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Wednesday, February 12, 2014
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Tuesday, February 15, 2005
Real Estate Transactions In Mexico
Before investing in real estate in Mexico, you should first understandthe legal requirements necessary to secure your rights in the propertyand know how to properly carry out the transaction. Although the basicelements of the transaction are the same as in the U.S., there are someimportant differences that you should be aware of.
APPLICABLE LAWS
The legal foundation for real estate law in Mexico starts with the Federal Constitution. Each state in Mexico has its own Civil Code which, especially in the case of the provisions concerning real estate, is usually exactly the same as the Civil Code for the Federal District. Nevertheless, it is advisable to check the Civil Code of the state in which you intend to purchase to make sure that there have not been any changes.
It is also important to consult a Mexican attorney to make sure that any of the state or municipal laws do not conflict with the federal provisions. Most of these principles are reflected in the various state legislation, but, to be sure, check with a competent Mexican real estate attorney.
The most basic laws for real estate transactions are:
- The Mexican Constitution and international treaties
- The Foreign Investment Law and its regulations
- The Civil Code
- The General Law of National Properties
- Federal Zone Regulations
- Condominium Law
- Tax Laws: income tax law, acquisition tax law
- The General Law of Negotiable Instrument
- Commercial Code
- Public Registry
- Notary Law and Federal Law of Public Brokerage
- Agrarian Law
- Corporation Law
FOREIGNERS AND FOREIGN INVESTORS
First, it's important to consider what determines the status of being a foreigner and what is considered foreign investment in Mexico.
Articles 30 and 33 of the Mexican Constitution specify that foreigners are those who are not Mexican by birth or naturalization.
In the case of Mexican nationality acquired by birth, there are three conditions, any of which, when met, would qualify an individual for Mexican nationality:
- If you were born in Mexico, regardless of your parents' nationality;
- If you were born outside of Mexico and your mother or father is Mexican; or,
- If you were born on a Mexican airplane or ship.
Mexican nationality by naturalization may be acquired by:
- Foreigners who obtain a letter of naturalization from the Ministry of Foreign Relations, and,
- Foreigners who marry Mexican nationals and establish residency within Mexico.
Article 33 also stipulates that all foreigners are protected under the civil rights provisions of the Constitution. The President has the power to deport any foreigner whose presence is deemed to be "inappropriate", even though this power is rarely, if ever, used.
The Mexican Foreign Investment Law, which was published on December 27, 1993, defines "foreign investment" and "foreign investor" as:
Foreign investment:
- The participation of foreign investors, in any proportion, in the capital stock of Mexican companies;
- That which is made by Mexican companies with a foreign capital majority; and
- The participation of foreign investors in the activities and acts provided for in the Foreign Investment Law.
Foreign Investor: an individual or legal person of a nationality other than Mexican and foreign entities without juridical personality.
Let's take a look at the parts of the law that deal with real estate investments by foreigners.
The Mexican government has put foreign investment in tourism and real estate development high on its list of priorities. The tendency of the Mexican government has been moving from one of tight restrictions throughout the seventies and part of the eighties, to a position of
encouraging foreign investment in all areas of Mexico. The government has been willing to show that it means business with its new "open-door" policy for foreign investment by making important changes in the foreign investment laws. Whether the investment is a "maquiladora", a tourist development involving the construction of hotels or condominiums, or simply the construction of summer homes by foreigners, the Mexican government has been sending out the message loud and clear: Mexico is open to foreign investment.
In spite of the advances and positive changes made in the Mexican foreign investment law, there are still some aspects of the law dealing with real estate acquired by foreigners that may seem overly restrictive, especially when compared to similar situations in the United States.
THE RESTRICTED ZONE AND "FIDEICOMISOS"
In an attempt to avoid some of the problems Mexico had to deal with in the past with regard to its territorial rights, the 1917 Mexican Constitution enacted restrictions on property ownership by foreigners. Basically the law declared that the Mexican nation has original ownership to all land and water in Mexico, as well as minerals, salts, ore deposits, natural gas and oil, but that such 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 50 kilometers (about 31
miles) of any Mexican coastline. However, in order to permit foreign investment in these areas, the Mexican government created the "fideicomiso", which can be roughly translated as a real estate trust. Essentially, this type of trust is similar to trusts set up in the United States, but in this case a Mexican bank must be designated as the trustee, and, as such, has title to the property and is the owner of record. The Mexican Government created the "fideicomiso" to reconcile the problems involved in developing the restricted zone and to attract foreign capital. This enabled foreigners, as beneficiaries of the trusts, to enjoy unrestricted use of land located in the restricted zone.
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. Since foreign buyers do not have the capacity to enter into a normal real estate sales contract, due to Constitutional restrictions, the bank acts on their behalf.
The bank, as trustee, buys the property for the foreigner, and has a fiduciary obligation to follow instructions given by the beneficiary. The beneficiary of the trust retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is the beneficiary of the trust and is entitled to use, enjoy and, if he or she should decide to, even sell the property held in trust at its market value to any eligible buyer.
In summary, the following parties are involved in a real estate trust:
- The seller of the property, or trustor (el fideicomitente) who irrevocably transfers title to the property to the bank.
- The bank, who acts as trustee (el fiduciario) and holds title to the property and is obligated to administer the property only for the benefit of the buyer or beneficiary.
- The buyer, or beneficiary (el fideicomisario) who is entitled to use, enjoy, lease, or sell the property held in the real estate trust without limitation whatsoever. ----- excerpted from "How to buy real estate in Mexico" (c) 1994 by Dennis Peyton -----
For more information e-mail us at vivasancarlos@gmail.com
Closing Cost for buyer and seller
Closing costs for the buyer are different from what many foreigner buyers first expect in Mexico. Because the majority of San Carlos is in the restricted zone, a foreigner buyer must own his residence in a trust. This trust is administered by a Mexican bank and has its own cost. A buyer may consider a new trust for 50 years, renewable, or assume an existing trust.
"A thing is worth whatever the buyer will pay for it." Publilius Syrus, first century B.C.
The notary gives the estimate of closing costs for the trust and associated fees. It is customary for the buyer to select the notary. The costs are given in pesos at a conversion rate selected by the notary or requested by the buyer. The rate is adjusted closer to closing, when the final payment is made. Customarily, the buyer pays a deposit of 50% of the estimated costs, so that the notary can start the application for ownership and order the appraisal. The appraisal is not a market appraisal, but one from which the city computes the property taxes.
The seller should know before closing if he has capital gains costs. However, many times this information is learned upon the written agreement of a sale, when the seller's documentation is taken to the notary.
"The greatest of all gifts is the power to estimate things at their true worth."
Francois de La Rochefoucauld, 1665
For a foreigner to be exempt from capital gains tax on a Mexican residence, he must have a permanent visa, such as an FM2 or FM3 and satisfy the notary with documentation of expenses, such as gas or electric bills for the property that he is selling.
If the seller has an existing trust, the bank charges a fee to cancel it, if the new buyer is not assuming it. The seller can also be responsible for the payment of the real estate commission, including iva or sales tax.
The seller should pay also, the proper portion of property taxes, his current trust fees, utilities until date of closing, condo fees and assessments, contributions to city services being charged to his neighborhood, and what other costs are negotiated between buyer and seller.
The buyer will work off the estimated statement from the notary, and when the final 50% is paid, should receive a formal paid receipt.
"What we obtain too cheaply we esteem too lightly: it is dearness only which gives everything its value." Thomas Paine, 1786
The Closing Cost Estimate from the notaries all follows a common format:
The Property Value of Sales price is given in Dollars and the selected exchange rate. The Property Value is then given in Mexican Pesos.
