With its innumerable attractions and great quality of life, Vallarta · Nayarit is a tourist destination that attracts thousands of foreigners who come to vacation or reside for long periods. In order to respond to the high residential demand, the region has developed a strong real estate industry with an extensive inventory, the sale and rental of properties a widespread practice among foreigners. However, many who come to Mexico have questions about whether they need to pay Mexican taxes when they rent or sell a property in the country and, if so, which, how and why.
At the recent Vallarta Real Estate Fair, held by Timothy Real Estate Group, this topic was among those that generated most interest among attendees. Expert on taxes for foreigners Paula Blanco, public accountant for the Escuela Bancaria Comercial (Commercial Banking School), was flooded with questions at her presentation “Mexican Tax Issues for Foreigners.” For this special article on taxes owed by foreigners who sell or rent real estate, we interviewed this subject expert, who is also the director of Equilibrium, a tax, accounting and administrative consulting firm.
Blanco says that the first question asked, mainly by US and Canadian citizens, is whether they will have to pay taxes in Mexico for the income they receive from the rental or sale of their properties in our country and, if so, how to show the government of their country that they have already paid Impuestos Sobre la Renta (ISR) (income tax) in Mexico.
“One of the issues of greatest concern is double taxation, that is, paying income tax in both their country of origin and their country of residence. The US and Canadian governments charge income tax to all their citizens, regardless of place of residence. There are agreements between countries to avoid double taxation, so that if you show the government that you already paid taxes for income in the other country—in this case Mexico—you receive a discount on the tax you owe and avoid paying double taxes,” assures Blanco.
Another of the issues that most ask is the simple “why” pay taxes for selling or renting your property here. The answer to this whole question is basic: “If you have a property in Mexican territory that is generating income—be it for sale or rent—regardless of the location of the bank to which the income is transferred, you have to pay Mexican taxes because it is a commercial transaction made in this country.”
Why Must I Pay Taxes in Mexico on These Activities?
According to the Mexican Ley del Impuesto Sobre la Renta (Income Tax Law), there are three reasons a foreigner must pay Mexican taxes:
“The first is ‘source of wealth,’ for income a foreigner generates from a commercial activity carried out in Mexico, like the sale or rental of a property. The second is ‘permanent establishment,’ when a person or entity carries out commercial activities for more than 183 days in the country. And the third is ‘tax residence,’ when a foreigner resides in Mexico for more than 183 days and generates income in the country. By meeting any of these conditions, you are obligated to pay taxes in Mexico,” says Blanco.
Does Immigration Status Make a Difference?
Any foreigner, regardless of immigration status, must file taxes if they meet any of the aforementioned requirements. However, there are differences:
If you file as No-Residente, you are required to appoint a legal representative with power of attorney, who will represent you before the authorities in case there is a fiscal offense. In addition, the tax is 25 percent of gross income, and 16 percent IVA (value added tax) must be paid, with no option for deduction.
Therefore, the expert recommends filing as Residente. “It’s the simplest, most economical way, and you do not involve a third party. When you obtain residency, you receive a CURP (Clave Única de Registro de Población) (similar to a social security number), and with this you can apply for your RFC (Registro Federal de Contribuyentes), similar to a tax ID, where your tax rate ranges between 10 and 35 percent of your net income, plus being able to deduct IVA at the time of filing.”
What Taxes Are Due on a Sale or Rental?
For temporary accommodations or rentals, there are three types of tax: ISR, which is between 10 and 35 percent of income, depending on your immigration status and regimen; IVA, which is 16 percent (charged to the guest); and Impuesto al Hospedaje (Lodging Tax), which is 3 percent in Jalisco and Nayarit.
If the income is generated by the sale of a property, the tax due is based on capital gain. In this case, there are three variants:
ISR as No-Residente is 35 percent or more of the gain and is retained by the notary, who pays it directly to the State.
ISR as Residente is also 35 percent and retained by the notary, but by having an RFC and being able to obtain facturas (official receipts) you can deduct up to 700 UDIS (Unidades Diarias de Inversión) (Daily Investment Units), which is approximately $4,000,000 pesos.
ISR for businesses is 30 percent and is not withheld by the notary; instead, the persona moral (legal entity) must declare it as sale of assets and specify the gain obtained in its annual declaration.
Regimens for Filing Taxes
If the foreigner obtains Residente status, he can file taxes as a persona física or persona moral (physical or legal entity). In the case of a persona física, there are two regimens:
The Régimen General para las Personas Físicas con Actividad Empresarial y Profesional (General Regimen for Physical Persons with Business and Professional Activity) incurs ISR rates between 10 and 35 percent of net income, IVA (16 percent, less deductible) and 3 percent lodging tax.
The Régimen de Incorporación Fiscal (Fiscal Incorporation Regimen) “is the most convenient and offers the most benefits,” according to Blanco. As she explains, it is a transitory regimen that lasts 10 years. In the first year, it gives the foreigner a 100 percent discount on ISR, in the second 90 percent, and so on, until year 11, when they change to the Régimen General. “With this, they can use simplified accounting and above all save.” However, there are two conditions that prevent qualifying for this regimen: the interested party cannot be a partner or shareholder in a legal entity in Mexico and their gross income from commercial activity cannot exceed $2,000,000 pesos per year.
The third option is to establish a Sociedad Mexicana, where the tax is fixed at 30 percent of net income. However, they have more obligations and need to have a partner.
Getting Tax Advice: Guarantee of Tranquility
Finally, public accountant Blanco recommends that foreigners who qualify to pay taxes do so through someone with experience in tax matters. “It is important to go with someone who knows the laws well, who knows how to analyze all the income they are receiving, what the conditions are and, in the case of double taxation, what treaties exist between Mexico and other countries, to be able to look for a strategy that suits them and thus prevents paying extra taxes. In tax matters, there are laws that change every year in Mexico, and here it is not as easy to file taxes as in the United States, where even a ticket serves to file. Here, deductions have many conditions, and you must know what to deduct, what is cumulative income and what is not. There are many provisions that change five or six times a year, and you need a professional who is constantly updated on the matter.”