The ocean's wonderful sights and smells and the peace of living or vacationing along Mexico's 6,000 miles of coastline is a powerful attraction for foreigners. But before purchasing vacation property or a retirement home on or near the beach, there are a few important legal and technical matters to keep in mind.
Foreigners are welcome to invest in property along the coast, but there are restrictions. The most important restriction is contained in Article 27 of the constitution which states "that foreigners cannot own property within 100 kilometers (60 miles) of the border and 50 kilometers (30 miles) of the coastline." The government, however, provides two ways to get around this restriction - through the use of a Trust (Fideicomiso) or a Mexican corporation.
How Does the Trust Work? - Three parties are involved in the trust:
- The trustor (the owner of the original property)The trustee (which is the bank)
- The beneficiary (the person who will receive the benefits of the trust.)
The Trust, which in Mexico is called a Fideicomiso,
does not give direct ownership to the foreign beneficiary. Instead,
it establishes the legal basis by which the bank holds legal title
to the property in order to act on the foreigners
behalf. This trust deed assures the foreign buyer of all rights and
privileges of ownership. The Foreign Investment Law, a Constitutional
amendment created in 1973 and amended again in 1994, allows the trust
to be established for a term of 50 years and is renewable any time
during its existence, forever.
The Bank (trustee) holds the trust deed for the person who purchases
the property (beneficiary). The property is not part of the bank's assets and cannot be liened or attached
for any other obligations. You, the purchaser, are the beneficiary
and have all rights of enjoyment of the property including the ability to remodel, lease, mortgage, pass to their heirs
or sell the property at any time.
The Mexican government established the trust system as a protection
for foreigners interested in owning property in Mexico.
By making ownership pass through the trust process, the bank is required
to check ownership, insurance, and liens against the property. There
would be an automatic review of the transaction, thus ensuring:
- Valid Ownership
- No outstanding indebtedness of the Property
Bank Trusts may be granted and extended in 50 year periods. If you
purchase property, the existing trust deed may be
assigned or a new 50 year trust created. Trusts are renewable at any
time by simple application. The costs to establish a fideicomiso trust
vary from bank to bank. However, the range is approximately $1,000
to $1,500 U.S. dollars for the trust set up and about $300 to $500
U.S. dollars for each year's maintenance of the trust. These fees
are paid directly to the bank that has your trust.
Bank trusts are established by a Mexican Notario (Notary), following
the receipt of a permit by the Minister of Foreign Affairs. This procedure
is routine due to the large number of foreign property owners. The forms are standardized and the entire process is usually
completed by the notary as part of the closing procedures.
What does the Bank Do? - It is an important link between the
foreigner and the government. The bank accepts full technical, legal
and administrative responsibilities and protects the beneficiary's
interests. While the bank is the technical owner of the property,
they have a statutory responsibility to follow the beneficiary's (YOUR)
instructions concerning the property. Therefore,
the control of the property is in your hands - not
the bank's.
What can the Foreigner Beneficiary Expect from the Trust Agreement?
- The beneficiary can occupy the property for
the life of the trust.Title to the property can be transferred to
the foreign beneficiary in the event that he acquires legal capacity
to hold such property, or to any legally qualified
person he/she may designate.The trust can also be heired to your family by naming them as
substitute beneficiaries in the event of your death. The property can also be sold to a person legally authorized to own land or
to a foreigner via a trust.
- The property may be rented with prior approval
from the ministry of foreign affairs.
Beneficiaries are allowed to modify their property.
Construction, in accordance to local zoning regulations, is permitted
at the owner's expense.
Closing Procedures - Once your offer of purchase and sale has
been accepted, the closing process begins. To validate the Offer of
Purchase and Sale, a deposit (normally 10% of the purchase price)
is required. The money is held either by your attorney, notario, real
estate agent, or placed in an escrow account. These funds
are held during the time needed to close. The balance is payable upon
the signing of the trust deed at the office of the Notario. Most real
estate agents have one or two notarios with whom they usually deal.
In order to obtain the trust deed, the notario will:
- Ensure the property is free and clear by checking
the Land Registry Office. This is guaranteed by obtaining a non-lien
certificate and tax statement from the treasury. Additional checks
are made for outstanding utility bills and municipal taxes.Obtain a permit from the Minister of Foreign Affairs to establish the trust deed.
- Prepare all documents for both buyer and seller.