The notary's fee is a percentage of the sales price in pesos and averages from .007-.01 percent. This includes the professional fee, a charge for office supplies, and iva. The notary's fee is sometimes negotiated.
The transfer or acquisition tax is approximately 2% of the appraisal value. The notary will order the appraisal to be done by an authorized appraiser. This value will also establish the basis for the yearly property tax. The law changed in 2002, whereby the transfer tax is charged on the appraised value instead of the sales price.
Additionally, there is the cost to apply or register the trust in Mexico City. Foreigner ownership of real estate is recorded at the Foreign Affairs Registry in Mexico City.
The buyer pays for the cost of certificates to show that there are no liens of record prior to sale and that the property tax has been paid. An additional certificate will show that the water bill (Seapal) has been paid, if the property has this city service.
The bank will also charge a set-up fee or assumption of the trust, plus the first year administration fee in advance. There is a yearly fee for administration of the trust, due on the anniversary date of the formation of the trust. These fees currently run from $350US-$700US a year, depending on the bank.
"The price of any commodity rises or falls by the proportion of the number of buyers and sellers." John Locke, 1692
The costs for closing for the buyer who has a trust, average 4-7% of the sales price. The sellers in this area consider the transfer tax and trust cost to be the responsibility of the buyer. A Mexican citizen does not have the cost of a bank trust, but pays the other normal fees charged by the notary.
For many first-time buyers, it is a shock to realize that closing costs are more than is typically paid in the US and Canada. It is important to budget for this expense when you are determining the overall cost of the purchase.
"If you pay peanuts, you get monkeys." James Goldsmith, 1979
If a bank or title company escrow account is used to hold the purchase funds, there is an additional one-time charge averaging $500US. Title insurance can also be selected and can be 1% of the sales price. Currently, no Mexican companies offer title insurance, but insurance can be obtained from US companies registered in Mexico.
If you are building in an area that is overseen by an environmental impact agency, there is a cost for an ecological study before a permit to build will be issued.
Additionally, if you have an attorney working for you, you will have the cost of his fees as well.
Although closing costs for the buyer can be substantial, I recommend that you not try to take a short cut. To protect your purchase, you need to have the trust and public deed. To do this, you must go through the proper channels with a notary.
The majority of pre-existing homes for sale, whether they are villas or condominiums, are offered furnished. There is no large discount in price to exclude the furniture.
If your purchase is adjacent to a federal zone, such as the ocean, a river or a federal highway, you should have the concession researched. If you want the private use of the federal zone, you enter into a lease agreement and pay an annual fee. By paying for the concession, you have the use of the federal zone under certain guidelines. Many homes have terraces, beach palapas, pools or landscaping on the federal zone. Construction of part of a permanent structure, such as a room of the house, is not permitted in the federal zone.
"My introduction to the theory of money and exchange occurred when the San Diego Chargers sold to the Buffalo Bills for $100" Jack Kemp, 1982
Information source: Harriet Murray, Broker in Puerto Vallarta, e-mail: harriet@pvnet.com.mx
"A thing is worth whatever the buyer will pay for it." Publilius Syrus, first century B.C.
The notary gives the estimate of closing costs for the trust and associated fees. It is customary for the buyer to select the notary. The costs are given in pesos at a conversion rate selected by the notary or requested by the buyer. The rate is adjusted closer to closing, when the final payment is made. Customarily, the buyer pays a deposit of 50% of the estimated costs, so that the notary can start the application for ownership and order the appraisal. The appraisal is not a market appraisal, but one from which the city computes the property taxes.
The seller should know before closing if he has capital gains costs. However, many times this information is learned upon the written agreement of a sale, when the seller's documentation is taken to the notary.
"The greatest of all gifts is the power to estimate things at their true worth."
Francois de La Rochefoucauld, 1665
For a foreigner to be exempt from capital gains tax on a Mexican residence, he must have a permanent visa, such as an FM2 or FM3 and satisfy the notary with documentation of expenses, such as gas or electric bills for the property that he is selling.
If the seller has an existing trust, the bank charges a fee to cancel it, if the new buyer is not assuming it. The seller can also be responsible for the payment of the real estate commission, including iva or sales tax.
The seller should pay also, the proper portion of property taxes, his current trust fees, utilities until date of closing, condo fees and assessments, contributions to city services being charged to his neighborhood, and what other costs are negotiated between buyer and seller.
The buyer will work off the estimated statement from the notary, and when the final 50% is paid, should receive a formal paid receipt.
"What we obtain too cheaply we esteem too lightly: it is dearness only which gives everything its value." Thomas Paine, 1786
The Closing Cost Estimate from the notaries all follows a common format:
The Property Value of Sales price is given in Dollars and the selected exchange rate. The Property Value is then given in Mexican Pesos.
The notary's fee is a percentage of the sales price in pesos and averages from .007-.01 percent. This includes the professional fee, a charge for office supplies, and iva. The notary's fee is sometimes negotiated.
The transfer or acquisition tax is approximately 2% of the appraisal value. The notary will order the appraisal to be done by an authorized appraiser. This value will also establish the basis for the yearly property tax. The law changed in 2002, whereby the transfer tax is charged on the appraised value instead of the sales price.
Additionally, there is the cost to apply or register the trust in Mexico City. Foreigner ownership of real estate is recorded at the Foreign Affairs Registry in Mexico City.
The buyer pays for the cost of certificates to show that there are no liens of record prior to sale and that the property tax has been paid. An additional certificate will show that the water bill (Seapal) has been paid, if the property has this city service.
The bank will also charge a set-up fee or assumption of the trust, plus the first year administration fee in advance. There is a yearly fee for administration of the trust, due on the anniversary date of the formation of the trust. These fees currently run from $350US-$700US a year, depending on the bank.
"The price of any commodity rises or falls by the proportion of the number of buyers and sellers." John Locke, 1692
The costs for closing for the buyer who has a trust, average 4-7% of the sales price. The sellers in this area consider the transfer tax and trust cost to be the responsibility of the buyer. A Mexican citizen does not have the cost of a bank trust, but pays the other normal fees charged by the notary.
For many first-time buyers, it is a shock to realize that closing costs are more than is typically paid in the US and Canada. It is important to budget for this expense when you are determining the overall cost of the purchase.
"If you pay peanuts, you get monkeys." James Goldsmith, 1979
If a bank or title company escrow account is used to hold the purchase funds, there is an additional one-time charge averaging $500US. Title insurance can also be selected and can be 1% of the sales price. Currently, no Mexican companies offer title insurance, but insurance can be obtained from US companies registered in Mexico.
If you are building in an area that is overseen by an environmental impact agency, there is a cost for an ecological study before a permit to build will be issued.
Additionally, if you have an attorney working for you, you will have the cost of his fees as well.
Although closing costs for the buyer can be substantial, I recommend that you not try to take a short cut. To protect your purchase, you need to have the trust and public deed. To do this, you must go through the proper channels with a notary.
The majority of pre-existing homes for sale, whether they are villas or condominiums, are offered furnished. There is no large discount in price to exclude the furniture.
If your purchase is adjacent to a federal zone, such as the ocean, a river or a federal highway, you should have the concession researched. If you want the private use of the federal zone, you enter into a lease agreement and pay an annual fee. By paying for the concession, you have the use of the federal zone under certain guidelines. Many homes have terraces, beach palapas, pools or landscaping on the federal zone. Construction of part of a permanent structure, such as a room of the house, is not permitted in the federal zone.
