“Any citizen, in any country in the world, has the obligation to contribute to public spending,” says Jorge Cadena, certified public accountant and partner of the firm Terán Rojas & Associates, when asked about the tax obligations of foreigners owning real estate in Mexico. “These tax contributions are the resources with which the state can finance its activities, aid programs and services.”
In Mexico, there are generally two types of taxes: Income Tax and Value Added Tax. As its name says, income tax is levied on your income generated within the country and/or state, while value added tax, also known as sales tax in other regions, is added to purchases you make. “Here, the first question would be: Is the foreigner going to have an income in Mexico? If the answer is affirmative, surely then they will pay income tax in our country. Value added tax is assessed on any type of consumption or purchase transaction,” explains Cadena, who has a master’s degree in taxes and is certified in the prevention of money laundering.
Section IV of Article 31 of the Political Constitution of the United Mexican States mentions that it is the obligation of Mexicans to contribute proportionally and equitably with the country’s public expenditures.
As in other countries, you must pay taxes on the property you own. “From the moment you are acquiring a property in Mexico, you are going to pay a tax, which is included in the closing costs you pay for the transaction. This tax is known as the Tax on Acquisition of Real Estate, although in Jalisco it is also known as Tax on Patrimonial Transmissions. This payment is approximately two percent of the value of the property,” Cadena explains.
Then, for each year of the possession of that land or property, the property tax must be paid, which is another tax that foreigners must take into account. In fact, anyone in Mexico who owns real estate must pay it. “Each year, this tax is determined based on the assessed value of the property. As it is a local tax, each state will publish its rates. In general, from January to March of each year, many municipalities offer discounts and/or promotions to encourage owners to make payments in advance, but the obligation is to pay it every two months.”
“The next consideration is, what use is going to be made of that property? With the current trend that exists, foreigners are buying properties to offer them as a lodging service or vacation rental properties, through different digital applications such as VRBO.com and Airbnb. Because the income tax applies here, it is the main tax that must be paid based on the way the property is being used.”
Cadena points out that, depending on the activities that foreigners carry out in Mexico, there are other taxes that should be considered: “If you have employees, then you must pay other contributions, such as labor charges and social security, among others.”
On the other hand, if the property is bought as an investment to be sold in the future, a tax must be paid on the profit of that sale. “This is also known to foreigners as Capital Gains Tax.”
When someone lives in a certain country permanently or for a long period, it is considered to be their place of residence. For tax purposes, the payment of income tax must be made only at your tax residence. It’s important to determine—especially if you own homes and/or generate income in more than one country—which is your tax residence country.
“For example, if a foreigner establishes his home in our country and no longer owns another property in his place of origin—he sold everything to come to settle in Mexico—and he makes his life here, it is considered that his tax residence is here, even if his only source of income is his pension from abroad. Each case is different, so you should review your status and see, apart from that pension, whether or not you have other income here and/or abroad.”
So, what happens if you have two houses, one abroad and one in Mexico? Or if you generate income in more than one country? To answer these questions, Cadena says: “You enter another level to determine which country is considered your tax residence. Both Mexican and international laws determine it very simply: Where does the majority of your income come from? If your income in our country represents only 10 percent and the other 90 percent comes from your country of origin, then, for tax purposes, income taxes are paid in the country of origin,” he concludes.