When
the above has been completed, the notario will present your
representative with a statement of remaining funds due and, once paid,
will present the legal transfer papers to be signed by the seller. The
entire closing process takes between 30 and 60 days.
The Closing Costs - Closing costs are paid by the Buyer and
depend on the value of the property purchased. They
include a transfer tax (ISAI) of 2% which goes to the Mexican government,
an average of 2% for legal Notary fees, a registration fee of .05%
of the assessed value of the property, fees for the tax certificate,
title search fees and property appraisal, as well
as miscellaneous office expenses.
The Seller pays all capital gains taxes and real estate fees.
Capital gains taxes are 35% of the difference between assessed values
at the time of purchase and sale, with adjustments made for inflation
and capital improvements.
Capital Gains Taxes
Tax law in Mexico requires a Capital Gains Tax to be paid on the
profit received from the sale of your property, this is calculated
from your 'cost basis'-the amount recorded by the Notary at the
point of transfer/sale. It is important that you understand how this
works, to avoid future loss that could have been a profit!
The only people exempt from capital gains tax in Mexico, are
those who have had their primary residence here for two or more
years. You are allowed only one primary residence to secure the tax
advantage; this includes property you may hold in the States.
This law is for Mexican Nationals or Foreigners holding their FM3
or FM2 visas and work permits.
There are two options when paying capital gains tax, they are:
- 34% of the net profit; the tax deductions included in this
option are substantial.
- 25% of the gross sale amount, with no deductions.
You may choose either option, whichever is the lesser.
To keep it simple, you need to understand that attempting to cut
costs by recording a lower purchase price, to lower the 2%
acquisition tax, will end up costing you far more when you decide to
sell. Do not let anyone tell you otherwise, and always discuss your
options with a tax professional.
It works like this:
You purchase your property for 500,000 but record the value as
$300,000 to lower the 2% acquisition tax. Your cost base will now be
calculated from $300,000. So, if you sell for $600,000, you may
think you have made a profit of $100,000, but the Mexican government
sees a profit of $300,000 and will tax you 34% of this amount
($102,000) in effect, loosing you $2,000. So it is best to take on
the seller's capital gain (profit margin) and record amounts justly
or you will end up paying their liability. Considering the forecast
rise in property prices, you will be better off in the long run.
An added bonus in paying the 2% acquisition tax is that you
become eligible to receive an 'inflationary credit'. Calculated
quarterly, the credit is added to your cost basis when you choose to
sell; this in turn can greatly reduce your capital gains tax. You
can not receive this credit unless you pay the 2% tax.
The Mexican Notary - In Mexico, certain attorneys
are designated by the government as a Notary, and their services are
required for the legal transfer of real estate. They
are an unbiased, official representative of the government and have
a fiduciary responsibility to both parties and sanctions the contract
from a tax and legal point of view.
Property Taxes - Property taxes are very low
here. The property tax, known as "predial" is a rate
of .08% of the assessed value, paid every bimester. The assessed value
is determined at the time of the sale. Historically, property taxes
have always been low because they have never been perceived as a source
of revenue for the government.
Millennium Vallarta Real Estate & Investments has arrangements with several banks and notaries who will assist in
setting up the trust. English-speaking personnel, as well as publications,
are usually available to answer questions about trusts.
How does the Corporation Work? - Ownership of property through a mexican corporation is an interesting and potentially lucrative
alternative. First of all, as long as there are two or more parties
to the corporation, a Mexican corporation can be wholly owned by foreigners
- a Mexican citizen no longer need be part of a Mexican corporation
to be valid. Secondly, a Mexican corporation can own property outright,
eliminating the need for a fideicomiso trust and their respective
fees. This means that you, as sole owners of the corporation, own
the property essentially in "fee simple," similar to the U.S.
Finally, by establishing the property in a corporation, you can then
legally rent out the property, thereby generating attractive income
if you are in a prime vacation destination such as Puerto
Vallarta. Mexican corporations are set-up similarly to those
in the U.S., with by-laws, articles of incorporation and the issuance
of stock. You should discuss the pros and cons of forming a Mexican
corporation with an attorney in Mexico who is familiar with the process.
Establishing a Mexican corporation for the purpose of purchasing real
estate is relatively simple and can be accomplished within
1-2 weeks and generally costs from $1,500 to $2,500 USD, depending
on the complexity and number of partners involved.
Contact Millennium Vallarta Real
Estate & Investments HERE for additional information and
professional assistance regarding all of your real estate needs in Puerto Vallarta.
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