"My introduction to the theory of money and exchange occurred when the San Diego Chargers sold to the Buffalo Bills for $100" Jack Kemp, 1982
Information source: Harriet Murray, Broker in Puerto Vallarta, e-mail: harriet@pvnet.com.mx
Mexican Bank Trusts
On a recent trip to the US, I met with a number of American real estate agents. Almost all of them wanted to better understand the Mexican bank trust, before they felt comfortable referring a client to me. In this article, I want to discuss the bank trust for foreigners, using several different sources.
Francisco Campos, Director of Permits, Secretary of Foreign Relations. Translated and used by permission. Linda Neil, Translator:
It is necessary to understand the background as to why and how bank trusts (fideicomiso) were created for foreign ownership of Mexican real estate. In the middle of the nineteenth century, Mexico lost large amounts of land to the United States when it invaded its neighbor. The Mexican government had to find a way to stop further loss of their territory. They did this by prohibiting in the Mexican Constitution, foreign acquisition of land along the borders and coasts of the country. A restricted zone was created.
The restricted zone is the strip of land 100 kilometers along the borders of states and 50 kilometers along the beaches.
In the twentieth century, Mexico realized that it needed foreign investment so the government developed the use of a trust in the restricted zone. The two advantages of the trust for Mexico are:
1. It encourages the flow of foreign capital into Mexico.
2. Foreign ownership in the restricted zone is held in a trust institution, which must have a permit from the Secretary of Foreign Relations. Through the use of the trust, there is compliance with the Mexican constitution in regard to non-Mexican ownership of real estate.
The parties to the trust are: The Trustee (Fiduciario) which is the bank or credit institution holding the real estate, the Trust Settlor who is the legal Mexican person appointed to sign for the trustee, and the Beneficiary (Fideicomisario) who is the person named as the beneficiary of the trust.
The law regulating the trust in the restricted zone is found in the Foreign Investment Law, 1993. This law establishes the requirement for a permit whereby the credit institution may acquire, as trustee, rights in real property located in the restricted zone. The trustee may admit foreigners into the trust in order for foreigners to acquire rights in residential property. The law also grants the credit institution the right to charge for the administration of the trust. The trustee charges a yearly fee in addition to having the right to charge other fees for requests on a per case basis.
The application for the trust has specific parts:
1. The name and nationality of the trustee (credit institution)
2. The name and nationality of the designee to sign for the trustee.
3. The name and nationality of the beneficiary and the substitute beneficiaries.
4. The term of the trust
5. The use of the property.
6. The description, location and surface area of the real property being placed into the trust. The distance of the real property from the Federal Maritime Zone, and the distance from the national border of Mexico.
The measurements and boundaries of the property must be attached to the application for the permit.
There are strict time limits on these applications. The time to respond to the request, if the permit is presented in the main office in Mexico City is 5 business days and 30 business days for applications presented in one of the state offices of the Foreign Relations Secretary. It no resolution is made within this time frame, the application for the permit is understood to be approved.
The notary who will handle the closing makes the application for the permit. The buyer needs to pay a deposit, usually half of the estimated closing costs, in order for the notary's office to start this process.
The foreign beneficiary, in order to have the trust granted, agrees to be considered a Mexican citizen and abide by the laws of Mexican regarding real estate ownership. The foreign owner agrees that he shall not invoke the protection of his government in matters pertaining to the ownership of real property in Mexico.
The trustee or credit institution must report every year the status of the trust beneficiaries and any changes to the trust. If the Secretary of Foreign Relations determines there is non-compliance, the trustee must make changes or corrections within 60 days from notification by the Foreign Relations Office. A trust can be extinguished if in violation of the permit. The Secretary of the Foreign Relations Department can require the trust to be ended within 180 days of notice to the trustee. Some of the causes for the dissolution of the trust occur when there is a violation of plans and programs for urban development or violations of ecology standards. Federal, state or municipal authorities determine these violations.
The term for trusts being issued now is 50 years, and can be renewable for an additional 50 years. If all the requirements of the permit have been complied with, the request is made to renew by the interested parties within 90 days prior to the expiration of the first term.
Mitch Creekmore of Stewart Title recommends that when a foreigner is buying a residential lot, he should require the developer to show proof that the Mexican government has approved the subdivision. The potential buyer should request to see the legal authorization. Also, the developer should be asked if the property will be conveyed into a trust at the time of sale. If this is not the case, the foreigner should find out the details, as well as the development issues that may exist. Only then can the prospective buyer make an informed decision about a purchase.
If a foreigner is purchasing non-residential property, the acquisition can be done through a Mexican corporation. Under certain conditions, the corporation may be 100% foreign-owned. Again, the foreigners must accept that they are subject to Mexican laws and agree not to invoke the laws of their own country in matters of real estate ownership. The purchasers also agree that the real estate acquired will be registered with the Department of Foreign Affairs and will be used for non-residential purposes. In this way, foreigners can directly acquire commercial, tourist or industrial properties.
It is absolutely necessary for a potential investor to understand the basic law regarding acquisition of Mexican properties, before buying. Harriet Murray, The Vallarta Articles.
For more information e-mail us at: vivasancarlos@gmail.com
Francisco Campos, Director of Permits, Secretary of Foreign Relations. Translated and used by permission. Linda Neil, Translator:
It is necessary to understand the background as to why and how bank trusts (fideicomiso) were created for foreign ownership of Mexican real estate. In the middle of the nineteenth century, Mexico lost large amounts of land to the United States when it invaded its neighbor. The Mexican government had to find a way to stop further loss of their territory. They did this by prohibiting in the Mexican Constitution, foreign acquisition of land along the borders and coasts of the country. A restricted zone was created.
The restricted zone is the strip of land 100 kilometers along the borders of states and 50 kilometers along the beaches.
In the twentieth century, Mexico realized that it needed foreign investment so the government developed the use of a trust in the restricted zone. The two advantages of the trust for Mexico are:
1. It encourages the flow of foreign capital into Mexico.
2. Foreign ownership in the restricted zone is held in a trust institution, which must have a permit from the Secretary of Foreign Relations. Through the use of the trust, there is compliance with the Mexican constitution in regard to non-Mexican ownership of real estate.
The parties to the trust are: The Trustee (Fiduciario) which is the bank or credit institution holding the real estate, the Trust Settlor who is the legal Mexican person appointed to sign for the trustee, and the Beneficiary (Fideicomisario) who is the person named as the beneficiary of the trust.
The law regulating the trust in the restricted zone is found in the Foreign Investment Law, 1993. This law establishes the requirement for a permit whereby the credit institution may acquire, as trustee, rights in real property located in the restricted zone. The trustee may admit foreigners into the trust in order for foreigners to acquire rights in residential property. The law also grants the credit institution the right to charge for the administration of the trust. The trustee charges a yearly fee in addition to having the right to charge other fees for requests on a per case basis.
The application for the trust has specific parts:
1. The name and nationality of the trustee (credit institution)
2. The name and nationality of the designee to sign for the trustee.
3. The name and nationality of the beneficiary and the substitute beneficiaries.
4. The term of the trust
5. The use of the property.
6. The description, location and surface area of the real property being placed into the trust. The distance of the real property from the Federal Maritime Zone, and the distance from the national border of Mexico.
The measurements and boundaries of the property must be attached to the application for the permit.
There are strict time limits on these applications. The time to respond to the request, if the permit is presented in the main office in Mexico City is 5 business days and 30 business days for applications presented in one of the state offices of the Foreign Relations Secretary. It no resolution is made within this time frame, the application for the permit is understood to be approved.
The notary who will handle the closing makes the application for the permit. The buyer needs to pay a deposit, usually half of the estimated closing costs, in order for the notary's office to start this process.
The foreign beneficiary, in order to have the trust granted, agrees to be considered a Mexican citizen and abide by the laws of Mexican regarding real estate ownership. The foreign owner agrees that he shall not invoke the protection of his government in matters pertaining to the ownership of real property in Mexico.
