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What you should know as buyer of real estate in Mexico
By Harriet Murray – Photos by Jesús de Avila • January 2009

• THE RESTRICTED ZONE AND "FIDEICOMISOS:

Mexico as a nation has original ownership to all land and water in the country, as well as minerals, salts, ore deposits, natural gas and oil. Ownership may be assigned to individuals.

The Mexican Constitution prohibits direct ownership of real estate by foreigners in what has come to be known as the "restricted zone". The restricted zone encompasses all land located within 100 kilometers (about 62 miles) of any Mexican border, and within 50 kilometers (about 31 miles) of any Mexican coastline.

In order to permit foreign investment in these areas, the Mexican government created the "fideicomiso," a form of real estate trust. A Mexican bank must be designated as the trustee and, it has title to the property and is the owner of record. The Mexican Government created the "fideicomiso" to solve the problems with the Mexican Constitution’s denial of foreign ownership, while still developing the restricted zone and attracting foreign capital. The “fideicomiso” has enabled foreigners, as beneficiaries of the trusts, to enjoy the use of property in the restricted zone without violating the law.

A "fideicomiso" is a trust agreement created for the benefit of a foreign buyer, executed between a Mexican bank and the seller of property in the restricted zone. The bank acts on behalf of the foreign buyer, taking title to real property. The bank, as trustee, has a fiduciary obligation to follow instructions given to them by the foreigner who is the trust beneficiary. The trust beneficiary retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is entitled to use, enjoy, remodel, gift, and sell the property.

Mexico requires all foreigners to apply for and obtain a permit from the Ministry of Foreign Affairs prior to acquiring real estate in Mexico. The application is currently made by the trustee/bank at the time a real estate trust is set-up. [*] The Calvo Clause, which is part of the agreement which the foreigner sings, states his agreement to be under the jurisdiction of the Mexican law for ownership of the property.

Beneficiaries of the trust (fideicomisarios) may be Mexican corporations with foreign investment or foreign individuals or legal entities.

There are time constraints for the application to the Ministry of Foreign Affairs for the permit for the” fideicomiso” trust. The Ministry must grant any petition for a trust permit that complies with the stipulated requirements within 5 working days following the date of its presentation to the Ministry's central office in Mexico City. The permit must be granted in 30 days if the application is submitted to one of the Ministry's state offices. The Ministry of Foreign Affairs must confirm the registration of any property acquired by foreign-owned Mexican corporations within a maximum period of 15 days following the filing of the petition. In both cases, if the maximum period passes with no action by the Ministry, the trust permit or registration is considered authorized.

A question frequently asked is what happens to the property if the trust expires. The beneficiary has a contractual right under the trust agreement with the Mexican bank to all benefits that may result from the use or sale of that property, even though he does not hold title to the property. Under Mexican Law, the bank, as trustee, has a fiduciary obligation to respect the rights of the beneficiary.

A real estate trust is not a lease. Sometimes I am asked if the “fideicomiso” trust is a 99 year lease. It is not. 

The beneficiary can instruct the bank to sell or lease the property at any time. As we have discussed previously, taxes are owed to the Mexican government for income derived from rent.

• TAXES LEVIED ON REAL ESTATE:

The property tax or “predial” is imposed by the municipality. This tax is to be paid annually. If the tax is not paid on time, it is paid when the property sells, with interest and penalties. Municipalities provide discount incentives to pay the “predial” in the early months of the year. In our area, January offers the most discount for payment.

The second tax is IVA, which is 15% in Jalisco and Nayarit.  A commercial property owes IVA when it is sold. IVA is collected on professional services and goods, as well.

Acquisition tax is imposed by the State government. Tax in this area is approximately 2% of the value of the transaction. This tax is to be paid by the buyer at the time of purchase, and it is the responsibility of the “Notario Público” to collect and pay.

The fourth tax is “Capital Gain Tax” or ISR. This tax is on the profit upon sale of the asset purchased at a lower price than its current sales price.

Currently, there is an option to pay 25% of the sales price or 28% of the gain after allowable deductions such as real estate commission or permanent improvements by showing the proper factura, including applicable IVA tax.

The law should treat all sellers the same by requiring the same criteria for exemption of capital gains tax. Foreigner and nationals must meet requirements to be exempt from capital gains tax.

What actually happens is that the seller is given the interpretation of the law by the notary appointed to transfer the property to the new buyer. If the seller is a foreigner, the notary may require that he have an FM2 for a certain period of time, or have an FM3 and be enrolled in the tax system with an RFC, Mexican tax id. A national must show his residency and proof of Mexican citizenship.

It is a requirement that you must generate an income to be able to have an RFC (Registro Federal de Contribuyente). If foreigners living in Mexico are not working or producing a taxable income, they cannot be registered as a tax payer and obtain an RFC.

It is important to understand that you, as the seller, do not want to commit fraud by claiming you have a meet a condition for exemption of capital gain tax, if you have not.  If you obtain a tax number with Hacienda, you should be earning an income and paying taxes legitimately. 

It is fraud to be renting or working for remuneration and not declaring the income in Mexico.

When selling, if a buyer’s documents do not reflect the price he is paying for the real estate, he has a problem that will resurface when he decides to sell his rights. Also, fraud has been committed.

[*]Calvo Clause is a clause which is part of the Constitution and it is very important for foreign real estate owners. The clause states that the real estate owners agree to be bound by the laws of México and to not seek recourse to law in their home countries. Foreigners must sign a Calvo Clause agreement to obtain permission for real estate ownership from Mexico’s Secretary of Foreign Affairs.

Harriet Murray

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• This article is based upon legal opinions, current practices and my personal experiences I recommend that each potential buyer or seller conduct his own due diligence and review. Harriet Murray Email: harriet@casasandvillas.com

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