What You Need to Know About Your Rental Property and Mexico’s tax laws.
The Mexican Government has made it possible for foreigners to acquire property in the restricted zones in Mexico. Now foreigners can purchase beach front property, and many will use this property as a rental income property. For years foreign property owners have not paid their rental income taxes. Vacation property income seemed to fall under the radar of taxable income in Mexico, until recently.
Whether you are investing in Mexico, doing business in Mexico or retiring in Mexico, you need to learn about the Mexican tax system. Consult a tax attorney in Mexico when you make an investment purchase or rent out your home.
The Federal Government expects foreign owners to follow the Mexican tax laws that come with owning property investments in Mexico. Any rental property in Mexico, whether it is just a small suite or a luxury condominium, whether you rent it part time and live there part time or you rent it full time, these tax laws apply. Many foreign home owners in Mexico are not complying with the laws, whether they choose not to, because they think anything goes in Mexico, or they are not aware of the Mexican tax laws and tax system. The reality is you can not escape taxes, no matter where you live. Avoiding these laws will put their homes at risk.
Some foreign owners assume they do not need to pay taxes on the property because the income for the rent is paid to their home country bank account, this is not the case. Any rental property in Mexico is subject to tax in Mexico, no matter which country or bank account the rent is paid to.
The Mexican tax laws have become more regimented over the years and the Mexican government has procedures in place to act on those who do not report this type of income. There has recently been a crackdown in Playa del Carmen, many homeowners that use their property as vacation rentals have received notice to ensure they are registered as rentals and claim the income they are receiving. Most rentals are listed on social media or Airbnb, making it easy for the government officials to find properties being used as a rental. It is not unheard of for authorities to base taxes and penalties on a perceived rental income by using the areas occupancy rate, which will be much more expensive for you in the end.
El Servicio de Administración Tributaria (SAT) branch responsible for applying taxes for la Secretaría de Hacienda y Crédito Público, states that there will be a 25% rate on the income from a rental, before deductions. The tax must be paid within 15 days of receiving the income, either through a bank teller or by online payments. If you are not living in Mexico you will need to have an accountant taking care of your investment and making the payments for income tax to SAT.
Expenses for the property can be deducted with the correct receipt/factura. Some deductibles may include management fees, property taxes, utilities, repairs, maintenance, strata fees, insurance, depreciation, and other upkeep expenses.
Also due is IVA Impuesto al Valor Agregado, (Value Added Tax) which is like a sales tax. It is 16% in the Riviera Maya. The IVA tax is due on the gross amount of the rent charged for the rental term and can be charged to the renter.
If your tenant pays their rent through a trust company, the trust company must issue a receipt, they will withhold the tax and pay on your behalf. In case payments are made in foreign currency, tax will be paid by conversion to Pesos.
Since your income from the rental property should be accounted for in your US or Canadian income tax, you will not need to pay double tax in Mexico. There are Mexican tax treaties with the United States and Canada. Remember, that the NAFTA countries do share information about investments and income tax, so it is important to report your investment income or rental income in both countries.
To avoid being double taxed, provide the Mexican government with a copy of your tax residence certificate or the most recently filed income tax, to prove you are a resident in the treaty partner country.
By creating a Mexican corporation, which only requires 2 owners, you may then buy property in a restricted area and legally use it as a vacation rental. Creating an income and enjoy the benefits of doing business in Mexico.
Discuss the pros and cons of forming a corporation in Mexico with an Mexican tax attorney to find out which is the best option for you as a property owner and landlord in Mexico.
It is very important that you consult with an accountant to learn about the Mexican tax system and ways to avoid any penalties. An accounting team and tax attorneys, such as MexLaw can help you lower your taxes and ensure you are receiving all the deductibles and discounts available.
Property owners that do not comply with these laws may lose their rights as the property owner, face possible jail time, fines, deportation from Mexico and forced sale of the property.