The trustee or credit institution must report every year the status of the trust beneficiaries and any changes to the trust. If the Secretary of Foreign Relations determines there is non-compliance, the trustee must make changes or corrections within 60 days from notification by the Foreign Relations Office. A trust can be extinguished if in violation of the permit. The Secretary of the Foreign Relations Department can require the trust to be ended within 180 days of notice to the trustee. Some of the causes for the dissolution of the trust occur when there is a violation of plans and programs for urban development or violations of ecology standards. Federal, state or municipal authorities determine these violations.
The term for trusts being issued now is 50 years, and can be renewable for an additional 50 years. If all the requirements of the permit have been complied with, the request is made to renew by the interested parties within 90 days prior to the expiration of the first term.
Mitch Creekmore of Stewart Title recommends that when a foreigner is buying a residential lot, he should require the developer to show proof that the Mexican government has approved the subdivision. The potential buyer should request to see the legal authorization. Also, the developer should be asked if the property will be conveyed into a trust at the time of sale. If this is not the case, the foreigner should find out the details, as well as the development issues that may exist. Only then can the prospective buyer make an informed decision about a purchase.
If a foreigner is purchasing non-residential property, the acquisition can be done through a Mexican corporation. Under certain conditions, the corporation may be 100% foreign-owned. Again, the foreigners must accept that they are subject to Mexican laws and agree not to invoke the laws of their own country in matters of real estate ownership. The purchasers also agree that the real estate acquired will be registered with the Department of Foreign Affairs and will be used for non-residential purposes. In this way, foreigners can directly acquire commercial, tourist or industrial properties.
It is absolutely necessary for a potential investor to understand the basic law regarding acquisition of Mexican properties, before buying. Harriet Murray, The Vallarta Articles.
For more information e-mail us at: vivasancarlos@gmail.com
Mexican Homestead Tax Exemption
Confused - and Concerned - About Tax Obligations Related to the Sale of Your Mexican Real Estate? Here's How to Build Your Case for a Mexican Homestead Tax Exemption!
"How can I obtain a capital gains, or homestead, tax exemption on the sale of my Mexican real estate?" is one of the most frequently asked questions by expatriate residents in Mexico when they contemplate selling their homes.
Residents may not be aware that the requirement that you live in your Mexican home for two years before it can be sold as a qualifying property under the homestead exemption was eliminated by tax reform in 2002. And, different interpretations by Notarios (the attorneys responsible for preparing and recording deeds of title and for calculating taxes on real estate transactions) may have sparked the current concern in the expatriate community about the so-called "capital gains" tax. A new awareness and sensitivity to how it's applied, especially to foreign sellers, seems to have created the confusion.
Answers differ depending on where in Mexico you are selling property. For instance, in Los Cabos, foreigners are almost never granted the homestead tax exemption by Notarios. In Mexico City, homestead exemptions are almost always granted to foreigners. And, in San Miguel, the homestead exemptions are granted on a case-by-case basis to the extent that the sellers comply with certain legal requirements. What it boils down to is the tax status of the seller, not his or her residency status.
What Notarios Decide is Critical
Under Mexican Income Tax Law, Notarios are jointly liable with the seller for all taxes due on the sale of real property in Mexico. If Hacienda (the equivalent to the Treasury Department in the US) decides the Notario did not calculate these taxes correctly, the Notario may be required by the tax authorities to make up the difference. Obviously, when they are doing dozens of transactions each year, very possibly involving millions of U.S. dollars, Notarios have to be very careful and will generally take a conservative approach.
The homestead tax exemption is still available to resident taxpayers in Mexico, and it is the Notario who decides who meets the requirements of tax residence. To make this determination, Notarios can base their decision on two different sets of laws: Mexican tax laws and Mexican immigration laws.
Who is a "Tax Resident"?
How foreign nationals who reside in Mexico are taxed in this country depends, first of all, on the tax treaties Mexico has signed with other countries. Often, tax treaties override any national legislation. In the case of U.S. citizens, therefore, one must review the Mexico-U.S. Tax Treaty, as amended in November 2002.
Article 4 of this treaty states that a "tax resident means any person who, under the laws of that state, is liable for tax therein by reason of his domicile, place of incorporation, or any other criterion of similar nature." This article goes on to state that if the taxpayer is a resident of both states he or she will be considered a resident of the country where he or she has a permanent home.
A tax resident in Mexico is distinctly different from someone who is a legal resident, although often a legal resident generally is also a tax resident. Article 9 of the Fiscal Code of Mexico, amended for 2004, establishes that tax residents are those "who have established an abode in Mexico". If they have two homes available to them, one in Mexico and another one abroad, they will considered a tax resident of the country where the taxpayer has his or her center of vital interests. Mexico will consider that that the center of vital interests is Mexico if over 50% of the taxpayer's income is derived from sources inside of Mexico.
Expatriate tax residents have all the obligations and benefits of all other tax residents in the country, including the homestead exemption contained in Article 109 of Mexican Income Tax Law, which identifies that the transfer of certain properties are exempt from taxes, including: "Those resulting from the transfer of…the taxpayer's home…."
Where the current confusion arises is that some Notarios are of the opinion that the homestead exclusion is available only to legal permanent residents, and they make their tax liability determination on the basis of immigration law, not tax law.
What is "Legal Residency" in Mexico?
Legal permanent residence is granted pursuant to Article 48 of the General Population Law and is evidenced by possession of an FM-2 visa. Temporary visitors on an FM-3 visa pursuant to Article 42, or on a tourist visa, are not considered permanent legal residents. In fact, the FM-3 document specifically states that the holder does not automatically acquire residency by merely holding the visa.
Building a Case for Exemption
Your Notario will carefully examine a "fact pattern" before deciding if you qualify for a homestead tax exemption when you sell your Mexican residence. By complying with as many of the points below, you can greatly increase your chance of obtaining a homestead exemption on your Mexican property:
1. Obtain an FM-2 visa to establish legal and permanent residence. There are some Notarios in Mexico who will indeed grant holders of an FM-3 visa a homestead exemption to the extent that the seller qualifies under the tax laws. However, you will gain more credibility as a legal resident with the FM-2. Most Notarios will allow the tax exemption if you hold an FM2.
2. Obtain a Mexican tax identification number, known as "RFC", to show that you take your tax responsibilities seriously. Remember: the homestead exemption is available to "taxpayers" per Article 109 of the Mexican Income Tax Law. What better way to prove that you are a taxpayer than by showing that you have a Mexican tax ID?
3. Open a Mexican bank account that pays interest. The bank will withhold income taxes on your behalf, making you a taxpayer.
4. Live in your home for at least six months. While there is now no time requirement to establish tax residence, often Notarios will want to see at least six months of continued residence at the house.
5. Make sure that your utility bills are in the name of the person who holds title to the property. If the property is owned jointly, try to obtain at least one utility bill in the names of both persons. Gather at least six months of these utility bills as documentation for your Notario.
6. Make sure that the address of the property is exactly the same as the address listed on your FM-3 or FM-2.
If you meet most of the requirements above, and you have been told that you do not qualify for a homestead exemption, you owe it to yourself to get a second opinion and possibly save yourself thousands of dollars in taxes. There are Notarios who follow the tax laws -- and who will grant you the homestead exemption, even if you only have an FM-3. You just need to make the effort to find one!
Information source: Raoul Rodríguez-Walters - Mexico Advisor. You can contact Raoul at his San Miguel de Allende office: Correo #24, CP 37700 tel.: 415-152-0586; info@mexadv.com
"How can I obtain a capital gains, or homestead, tax exemption on the sale of my Mexican real estate?" is one of the most frequently asked questions by expatriate residents in Mexico when they contemplate selling their homes.
