Q: I'm a U.S. citizen who's investing in a timeshare in Mexico. What property taxes will I be facing?
"There should be no property taxes because you won’t own the real estate," said John Harbin, principal, Law Offices of John A. Harbin in Coronado, California. Buying a timeshare in Mexico is merely purchasing a right to use the property during a given time period, he said.
However, if the property is bought as a "fractional," in which an investor actually owns an equity interest in the property, the investor might be liable for property taxes, said Enrique Hernandez, international tax partner with Procopio, Cory, Hargreaves & Savitch, a law firm in San Diego, California. Even then, you probably wouldn’t have "the direct administrative responsibility of paying the property taxes," he said, elaborating that those are generally imposed on the property as a whole, regardless whether the property is owned by one person or by various fractional owners. "The taxes will usually be paid by the property manager, the HOA [homeowners association], or a common representative of the owners."
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Fractionals are very common, especially with more upscale developments. But not all fractional interests are equally priced or offer equal access. "A one-quarter fractional interest in a beachfront property that allows use during the summer may be more expensive than one that allows use during the spring," explained Mr. Hernandez, who practices law in both California and Mexico. As a result, "it would be common that the summer investor pays more of the property tax bill than the spring investor even though both may own an equal 25% equity interest," he added.
Mexico limits foreign ownership, so "most fractional projects within the Mexican coastal or border zones are structured so that the real estate is owned by a Mexican fideicomiso, which is similar to a trust," he said.
With a fideicomiso, investors receive a beneficiary interest but "are not considered the direct owners for purposes of local property tax," he said. In both the timeshare and fractional scenarios, the costs associated with property taxes usually are passed along to the members, owners and investors through their "maintenance" fees, he said.
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In addition, investors should be aware of the 16% Value Added Tax. This charge is not a property tax but a consumption tax, similar to a sales tax, that applies to most goods and services sold and provided in Mexico, Mr. Hernandez noted. Commonly, this tax will be charged monthly or yearly on maintenance and other fees related to the ownership and use of timeshare and fractional projects, he continued.
Investors also need to know that if property tax is due and the property is sold, the buyer is liable for the tax and a lien may be placed on the property, Mr. Hernandez said, pointing out that California has a similar system.
Yet property taxes typically aren’t "something owners of high-end homes really consider," he said, citing that the yearly property tax bill for some million-dollar properties in upscale neighborhoods of Los Cabos don’t even amount to US$1,000. "Homeowner association fees are usually the biggest-ticket item for these owners."
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