yes, the Fideicomiso to hold property in the restricted zone of Mexico is both a contract with the Mexican bank to hold your title as trustee, and also is the deed to your rights in the property.

 

WE HAVE HEARD THAT OUR PROPERTY CAN BE SEIZED BY THE GOVERNMENT IF TAXES ARE NOT PAID MONTHLY.   IS THIS TRUE?

 John from Puerto Penasco

Yes.   Definitely failure to pay taxes on income is a violation of the Mexican law and property can be attached and sold as payment for past due taxes after a procedure similar to those used by the US and Canada tax authorities.  To date the Mexican tax authorities have not aggressively pursued violators, but this is changing as they have access to internet and rental promotion programs.

 

PAYING TAX ON YOUR RENTAL INCOME FROM MEXICAN PROPERTIES IS A MUST, WHETHER YOU LIVE IN MEXICO OR NOT.  GET LEGAL and AVOID THE CONSEQUENCES OF TAX EVASION!

 

FOR ADDITIONAL INFORMATION, PLEASE CONTACT GO TO WWW.RENTALTAXMEXICO.COM 

Or Email to    info@settlement-co.com     rentaltaxmexico@settlement-co.com

 

 

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.