Residents may not be aware that the requirement that you live in your Mexican home for two years before it can be sold as a qualifying property under the homestead exemption was eliminated by tax reform in 2002. And, different interpretations by Notarios (the attorneys responsible for preparing and recording deeds of title and for calculating taxes on real estate transactions) may have sparked the current concern in the expatriate community about the so-called "capital gains" tax. A new awareness and sensitivity to how it's applied, especially to foreign sellers, seems to have created the confusion.
Answers differ depending on where in Mexico you are selling property. For instance, in Los Cabos, foreigners are almost never granted the homestead tax exemption by Notarios. In Mexico City, homestead exemptions are almost always granted to foreigners. And, in San Miguel, the homestead exemptions are granted on a case-by-case basis to the extent that the sellers comply with certain legal requirements. What it boils down to is the tax status of the seller, not his or her residency status.
What Notarios Decide is Critical
Under Mexican Income Tax Law, Notarios are jointly liable with the seller for all taxes due on the sale of real property in Mexico. If Hacienda (the equivalent to the Treasury Department in the US) decides the Notario did not calculate these taxes correctly, the Notario may be required by the tax authorities to make up the difference. Obviously, when they are doing dozens of transactions each year, very possibly involving millions of U.S. dollars, Notarios have to be very careful and will generally take a conservative approach.
The homestead tax exemption is still available to resident taxpayers in Mexico, and it is the Notario who decides who meets the requirements of tax residence. To make this determination, Notarios can base their decision on two different sets of laws: Mexican tax laws and Mexican immigration laws.
Who is a "Tax Resident"?
How foreign nationals who reside in Mexico are taxed in this country depends, first of all, on the tax treaties Mexico has signed with other countries. Often, tax treaties override any national legislation. In the case of U.S. citizens, therefore, one must review the Mexico-U.S. Tax Treaty, as amended in November 2002.
Article 4 of this treaty states that a "tax resident means any person who, under the laws of that state, is liable for tax therein by reason of his domicile, place of incorporation, or any other criterion of similar nature." This article goes on to state that if the taxpayer is a resident of both states he or she will be considered a resident of the country where he or she has a permanent home.
A tax resident in Mexico is distinctly different from someone who is a legal resident, although often a legal resident generally is also a tax resident. Article 9 of the Fiscal Code of Mexico, amended for 2004, establishes that tax residents are those "who have established an abode in Mexico". If they have two homes available to them, one in Mexico and another one abroad, they will considered a tax resident of the country where the taxpayer has his or her center of vital interests. Mexico will consider that that the center of vital interests is Mexico if over 50% of the taxpayer's income is derived from sources inside of Mexico.
Expatriate tax residents have all the obligations and benefits of all other tax residents in the country, including the homestead exemption contained in Article 109 of Mexican Income Tax Law, which identifies that the transfer of certain properties are exempt from taxes, including: "Those resulting from the transfer of…the taxpayer's home…."
Where the current confusion arises is that some Notarios are of the opinion that the homestead exclusion is available only to legal permanent residents, and they make their tax liability determination on the basis of immigration law, not tax law.
What is "Legal Residency" in Mexico?
Legal permanent residence is granted pursuant to Article 48 of the General Population Law and is evidenced by possession of an FM-2 visa. Temporary visitors on an FM-3 visa pursuant to Article 42, or on a tourist visa, are not considered permanent legal residents. In fact, the FM-3 document specifically states that the holder does not automatically acquire residency by merely holding the visa.
Building a Case for Exemption
Your Notario will carefully examine a "fact pattern" before deciding if you qualify for a homestead tax exemption when you sell your Mexican residence. By complying with as many of the points below, you can greatly increase your chance of obtaining a homestead exemption on your Mexican property:
1. Obtain an FM-2 visa to establish legal and permanent residence. There are some Notarios in Mexico who will indeed grant holders of an FM-3 visa a homestead exemption to the extent that the seller qualifies under the tax laws. However, you will gain more credibility as a legal resident with the FM-2. Most Notarios will allow the tax exemption if you hold an FM2.
2. Obtain a Mexican tax identification number, known as "RFC", to show that you take your tax responsibilities seriously. Remember: the homestead exemption is available to "taxpayers" per Article 109 of the Mexican Income Tax Law. What better way to prove that you are a taxpayer than by showing that you have a Mexican tax ID?
3. Open a Mexican bank account that pays interest. The bank will withhold income taxes on your behalf, making you a taxpayer.
4. Live in your home for at least six months. While there is now no time requirement to establish tax residence, often Notarios will want to see at least six months of continued residence at the house.
5. Make sure that your utility bills are in the name of the person who holds title to the property. If the property is owned jointly, try to obtain at least one utility bill in the names of both persons. Gather at least six months of these utility bills as documentation for your Notario.
6. Make sure that the address of the property is exactly the same as the address listed on your FM-3 or FM-2.
If you meet most of the requirements above, and you have been told that you do not qualify for a homestead exemption, you owe it to yourself to get a second opinion and possibly save yourself thousands of dollars in taxes. There are Notarios who follow the tax laws -- and who will grant you the homestead exemption, even if you only have an FM-3. You just need to make the effort to find one!
Information source: Raoul Rodríguez-Walters - Mexico Advisor. You can contact Raoul at his San Miguel de Allende office: Correo #24, CP 37700 tel.: 415-152-0586; info@mexadv.com
Buying Mexican real estate gets easier
Onward, the Mexican land rush. Lured by beachfront vistas, quaint colonial backdrops and a historic construction boom, thousands of Americans are heading down Mexico way to snap up vacation homes, retirement villas and investment properties.
Heartened by wide-sweeping reforms in the country's judicial and foreign-investment systems over the past decade or so and heightened interest from investors, many Yanks have watched the values of their south-of -the-border properties head north in surprisingly short order.
"The market has just become prolific in Mexico, with about 1.5 million Americans now owning property there," says Mitch Creekmore, vice president of the Stewart Title Guaranty de Mexico office in Houston and one of America's foremost experts on Mexican real-estate acquisition. "Values in some markets have tripled in five years -- far exceeding the rates of return you find in the United States."
Barriers falling. Yet foreigners are still paying a premium to finance such deals, either through developer/seller financing that requires at least 30 percent down, or pricey, hard-to-get mortgage loans at Mexican banks that can hover well above 15 percent.
That's why several U.S. institutions are gearing up their own lending programs to cater to the growing niche. A handful of banks, including Marshall & Ilsley, Sonada Financial Group and Collateral Mortgage, now provide mortgages to American entities buying Mexican real estate.
Others, such as GS Mortgage Securities, plan rollouts in 2005. Collateral announced its "Mexico -- My Dream" program in late 2004, focusing on the vibrant Cancun and Riviera Maya markets. The company plans to step up its program in 2005, says Creekmore, whose firm, along with a few other U.S. companies, offers title insurance in Mexico.
Previously, American banks were reluctant to lend monies for Mexican real estate because of unreliable foreclosure laws and the potential for corruption, says Jeronimo Gomez del Campo, partner in the Phoenix office of Bryan Cave LLP, who specializes in the representation of U.S. companies and financial institutions investing in Mexico.
"But it is next to impossible now for corrupt officials or other individuals to mess with the chain of title or encumber properties for no legitimate reason," says Gomez del Campo. "Under NAFTA and other reforms, the Mexican government can't discriminate against foreigners in terms of property ownership."
Hence, Mexican haciendas are becoming hotter and bigger targets for many Americans and Canadians, especially those who have been priced out of U.S. resort areas, he says.
