Facts to know about Taxation when renting your condos, houses or villas in Mexico

theyucatantimes.com

“Paradise”…..a land where life is worry-free and simple. We all seek a place where all responsibilities are left behind, where having-to is forgotten and replaced with not-having to.

Many foreigners found this “Paradise” in the beautiful country of Mexico where they find pleasant surroundings, affordable living and a wonderful lifestyle!

Several years ago the Mexican Federal Government made it possible for foreigners, non-Mexicans, to acquire the “rights of ownership” for properties in the “forbidden zone” opening the door to the coastal regions where many a foreigner has purchased his “Own piece of Paradise”.

Many of these “property owners” partially subsidize their “Paradise” by renting their property to visitors in tourist areas who desire a vacation rental over the traditional hotel experience. The rental income helps offset the cost or “ownership” and provides a great incentive for having the property while also using it personally. All seemed well with this arrangement until a recent issue on rental income tax requirements began to surface.  While the Mexican Federal Government welcomes foreigners to purchase the “rights of ownership” on properties in Mexico, it also expects the “owners” to abide by the Mexican laws governing these “rights”. The pressure is on to get these “owners” legal and paying taxes as the law requires.

The current situation in Mexico is that many foreign “owners” are not complying with the laws either due to not knowing about them, getting bad advice about them or choosing to ignore them altogether. Regardless of the reason, lack of compliance is risky at best.

Many “owners” who rent their properties personally say they claim the income in their “home” country because that is where they receive the money for the rent. Others claim they are not obligated to pay taxes in Mexico because the property is a second or third residence and the income is under 51% of their total income which means they do not need to declare it in Mexico. Many have been making good money on rentals and keeping the bulk of it after expenses and are used to the huge return on investment. Not being legal and paying taxes is a mistake that “owners” do not want to think about or accept.

The law in Mexico is simple; any income from a rental property located in Mexico is taxable in Mexico….period!

The international accounting firm, Deloitte, recently gave a seminar to AMPI agents on the subject of renting Mexican properties and the reporting of income. For years, some owners of homes and condos in Mexico, both foreigner and national alike, have not reported their rental income. The law has become more formal over the years and the procedures the country has now to seek and find those not reporting income, has become more strict and encompassing.

Pedregal Escapes Manager, Kathinka Roesiger in Cabo San Lucas, Baja Sur says, “There are some very serious facts to know about taxation when renting your condos, houses or villas in Mexico and she has provided a few alternatives for those foreigners who wish to do so legally.

It is important to know that in accordance with Mexican law, at the moment of acquiring property and the rights to use and enjoy it, if via fideicomiso or another title, (regulated by the Secretaria de Relaciones Exteriores, SRE) you will be considered Mexican in every respect concerning the fideicomiso. In case of any failures to comply with Mexican laws, you may lose your rights as the holder of a fideicomiso and the related property, to the Mexican Government as beneficiary (so it is ruled under the Second Title of the Foreign Investment Law and Regulations). The SRE gives permission to foreigners to be holders of a fideicomiso this allows foreigners to acquire property in any zone. This brings with it the obligation to comply with all laws concerning the property as the object of the fideicomiso.

So what law governs taxes on rental income?

 LEY DEL IMPUESTO SOBRE LA RENTA

CÁMARA DE DIPUTADOS DEL H. CONGRESO DE LA UNIÓN

Secretaría General

Secretaría de Servicios Parlamentarios

Centro de Documentación, Información y Análisis

Última Reforma DOF 27-04-2010 1

LEY DEL IMPUESTO SOBRE LA RENTA

Nueva Ley publicada en el Diario Oficial de la Federación el 1º de enero de 2002

TEXTO VIGENTE

Última reforma publicada DOF 27-04-2010

What does the law say about rental income?

RENTAL AND TAX OBLIGATIONS – If you rent the property you have purchased in Mexico you do have tax obligations in Mexico. Many people believe that if they rent rooms in Mexico but receive the money in the US or Canada that they do not have any tax obligations in Mexico. This is not true. If you rent a property that is located in Mexico, the income generated by this rental is taxable in Mexico.

The Mexican tax authority is getting tougher each year and recently has been reviewing the internet (web pages) to determine what properties are being rented. If you rent your property and do not pay taxes you are running the risk of having the tax authority put a lien on your property or worse.

