Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I’m a U.S. resident interested in buying a second home in Puerto Vallarta. I understand property taxes in Mexico are very complicated. What are the biggest concerns?
Foreign citizens can buy real estate in Mexico. But you’d want to be aware of the following:
Ownership
"Property located in a restricted area, such as border areas or the coastline, must be acquired through a bank trust," said Fernando Camarena, tax partner at Gardere Arena y Asociados, S.C., the Mexico City branch of the U.S. law firm Gardere Wynne Sewell, which has offices in Texas and Colorado. "The bank acts as trustee and holds titles to the property while the purchaser is the beneficiary of the trust," Mr. Camarena said.
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Acquisition tax
The buyer generally pays this tax that is levied on the purchase, said Enrique Hernandez, international tax partner with Procopio, Cory, Hargreaves & Savitch, a law firm in San Diego, California. The tax is different in each Mexican state, but the rates range from 1.8% to 4.5% of the value of the property, Mr. Camarena said. In Puerto Vallarta, the tax could be as much as 3%, he added.
Notary fees
It’s advisable to have a Mexican notary public execute the purchase contract, Mr. Camarena said. These fees, which "together with other closing costs, could go up to 5% of the value of the property."
Value-added tax
This 16% tax applies only to the purchases of new, not used, property, said Mr. Hernandez, who also practices law in Mexico.
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Income tax
Rental income and net capital gains are usually subject to income tax through withholding on a gross basis and at a 25% rate, Mr. Hernandez said. But U.S. residents can choose to be taxed on a net basis at 35%, he said. When the property is sold, he added, "the tax is generally levied at a flat 35% tax on the net capital gain realized by the seller and it is withheld by the notary."
Property tax
Owners of real estate in Mexico must pay a yearly state property tax, which varies depending on the state, but it isn’t "a significant amount," Mr. Camarena said.
Because the tax is levied on the registered value of the property, which "tends to be low and not corresponding to market value," Mr. Hernandez said, "the resulting tax is generally not significant, especially compared with what a similar property would pay in the U.S."
For example, Mr. Camarena said, a house in Mexico City worth US$250,000 pays approximately US$300 a year.
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