Rules, restrictions remain. However, Mexican real-estate laws still differ substantially from the American system and there are many crucial nuances to consider before cutting a deal for Mexican property, say experts.
While foreigners can purchase real estate in their own names throughout the country's interior, they can only buy property in Mexico's "restricted zone" -- within 31 miles of its coastlines and 62 miles of its borders -- as the beneficiary of a Mexican bank trust called a "fideicomiso." In this arrangement, the bank technically holds legal title to the real estate but its beneficiaries, who are known as the "fideicomisarios," retain the right to use, improve, sell, and will the property as they would if they were fee-simple owners.
While there's more bureaucracy involved in the trust process, "it is still as good as outright ownership ... and it's a real opportunity for people from the U.S. to settle in some incredibly beautiful areas such as Puerto Vallarta and Cancun," says Gomez del Campo. "Prior to 1992, all you could do was lease."
Closings pricey. The Mexican bank trust, which costs about $500 to establish, is good for 50 years and is easily renewable for another 50 years. Other costs, however, can add up quickly. There's a mandatory real-estate transfer tax, which averages 2 percent, a 1-percent to 3-percent fee for a government-appointed "notario publico" for processing and transaction certification, plus a bank appraisal fee.
"At the end of the day, buyers just have to realize that they are going to pay at least 6 percent to close a deal, as opposed to about 1 to 2 percent in the U.S.," said Stewart Title's Creekmore, who teaches classes to real estate agents on Mexican real estate. "While real estate deals in Mexico are more expensive ... some of that (extra money) goes to providing protective benefits to the foreign buyer. And once you do close, it's a little easier going, because property taxes are much cheaper and the trust fees are small."
Indeed, property taxes are only about a half of one percent in the Los Cabos region of Baja California, says Ted Downward, co-owner of Century 21 Paradise in Los Cabos. The cost of living in the area, which encompasses Cabos San Lucas and San Jose del Cabo, is also low and seems to be dropping as Mexican merchants adjust their prices to compete with such new-to-the-market American retailers as Costco, he said.
The Century 21 Paradise agent recalls when he first came to Los Cabos 21 years ago. "There were just a handful of gringos who lived here. Now, there are tens of thousands." Property values have risen rapidly and in many cases have more than tripled in the last half decade, Downward said. "It's been almost astronomical. I guess because we were so behind the U.S. for so long, everything here seems like a bargain."
U.S. lenders can offer much more competitive mortgage rates to buyers than their Mexican counterparts, although rates are still slightly higher than what buyers would pay for American real estate due to the added risks and extra legal precautions necessary to do business in another country, say real estate agents.
Cash, not credit, rules. Currently most loans used to buy Mexican property originate through developers or sellers, who require down payments of 30 percent or more and terms of 7 percent interest or more on the balance. "These are generally five- to 10-year loans that require a lot of cash," Downward says. "The good thing is that if you have the 30 percent, then you instantly qualify here, regardless of your credit."
In the past, the main obstacle for U.S. lenders has been Mexico's lax foreclosure laws, which virtually prohibited them from pursuing homeowners in Mexico who were in default. "That is changing," says Downward. "The Mexican government is becoming more reasonable and that is making it a little easier to foreclose and a little more worth the risk."
Representatives of more than a half-dozen mortgage-lending companies interested in offering Mexican mortgages from the U.S. side have talked with Downward recently about opportunities in the country, he says. "That's a market that is really going to open up. Lenders are just trying to figure out how to make it work."
Information source: Yahoo finance. Steve McLinden.
For more information e-mail us at vivasancarlos@gmail.com
Heartened by wide-sweeping reforms in the country's judicial and foreign-investment systems over the past decade or so and heightened interest from investors, many Yanks have watched the values of their south-of -the-border properties head north in surprisingly short order.
"The market has just become prolific in Mexico, with about 1.5 million Americans now owning property there," says Mitch Creekmore, vice president of the Stewart Title Guaranty de Mexico office in Houston and one of America's foremost experts on Mexican real-estate acquisition. "Values in some markets have tripled in five years -- far exceeding the rates of return you find in the United States."
Barriers falling. Yet foreigners are still paying a premium to finance such deals, either through developer/seller financing that requires at least 30 percent down, or pricey, hard-to-get mortgage loans at Mexican banks that can hover well above 15 percent.
That's why several U.S. institutions are gearing up their own lending programs to cater to the growing niche. A handful of banks, including Marshall & Ilsley, Sonada Financial Group and Collateral Mortgage, now provide mortgages to American entities buying Mexican real estate.
Others, such as GS Mortgage Securities, plan rollouts in 2005. Collateral announced its "Mexico -- My Dream" program in late 2004, focusing on the vibrant Cancun and Riviera Maya markets. The company plans to step up its program in 2005, says Creekmore, whose firm, along with a few other U.S. companies, offers title insurance in Mexico.
Previously, American banks were reluctant to lend monies for Mexican real estate because of unreliable foreclosure laws and the potential for corruption, says Jeronimo Gomez del Campo, partner in the Phoenix office of Bryan Cave LLP, who specializes in the representation of U.S. companies and financial institutions investing in Mexico.
"But it is next to impossible now for corrupt officials or other individuals to mess with the chain of title or encumber properties for no legitimate reason," says Gomez del Campo. "Under NAFTA and other reforms, the Mexican government can't discriminate against foreigners in terms of property ownership."
Hence, Mexican haciendas are becoming hotter and bigger targets for many Americans and Canadians, especially those who have been priced out of U.S. resort areas, he says.
Rules, restrictions remain. However, Mexican real-estate laws still differ substantially from the American system and there are many crucial nuances to consider before cutting a deal for Mexican property, say experts.
While foreigners can purchase real estate in their own names throughout the country's interior, they can only buy property in Mexico's "restricted zone" -- within 31 miles of its coastlines and 62 miles of its borders -- as the beneficiary of a Mexican bank trust called a "fideicomiso." In this arrangement, the bank technically holds legal title to the real estate but its beneficiaries, who are known as the "fideicomisarios," retain the right to use, improve, sell, and will the property as they would if they were fee-simple owners.
While there's more bureaucracy involved in the trust process, "it is still as good as outright ownership ... and it's a real opportunity for people from the U.S. to settle in some incredibly beautiful areas such as Puerto Vallarta and Cancun," says Gomez del Campo. "Prior to 1992, all you could do was lease."
Closings pricey. The Mexican bank trust, which costs about $500 to establish, is good for 50 years and is easily renewable for another 50 years. Other costs, however, can add up quickly. There's a mandatory real-estate transfer tax, which averages 2 percent, a 1-percent to 3-percent fee for a government-appointed "notario publico" for processing and transaction certification, plus a bank appraisal fee.
"At the end of the day, buyers just have to realize that they are going to pay at least 6 percent to close a deal, as opposed to about 1 to 2 percent in the U.S.," said Stewart Title's Creekmore, who teaches classes to real estate agents on Mexican real estate. "While real estate deals in Mexico are more expensive ... some of that (extra money) goes to providing protective benefits to the foreign buyer. And once you do close, it's a little easier going, because property taxes are much cheaper and the trust fees are small."
Indeed, property taxes are only about a half of one percent in the Los Cabos region of Baja California, says Ted Downward, co-owner of Century 21 Paradise in Los Cabos. The cost of living in the area, which encompasses Cabos San Lucas and San Jose del Cabo, is also low and seems to be dropping as Mexican merchants adjust their prices to compete with such new-to-the-market American retailers as Costco, he said.