A lot of our clients tell us “well if the tax authority comes to the house I will just tell them I have not rented my property to anyone”. The bad news is that if you show no rental income or very little, the tax authority will use
its “discretional” powers to determine that you are not properly reporting income. They will use as a market indicator the occupancy of the hotels in your area (some times as high as 80%) and multiple this times your rate per night. Yes we have seen cases where the tax authority has determined huge fines and penalties based on “perceived” rental income using estimated rates of occupancy.  If you rent property, contact a certified public accountant, get registered and start filing and paying taxes. It is not worth losing having your property encumbered for a tax debt and having to pay an attorney to defend you.

David Connell has been living and working in Mexico for over 16 years. He is a licensed Mexican attorney and the managing partner of the firm Connell & Associates with offices in Mexico City, Ixtapa/Zihuatanejo and Puerto Vallarta. Mr. Connell sits on the board of several organizations and corporations including non-profit and charitable organization, real estate and development companies, Home Owner Associations, hotel, time-share and fractional companies.

An excerpt from Harriet Cochran Murray for Cochran Real Estate offers:

What property applies to the current law? 

All properties which are rented and generate an income for their owners are income properties for the length of time they are rented.  When the owners are occupying them personally, and not charging their guests, it is not rented.

Does it matter if the money goes directly to a foreign country?

No, rental income on a Mexican property requires taxes paid, regardless of where the money is sent.  The income generator is the property itself and where it is located is the jurisdiction of where the first tax is due and payable.

What tax is due?

 IVA tax is due, which is like a sales tax.  It is 15% in the Bay of Banderas, and some border states charge 10% IVA. So the IVA tax is due on the gross amount of the rent charged for the rental term.  In addition, income tax is owed. US citizens may elect to pay 25% of the gross or 28% of the net.  Expenses can be deductible with the correct receipt or factura.  Canadian citizens pay 25% of the gross.  With proof of the purchase with a proper invoice, the net basis can be used.

What is deductible against income?

It is wise to get a list from your Mexican accountant, but basically expenses which are part of the normal cost to do business are in the deductible category: utilities, repairs, cleaning supplies, staff salaries,  management charges, property taxes and trust payments and replacement of equipment.

Does it matter what kind of receipt I receive as long as the type of expense is allowable?

Absolutely it matters!  An acceptable receipt has 10 characteristics to it, including a permit to be printed, an expiration date, and a stamp of the tax ID of the property or tax payer.  The term used most often is “factura”.  Get to understand what makes a factura different from a credit card receipt, etc.

If I rent my own home out personally and don’t use an agent or a rental company, aren’t I exempt from paying taxes?

Absolutely not! You still owe IVA and tax on adjustable income after expenses.  In fact, the expense of the agent commission or the management company is a deduction you will want to include in your expenses.

What about developers who manage their Home Owners Association or rental pools for their owners within their development?

Compliance of the tax laws is an important factor and applies to these developers, as well.

How do I pay taxes?  Many American or Canadian accountants don’t know how to do this.

You must register with Hacienda or Mexican IRS after you have notified Immigration that your home is earning income.  Immigration will give you permission to rent and will issue you a permit.  You will need then to go to Hacienda and make application to be within their tax structure and receive an RFC or tax ID number.

What do I do then? 

You will need to use a Mexican accountant or an accountant qualified to file your returns and pay your taxes or learn to do this yourself.

What if I decide not to get involved with a tax number and payment of these taxes?

If Hacienda finds out your situation and determines you are renting the property illegally, you can be fined and charged for unreported income back 5 years at a rental rate established by the government tax authority.

How would Hacienda find out? 

The same way we know IRS operates in the US. If you are advertising in any printed material or on the internet, you are vulnerable.  If someone knocks on your door and asks who the people are who are occupying the property, they can determine these are renters.

What does the recent law on bank accounts in Mexico mean exactly?

If you have an account in your name in a bank (and soon to be investment houses), you have to prove if you asked,  the income in that account has already paid tax from the country where it was earned.  If your bank account has money from your foreign income after taxes, you will have to prove it with acceptable tax returns and a “trail” of the money flow.  The burden of proof is on you.

Do I have to report and pay additional taxes in my home country on my Mexican income?

The US has a treaty with Mexico whereby the taxes paid in Mexico can be applied as a credit toward taxes due in the US. You must get your American accountant to work with you on this. Canadians don’t have the same treaty with Mexico, so it is wise to check this out while you are doing your fiscal planning.

Why is all of this tax important?

It is important for many reasons, but you already know what they are.  Modern governments raise money to run the country by taxing income.  You have a responsibility to the country where you use the goods and
services and benefits of income derived from the amenities of your property and location.  You are also receiving a benefit of the net income to pay your operating expenses of your property and keep it in good repair. You also may be receiving an economic return on your investment. It is really a win-win situation. You are a partner with the country where you receive these benefits.

