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 Vallarta Living | Home & Real Estate | November 2005 
Realty Q&A - Depreciation For Rental Owners; Realty And Taxes In Mexico
 Lew Sichelman - Market Watch
| | Nationally syndicated columnist Lew Sichelman has been covering the housing market for 35 years. lsichelman@aol.com |
Q. I am interested in the topic of purchasing property in Mexico. I would like to form an LLC to buy land or real estate in Mexico but am not sure about the taxes when I go to sell or annual taxes on the operating rental income. Do I have to file a Mexican return and pay Mexican taxes?
A: I checked with two sources and both offered the same advice - seek competent legal help from both sides of the border before proceeding.
Tom Kelly, the co-author of the new book, "Cashing in on a Second Home in Mexico" (Crabman Publishing), points out that the maximum capital gain on the sale of investment property in Mexico is 35%. But computing the gain is not solely calculated on the resale price. Rather, the formula is "a complicated, confusing method involving the original basis and an adjustment for inflation."
Kelly also notes that it makes no difference whether you form an LLC or not; the Mexican government is going to want its capital gain tax. "If you generate rental income, you are subject to Mexican taxes," he says.
The good news, though, is that the taxes you pay south of the border reduce what you would owe Uncle Sam. Full-time American residents realizing income from out-of-country interests must pay federal taxes on that income. But at least the taxes paid in Mexico become, in essence, a credit against the amount of tax owed in the U.S.
Setting up a limited liability company to own property in Mexico is something that should be considered with great care, agreed Enrique Hernandez Pulido of Procopio, Cory, Hargreaves & Savitch LLP, a San Diego law firm with a Mexican-U.S. international tax and real estate practice. He warns that a poorly structured LLC can unknowingly expose your Mexican vacation property to potentially high Mexican tax liabilities.
According to Pulido, certain Mexican vacation properties are prohibited by Mexican law from being owned by a U.S. LLC, either directly or indirectly, or by a Mexican company.
"It is a complex area that is not the same as in the U.S.," he reports. "For example, Mexico has an asset tax and a consumption tax, which we do not have in the U.S."
The topic is discussed in detail in an "How Do You Say 'FIRPTA' in Spanish?, "article published in the California Tax Lawyer (http://www.procopio.com/publications/articles.htm).
Pulido also points out that a foreign entity, including a limited liability company, may not own real estate directly in the prohibited zone along the international border regions or the coastal zone, which includes such popular beach areas as the Baja Peninsula, Puerto Vallarta, Cancun and Acapulco.
Pulido says as long it is not prohibited by Mexican law it is generally preferable to set up a Mexican company to hold title directly to the real estate property. If structured properly, the Mexican company will be taxed at a lower rate than the one applicable to a foreign entity. On the downside, however, increased administrative costs and tax and informative filings will be required.
The tax expert also says it is key to structure the purchase so that any Mexican income taxes paid can be credited in this country to avoid double taxation on the same income.
"In some cases, the preferable and simplest approach is to simply acquire the Mexican real property located along the coastal zones directly through a Mexican land trust (fideicomiso)," according to Pulido. "However, you should also be aware, that you probably will want to incorporate specific provisions in these Mexican fideicomisos so as to minimize your U.S. estate and gift tax consequences associated with the Mexican real estate purchase."
Complicated stuff here, so don't try to go it alone.
Nationally syndicated columnist Lew Sichelman has been covering the housing market for 35 years. Because of the volume of mail he receives, he cannot answer individual questions, nor can all questions be answered in this space. Email lsichelman@aol.com |
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