The Century 21 Paradise agent recalls when he first came to Los Cabos 21 years ago. "There were just a handful of gringos who lived here. Now, there are tens of thousands." Property values have risen rapidly and in many cases have more than tripled in the last half decade, Downward said. "It's been almost astronomical. I guess because we were so behind the U.S. for so long, everything here seems like a bargain."
U.S. lenders can offer much more competitive mortgage rates to buyers than their Mexican counterparts, although rates are still slightly higher than what buyers would pay for American real estate due to the added risks and extra legal precautions necessary to do business in another country, say real estate agents.
Cash, not credit, rules. Currently most loans used to buy Mexican property originate through developers or sellers, who require down payments of 30 percent or more and terms of 7 percent interest or more on the balance. "These are generally five- to 10-year loans that require a lot of cash," Downward says. "The good thing is that if you have the 30 percent, then you instantly qualify here, regardless of your credit."
In the past, the main obstacle for U.S. lenders has been Mexico's lax foreclosure laws, which virtually prohibited them from pursuing homeowners in Mexico who were in default. "That is changing," says Downward. "The Mexican government is becoming more reasonable and that is making it a little easier to foreclose and a little more worth the risk."
Representatives of more than a half-dozen mortgage-lending companies interested in offering Mexican mortgages from the U.S. side have talked with Downward recently about opportunities in the country, he says. "That's a market that is really going to open up. Lenders are just trying to figure out how to make it work."
Information source: Yahoo finance. Steve McLinden.
For more information e-mail us at vivasancarlos@gmail.com
Wednesday, January 19, 2005
Trust vs. Lease
This question always comes up often with people new to the world of Mexican coastal real estate. It also comes up among seasoned veterans in the RV and mobile home communities. One comment we have heard is: "Trust -- lease; it's all the same in Mexico". The fact is, nothing could be further from the truth!
What's the difference? The difference is in the ownership of the "asset value" of the underlying real estate. The underlying real estate is the land plus all permanently attached improvements. The question is: Who ownes the "asset value"?
Under the Trust situation: When you purchase you become the "beneficiary" of the trust with a Mexican National Bank as the "trustee" in a fiduciary capacity. No one HAS EVER lost a property property placed in a Mexican Land Trust! As the beneficiary of the trust, you receive ownership of 100% of the asset value of the real property along with all of the responsibilities of real property ownership. When you purchase you can assume an existing trust or set up a new one. A new trust runs for a period of 50 years.
KEY POINT: ALL of these trusts are renewable such that you or your heirs can own 100% of the asset of the real property for as long as you want! You can buy it, sell it, will it or donate it at any time. You can improve it all you want subject only to local zoning regulations. These zoning regulations ca be either municipal, or agreed to by the members of an owner's association. (Since we are guests in a foreign countrym it is very important that we respect these regulations whether we agree with them or not!).
Under the Lease situation: The asset value is owned by the landlord. The responsibilities of property ownership are negotiable. Again, the asset value includes the land plus all permanently attached improvements regardless of who paid for them. Technically you own the right to the property for the duration of your lease as long as your lease payments are current, HOWEVER, at the end of the lease, unlike the trust, you own NOTHING. Under this arrangement, as we have seen in San Carlos in the recent past, the leases can be broken and the lessees run off.
Information from Richard Baca, Sunshine Realty, San Carlos Sonora, Mexico 85506. For more information e-mail us at vivasancarlos@gmail.com
What's the difference? The difference is in the ownership of the "asset value" of the underlying real estate. The underlying real estate is the land plus all permanently attached improvements. The question is: Who ownes the "asset value"?
Under the Trust situation: When you purchase you become the "beneficiary" of the trust with a Mexican National Bank as the "trustee" in a fiduciary capacity. No one HAS EVER lost a property property placed in a Mexican Land Trust! As the beneficiary of the trust, you receive ownership of 100% of the asset value of the real property along with all of the responsibilities of real property ownership. When you purchase you can assume an existing trust or set up a new one. A new trust runs for a period of 50 years.
KEY POINT: ALL of these trusts are renewable such that you or your heirs can own 100% of the asset of the real property for as long as you want! You can buy it, sell it, will it or donate it at any time. You can improve it all you want subject only to local zoning regulations. These zoning regulations ca be either municipal, or agreed to by the members of an owner's association. (Since we are guests in a foreign countrym it is very important that we respect these regulations whether we agree with them or not!).
Under the Lease situation: The asset value is owned by the landlord. The responsibilities of property ownership are negotiable. Again, the asset value includes the land plus all permanently attached improvements regardless of who paid for them. Technically you own the right to the property for the duration of your lease as long as your lease payments are current, HOWEVER, at the end of the lease, unlike the trust, you own NOTHING. Under this arrangement, as we have seen in San Carlos in the recent past, the leases can be broken and the lessees run off.
Information from Richard Baca, Sunshine Realty, San Carlos Sonora, Mexico 85506. For more information e-mail us at vivasancarlos@gmail.com
Monday, January 10, 2005
Foreign Ownership of Mexican Property
If you’ve been considering purchasing a vacation or retirement property in Mexico you’ll be joining literally thousands who have made the same happy choice, but there are a few things you’ll need to know concerning the legal and financial issues of your acquisition.
Many people believe that foreigners cannot own land in Mexico. This is not true. Let us clarify these common misconceptions. Article 27 of the Mexican Constitution states that no foreigner may own any Mexican Property within 100 km of the border or within 50 km of the coast. At the time of the Mexican revolution, most of this "Restricted Zone" was controlled by foreigners, hence the constitutional concerns.
Naturally, this "Restricted Zone" includes the largest portion of current Mexican resort cities. The Mexican government, however, does allow indirect acquisition of properties within the "Restricted Zone" through the established system of "Trusts" (Fideicomisos) with Mexican Banks. This is the only legal and correct way for a foreigner to purchase a residence in the "Restricted Zone".
This is how the process works:
A Mexican Bank will acquire the property for you as the owner in Trust. All rights to, and use of the property is yours as the purchaser for 50 years, and is renewable. The purchaser’s rights may be transferred to a third party, and your heirs named as "Beneficiaries". All Real Estate transactions in Mexico are processed through a "Notario Publico", who is an Attorney appointed by the government.
The Notario’s duties are to
- make a title search through the Public Registry, to certify the property free of any liens or encumbrances (Libertad de Grabamen);
- verify that there are no unpaid bills or taxes due to the Treasury,
- and conduct an official appraisal, so the property can be transferred properly.
There are registration and transfer fees to the government and possibly Capital Gains taxes owed by the seller, which are all due and payable at the time of transfer. The Bank also has a set up fee for a new trust or a transfer fee for an existing trust and an annual fee to maintain the trust. These fees will vary slightly depending on the bank. Overall the "closing costs" will be slightly more than similar transactions north of the border, and property taxes less.
It is not uncommon for sellers to require a 20-30% deposit with a written offer, and the full cost upon signing the official deed (Escritura). Financing of property is rare, so most purchases are for cash.
We’ve all heard the horror stories of nightmares in Mexican Real Estate purchases - these can be traced to 3 issues;
1. Trying to circumvent the "Trust" system, to save some fees (such as putting the property in the name of a Mexican "friend").
2. The leasing of "Ejido" land (Government land for agrarian use).
In both cases the old saying "Buyer Beware" is appropriate advice.
3. Failure to properly sever past owner liabilities (labor and construction issues).
Future Growth and Development
The San Carlos area is not part of the destinations promoted by FONATUR, such as Cancun, Ixtapa and Los Cabos, although the national tourism entity is backing a $1.7 billion plan -called Escalera Nautica- renamed to "Sea of Cortez Project", to build 22 marinas along the Sea of Cortez in an attempt to stimulate tourism and development in the area. FONATUR projects that by 2014 it can attract enough investment to build 10,300 rooms and attract 5.3 million tourists annually, up from 200,000 today, while creating 53,000 jobs.