How is the tax rate on rental income calculated?

ON RENTAL INCOME:

There are two ways to calculate tax on rental income:

1. The blind deduction of 35% of total income, without deductions with tax of 35% paid on the remaining amount;

2. A 30% tax on income, less allowable deductions which include property tax, maintenance, interest on loans for construction expenses, insurance, salaries of employees and commissions paid to rental agents and property managers.

3. IVA tax is charged on lodgings, hotel rooms and furnished homes which are rented. As of January 1, 2010, this tax has been increased from 15% to 16% in the interior of the country and from 10% to 11% in the border zones.

Hacienda is paying more attention to Internet advertising and is beginning to inquire into the income of those who are renting their homes. It makes sense to become legal since penalties for non-compliance can be considerable. Reprinted from an article by Linda Neil – settlement-co.com

January 17, 2010 entitled,” Tax Obligations for Foreigners in Mexico – Death and Taxes… Both are Inevitable.”

Rental income generated in Mexico is taxed at regular income tax rates, after deducting actual expenses or a blind deduction of 35%, whichever is greater. This provision applies to residents. Non-residents pay a flat 25% on the gross income. Both residents and non-residents may be required to charge valued added taxes and may also need to charge a 2% hotel tax, depending on the circumstances. While it has been relatively easy to avoid taxes on Mexican rental income, some jurisdictions, for example in San Miguel de Allende, are cracking down on those persons who are not paying income taxes on rental income.

From an article by Raul Rodríguez-Walters, CFP ® is the founding partner of Mexico Advisor, the only company in Mexico offering financial management, legal, tax and title services under one roof, to English-speaking foreigners wanting to live, retire or set up a small business in Mexico.

What are the potential consequences of not paying taxes on rental income in Mexico?

What are the consequences for those who evade the fiscal obligations?

A) Anyone who generates income MUST declare to SAT and if one decides not to he faces FINES AND JAIL as per the law.

B) In the case where this is a foreigner, the DEPARTMENT OF IMMIGRATION will apply sanctions up to expulsion from the country.

C) The Secretary of Economy (Secretaria de Economia) will also apply fines.

D) If an FTD contract (Contrato de Fideicomiso Translativo de Dominio)  is the document providing Rights on the property the person could lose said Rights because of the fraud and non-respect of the obligations one has in said contract.

E) The property can be seized and put on the block for sale.

Lic. J.E. Beaulne, LL.B.

Abogado / Avocat / Attorney at Law,
Cedula profesional # 0086,
Miembro del Colegio de Abogados de B.C.S.
Member of the Lawyer’s College of B.C.S.
Plaza Cerralvo, Suite 6
Alvaro Obregon #1665
La Paz, B.C.S., Mexico C.P. 23000

What are the options to legally comply with the law on rental income in Mexico?

Various options and alternatives of commercial and fiscal strategies exist to stay on top of tax regulations. For example, one can create a Mexican corporation as a vehicle for such tax payments. Needless to say, this alternative brings with it an additional cost of hiring approved accountants and lawyers and other obligations such as quarterly and yearly fiscal reports.

Another alternative could be to comply with fiscal obligations as the holder of the fideicomiso as a physical person or foreigner. However in this case, it would be necessary to register the fideicomiso at the
Mexican Tax Office, Secetaria de Hacienda y Credito Publico. The third and probably easiest alternative would be to hire a company specialized in the administration of rentals, which would then take
care of all fiscal obligations for the holder of the fideicomiso, who wants to rent his property.

Of course the reliability and seriousness of this company is of upmost importance, as they will be in charge of the complete payment of all taxes and will be obliged to produce the necessary documents to prove the correct payment of such for the fideicomiso.

In addition to that, a treaty to avoid double taxation exists between Mexico and the United States of America, which in its article 8 establishes that the taxation of rental profits will be treated as if the foreigner was a Mexican. However, if this tax is not paid, this will be treated as non-fulfillment of fiscal regulations and is thus as a fiscal evasion in both countries.

With all that being said, it may not be what foreign property “owners” in Mexico want to hear but I am only the messenger and please do not shoot the messenger. It makes sense that taking the risk of facing a huge fine or
possibly losing your property over failure to pay taxes is not a safe gamble.

There are ways to comply with the law, eliminate the risks and minimize the amount of taxes you will pay allowing you to keep more of your rental income while enjoying that worry-free and simple life in “Paradise” we
talked about in the beginning. So contact us to get the facts and ……get legal!