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

Everthing You Wanted or Need to Know About Mexico Real Estate

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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

Mexican Taxes on Sale of Mexican Property

You can pay 28 on the net profit on the sale of Mexican property to the Hacienda or chose to pay 25% on the gross proceeds from the sale. This is not as bad as it seems since your cost basis is adjusted up for inflation over the years that you own the property.  Read the details of the Mexican tax on property sales as set forth HERE by Snell Real Estate in Cabo San Lucas.

You do get to claim this tax as a credit against your US tax on the gain (if you owned the property individually or through a fideicomiso) which does avoid double taxation.

If you own the property in your individual name or through a fideicomiso, you can utilize or US tax purposes the $500,000 gain exemption if married (or $250,000 if you are single) on sale if you occupied it for 2 out of the last five years as your primary residence.  The primary residence gain exclusion has much tougher requirements under Mexican tax law, but those rules do not apply for US tax purposes.

The surprise arises when you sell your Mexican property that was held in a Fideicomiso and you failed to file the IRS required forms 3520 and 3520A each year.  You could incur substantial penalties for failing to file those forms or all of the years you owned the property. Sometimes those penalties can be abated.

Another problem arises when you held your Mexican real estate through a Mexican corporation and you or other US taxpayers owned more than 50% of that corporation.  Due to that manner of ownership, it could prevent you from claiming the foreign tax credit for the Mexican capital gains taxes you paid and cause you to pay high US taxes on the gain when it is distributed from your corporation which is often double taxation.

What is the solution?  When you purchase property in a Mexican corporation make certain it is the corporation known as SRL de CV.  That Mexican entity (and none other) is eligible or US tax purposes  to elect flow through status (for US tax purposes only- this election does not affect the Mexican taxes) which means any gains on sales will be taxed at US capital gains rates (if you held the property for more than a year) and you can offset that tax with the Mexican gains tax you paid on sale.  It totally avoids any possibility of double taxation.  Ask us how.