Information provided by John Barttlet from Caballero Group Realty. For more information e-mail us at vivasancarlos@gmail.com
Many people believe that foreigners cannot own land in Mexico. This is not true. Let us clarify these common misconceptions. Article 27 of the Mexican Constitution states that no foreigner may own any Mexican Property within 100 km of the border or within 50 km of the coast. At the time of the Mexican revolution, most of this "Restricted Zone" was controlled by foreigners, hence the constitutional concerns.
Naturally, this "Restricted Zone" includes the largest portion of current Mexican resort cities. The Mexican government, however, does allow indirect acquisition of properties within the "Restricted Zone" through the established system of "Trusts" (Fideicomisos) with Mexican Banks. This is the only legal and correct way for a foreigner to purchase a residence in the "Restricted Zone".
This is how the process works:
A Mexican Bank will acquire the property for you as the owner in Trust. All rights to, and use of the property is yours as the purchaser for 50 years, and is renewable. The purchaser’s rights may be transferred to a third party, and your heirs named as "Beneficiaries". All Real Estate transactions in Mexico are processed through a "Notario Publico", who is an Attorney appointed by the government.
The Notario’s duties are to
- make a title search through the Public Registry, to certify the property free of any liens or encumbrances (Libertad de Grabamen);
- verify that there are no unpaid bills or taxes due to the Treasury,
- and conduct an official appraisal, so the property can be transferred properly.
There are registration and transfer fees to the government and possibly Capital Gains taxes owed by the seller, which are all due and payable at the time of transfer. The Bank also has a set up fee for a new trust or a transfer fee for an existing trust and an annual fee to maintain the trust. These fees will vary slightly depending on the bank. Overall the "closing costs" will be slightly more than similar transactions north of the border, and property taxes less.
It is not uncommon for sellers to require a 20-30% deposit with a written offer, and the full cost upon signing the official deed (Escritura). Financing of property is rare, so most purchases are for cash.
We’ve all heard the horror stories of nightmares in Mexican Real Estate purchases - these can be traced to 3 issues;
1. Trying to circumvent the "Trust" system, to save some fees (such as putting the property in the name of a Mexican "friend").
2. The leasing of "Ejido" land (Government land for agrarian use).
In both cases the old saying "Buyer Beware" is appropriate advice.
3. Failure to properly sever past owner liabilities (labor and construction issues).
Future Growth and Development
The San Carlos area is not part of the destinations promoted by FONATUR, such as Cancun, Ixtapa and Los Cabos, although the national tourism entity is backing a $1.7 billion plan -called Escalera Nautica- renamed to "Sea of Cortez Project", to build 22 marinas along the Sea of Cortez in an attempt to stimulate tourism and development in the area. FONATUR projects that by 2014 it can attract enough investment to build 10,300 rooms and attract 5.3 million tourists annually, up from 200,000 today, while creating 53,000 jobs.
Information provided by John Barttlet from Caballero Group Realty. For more information e-mail us at vivasancarlos@gmail.com
Wednesday, December 22, 2004
Buying Real Estate in Mexico's restricted zone
The Mexican Constitution does not allow foreigners to register deeds to land in their own names in areas of Mexico that are included in a zone 50 kilometers wide along the coast and 100 kilometers from the US border. This is called the restricted zone.
The Mexican government encourages foreign investment in Mexico. To this end, they passed in the early 70's a law that allows foreigners to "own" real estate in the Restricted Zone by using a "bank trust deed" or Fideicomiso, or Trust. This law was amended in 1993 to make it more liberal and to comply with the provisions of the North American Free Trade Agreement(NAFTA).
The Trust (Fideicomiso) is basically a deed in the name of a Mexican bank and has all the rights of ownership. The bank has no rights of ownership in the property. The deed does not form part of the bank's assets. Even if a bank were to fail or close, the deeds in trust would be transferred to another bank and would no be subject to bank creditor claims.
The Foreigner/Purchaser has all the rights of normal ownership including, but not restricted to selling, renting, improving, disposing or even destroying. The Foreigner/Purchaser pays all property taxes, utilities, and other charges made against the property. The banks charge an annual fee ($350-$550 depending on the bank) for holding the deed of trust.
For any foreigner to own property in Mexico, a permit must be obtained from the Secretary of State in Mexico City. As evidence that the government considers Trusts (Fideicomiso) a form of ownership, the Foreigner/Purchaser of a Trust must also obtain this permit. The trust allows the Foreigner/Purchaser to name primary can pass to descendants without the need of a will or probate.
Under current law, the Trust run for a term of 50 years and then they are renewable for another 50 years. It is not the intention of the government to ever acquire these properties, so this does not happen. When a Foreigner decides to sell this property, the new purchaser has the option of assuming the existing Trust or taking out a new Trust for a new term of 50 years. Foreigners have also been known to switch banks and take out a new Trust for a new 50 year term without selling the property.
As a buyer, you will pay approximately 5-6% for closing costs in addition to costs associated with either assuming an old trust ($1000-$1500) or starting a new trust ($2500). Trusts (Fideicomisos) are not leases! They are simply a different kind of ownership. Leases are a different matter and must be investigated thoroughly as the Foreigner has less protection with a lease. Some leases on the Baja were involved in a lawsuit that eventually saw Americans losing their leases.
San Carlos Nuevo Guaymas Sonora 85506 Mexico. For more information e-mail us at vivasancarlos@gmail.com
The Mexican government encourages foreign investment in Mexico. To this end, they passed in the early 70's a law that allows foreigners to "own" real estate in the Restricted Zone by using a "bank trust deed" or Fideicomiso, or Trust. This law was amended in 1993 to make it more liberal and to comply with the provisions of the North American Free Trade Agreement(NAFTA).
The Trust (Fideicomiso) is basically a deed in the name of a Mexican bank and has all the rights of ownership. The bank has no rights of ownership in the property. The deed does not form part of the bank's assets. Even if a bank were to fail or close, the deeds in trust would be transferred to another bank and would no be subject to bank creditor claims.
The Foreigner/Purchaser has all the rights of normal ownership including, but not restricted to selling, renting, improving, disposing or even destroying. The Foreigner/Purchaser pays all property taxes, utilities, and other charges made against the property. The banks charge an annual fee ($350-$550 depending on the bank) for holding the deed of trust.
For any foreigner to own property in Mexico, a permit must be obtained from the Secretary of State in Mexico City. As evidence that the government considers Trusts (Fideicomiso) a form of ownership, the Foreigner/Purchaser of a Trust must also obtain this permit. The trust allows the Foreigner/Purchaser to name primary can pass to descendants without the need of a will or probate.
Under current law, the Trust run for a term of 50 years and then they are renewable for another 50 years. It is not the intention of the government to ever acquire these properties, so this does not happen. When a Foreigner decides to sell this property, the new purchaser has the option of assuming the existing Trust or taking out a new Trust for a new term of 50 years. Foreigners have also been known to switch banks and take out a new Trust for a new 50 year term without selling the property.
As a buyer, you will pay approximately 5-6% for closing costs in addition to costs associated with either assuming an old trust ($1000-$1500) or starting a new trust ($2500). Trusts (Fideicomisos) are not leases! They are simply a different kind of ownership. Leases are a different matter and must be investigated thoroughly as the Foreigner has less protection with a lease. Some leases on the Baja were involved in a lawsuit that eventually saw Americans losing their leases.
San Carlos Nuevo Guaymas Sonora 85506 Mexico. For more information e-mail us at vivasancarlos@gmail.com
