Mexican Taxes on Rental Income - What are those taxes? What are the penalties if you fail to pay those taxes?

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.   

Want to know more about rental taxes in Mexico or locate an experienced rental tax service to handle those taxes for you? The Settlement Company in La Paz offers a service which files and pays these rental taxes for nonresidents on their Mexican rental income. Read more at www.rentaltaxmexico.com

IRS Issues Explanation of When it will not charge Penalites for filing FBARs (TDF 90-22.1 forms) Late

FBAR filing requirement

As a United States citizen, you may be required to report your interest in certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).  For information about FBAR reporting requirements, including reporting exceptions, seeForm TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

 How to file an FBAR

For information about how and where to file an FBAR, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late.  You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR.  As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause.  Keep copies, for your record, of what you send.

  Possible penalties for failure to file FBAR

If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty.  Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation.  See 31 U.S.C. § 5321(a)(5).  Note that this penalty is applicable only in cases in which there is willful intent to avoid filing.  Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.  There is no penalty in the case of a violation that IRS determines was due to reasonable cause.  For more information about the FBAR penalty, see Form TD F 90-22.1.  For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).

Example 3:  Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR.  The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause.  The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances.  Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case.  Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account.  There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause.  No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.  As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause.  No single factor is determinative.

Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter.  See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).  The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate.  Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.

Example 4:  Taxpayer is a United States citizen who lives and works in Country B as a computer programmer.  Taxpayer has checking and savings accounts with a bank that is located in the city where he lives.  The aggregate balance of the checking and savings accounts is $50,000 during the tax year.  Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns.  Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts.  After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR.  Taxpayer also filed federal income tax returns properly reporting all income and no tax was due.  The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances.  Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due.  Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case.  Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

 New reporting requirement for foreign financial assets

A new law requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 to report those assets to the IRS.  This reporting will be required beginning in 2012.  Taxpayers who are required to report must submit Form 8938 with their tax return.  See Notice 2011-55  for additional information about this reporting requirement under IRC section 6038D.

Form 3520A due on 3/15/11 For Your IRS Reporting Requirement for Fideicomisos

Report your Fideicomiso to Uncle Sam

Form 3520A is due on 3/15/11 to comply with IRS requirements for reporting your Fideicomiso. That form can be extended until 9/15/11 if you file form 7004 by that due date. The related Form 3520 is due on the extended due date of your personal tax return.

If you have a US Corporation or LLC, those returns are due on 3/15/11 also for the 2010 tax year unless you file for an extension. There are now stiff penalties for not filing these returns on a timely basis based on the number of months it is filed late and the number of shareholders or members of the entity.

IRS Today Announces New Voluntary Offshore Disclosure Program for 2011 for Undisclosed Foreign Assets and Financial Accounts

The IRS TODAY announced a New 2011 Voluntary Offshore Disclosure Program which will be available through August 31, 2011. It gives taxpayers who are hiding assets abroad, or not disclosing those assets on their tax returns as required by tax law , or those who failed to  file the required forms disclosing their assets abroad asecond chance to come out of the closet. The new program will give participants  reduced penalties from those they would have paid if they did not enter the program. The new program's penalties however are in many circumstances higher than those charged participants in the 2009 Offshore Voluntary Disclosure Program which ended 10/15/09.  Over 15,000 taxpayers participated in the original program and over 3,000 taxpayers have  since that time have filed to  disclose foreign bank accounts which had not previously been disclosed to the IRS.


Many informal estimates indicate that there are a large number of US Citizens not disclosing their bank accounts, real estate and corporation ownership in Mexico. This program offers the opportunity to reduce your potential criminal and civil penalties if you have not been reporting these assets as required by the Federal Tax Laws.

Read more about the program here.  Our firm counseled and represented many  clients concerning the previous Disclosure program. Please contact us if you need assistance of an Attorney CPA with this New program.You can discuss your situation and we can help you develop a strategy with the protection provided by the confidentiality of Attorney-Client Privilege.