Realty Executives knows you have a lot of questions about buying and selling real estate in Mexico. Here are a few of our more commonly asked questions and answers. Please contact us if you have a question.

Q: Is it legal for foreigners to own property in Mexico?
A: Yes! Under Mexican law, specific requirements exist for foreign ownership of property in the restricted zones. All of Realty Executives Mexico properties are sold through a Bank Trust. The bank trust holds the deed of property. Trusts are good for 50 years and can be renewed every 50 years. If you would like more information on Bank Trusts please email us.

Q: Will I own title to the land?
A: Yes! The title to your land will be held on your behalf by the Fideicomiso bank trust as required by Mexican law. Title insurance will be covered by an individual title insurance policy on the property.

Q: Do I have to go to separate places to obtain escrow, mortgage and title services?
A: No! Realty Executives-Mexico has in-house Escrow, Title and Mortgage services.

Q: Can the Mexican Government confiscate my land?
A: Foreigners often worry about their land being expropriated by the Mexican government. Under the North American Free Trade Agreement, NAFTA, Mexico may not directly, or indirectly, expropriate property except for a public purpose. This is the same as "Eminent Domain" in the U.S. Where it is necessary to expropriate land, swift and fair market compensation must be paid, together with accrued interest.

Q: What happens if the bank fails?
A: In the event the holding Bank should ever fail, be bought by an unauthorized Bank, etc., what happens to the Fideicomiso? Answer - the Fideicomiso will be transferred to another authorized Bank. The Bank does not own the Fideicomiso, you do!

Q: Can my family inherit my property?
A: Yes! Inheritance in Mexico is actually easier than in the U.S. since the property can be inherited directly without the delays and expense of probate as long as a will is in place. There is no inheritance tax in Mexico as long as a will exists.

Q: Can I legally own property without a bank trust if I have an FM2?
A: No, the only way a foreigner can own property in Mexico without a bank trust is to become a Mexican citizen or to have a corporation.

Bank Trust Information

The "fideicomiso" is set up through a Mexican bank for a period of up to 50 years and can be renewed for 50 years. To acquire the land the purchaser must obtain a permit from the Ministry of Foreign Affairs. The buyer can lease, sell or transfer the property to another family member, and if he dies, his property can be passed to an heir. At the end of the 100 years the property can be sold.

In the trust there are three elements: The trust Settlor (Fideicomitente) which may be a physical or legal Mexican person, who is the owner of the property which is to be placed in trust; the Trustee (Fiduciario) which, by law may be only a credit institution and which holds the raw real estate; and the Beneficiaries (Fideicomisarios) the legal or physical foreign persons who are the beneficiaries of the trust who obtain the use and benefit of the property.

The bank (known as the trustee) holds the trust deed (known as the escritura) for the person or persons purchasing the property (known as the beneficiaries). This property is not part of the bank's assets and cannot be subject to any lien or attachment for any bank obligations. The beneficiary has all ownership rights to the property and may sell, lease, mortgage or pass on to their heirs as desired under law. A bank trust is not a lease.

The Mexican government established the trust agreement as a way of protecting foreigners interested in owning property in Mexico. The reasoning was that by making ownership pass through the trust process, there would be an automatic review of the transaction to ensure it was legal and unencumbered. The bank is required to check ownership, insurance and indebtedness of the property, providing further protection to the foreign owner.

Trusts are renewable at any time by filling out a simple application with the bank. It was never the intent that these properties pass back to the government at the end of the trust period. This is a common misconception and fear of most buyers. It may help in understanding the Bank Trust to compare it with the Deed of Trust, a type of financing instrument used in the U.S. People who buy homes, paying the full amount upfront, receive their titles right away. However, this rarely happens. Under a deed of trust the buyer of a house has only "equitable title," or an equity interest, with the right to use but only a restricted right to sell, until the loan is paid off, after which the owner receives the actual fee simple title. Until then it is held by a trustee, usually a bank or title company. In Mexico the Bank Trust is also held by a trustee, but the buyer never receives the actual title. Realistically many homeowners in the U.S. never receive title to their properties either, because they sell or refinance their homes before the 30-year term of their loan is complete.

Taxes

Property taxes are very low in Mexico as a whole. The property tax, known as a predial is .1% of the assessed value. Taxes are paid annually, with the assessed value determined at the time of sale. If you purchase a property with an assessed value of $100,000US dollars your annual tax rate would be $100.00US dollars. The reason taxes are so low is due to the fact that they have never been a source of revenue for the Mexican government

Real Estate Acquisition Tax (transfer tax): Individuals or companies purchasing real estate, consisting of land, or land and its improvements in Mexico, are subject to the payment of a real estate acquisition tax calculated at the rate of 2% of the value of the property (the rate may vary from state to state from 2% to 3.3%). All purchasers of real property must pay this tax whether the acquisition is carried out through a purchase and sale agreement, donation, trust, assignment, mergers of companies, split-off, or payment in kind.

Mexican real estate is subject to a 20% capital gains tax on the gross proceeds from the sales without any deduction. There is another option, net basis taxation up to 35% (depends on the state and the interpretation of the notary). Under this tax plan, gain is calculated by deducting from the gross proceeds (1) the original cost of acquisition, (2) the cost of improvements, (3) notarial expenses and other costs of sale, including appraisal costs, and (4) commissions. The original cost is separated between land cost and cost of buildings, with at least 20% allocated to land. The cost of buildings and any other improvements is then decreased at 3% per year between the date of acquisition and date of sale, but the cost is not decreased below 20% of the original amount. The cost of the land is increased based on changes in the National Consumer Price Index.

Formula for capital gains tax:

AV2(appraised value 2) -AV1(appraised value 1) ?Improvements - Cost of the Sale=Taxable Amount x 35%=Tax Due

Your FM2 or FM3 can help you to avoid capital gains taxes when selling your property. If someone proves they were living on their property for two years in Mexico, they can avoid paying any type of capital gains.

Individuals in the restricted zone, who are residents of Mexico (have an FM3), and who rent their rights in trust property (fideicomisos) must make provisional payments on their Impuesto Sobre la Renta (Tax on Rents) for income generated from cash deposits, credits, exchanges coming from rents or sub-rentals. The calculation will be based on one of two methods; one option is to pay 1% (on average, based on state) of the gross amount received during a three-month period, or you can opt to pay around 35% (on average, based on state) of your net profit.

In order for any authorized expense to be deductible, the taxpayer must obtain an official invoice, which is known as a FACTURA. This receipt must be printed on the press of a government-authorized printer and will contain the RFC number (taxpayer ID number) of the individual or company issuing the receipt.

Authorized items for deductions are the following:

1. Property taxes, as well as any contributions or local taxes for improvements, planning or public works expenditures.

2. Maintenance costs that are not related to improvements or additions; water payment when not paid by the tenant who occupies the property

3. Interest paid for loans obtained for the purchase, construction, or improvements of the property

4. Employees directly employed at the rental property. Salaries, commissions and /or fees are deductible, as well as taxes and benefits paid on those salaries.

5. Insurance premiums on the properties

6. Investment in construction, including additions and improvements (these expenses are amortized at the rate of 5% per year for construction and 10% for installation expenses or improvements.

Mexican residents must file a declaration with authorities by the 17th of each month. An annual declaration is due no later than April 1st the following year and the difference between provisional payments made and total tax due, based upon global Mexican income, is due with the annual return.

Mexico has signed a number of treaties to avoid double taxation with other countries and their benefit can be applicable depending on the type of transaction. Taxes that are paid on Mexican income are generally deductions on U.S. and Canadian income. It is wise, however, for the foreign taxpayer to check with his or her personal accountant to determine how to declare these foreign tax payments.