Owning Property in Mexico
Why Baja California? from our friends at AT² La Paz
La Paz has recently been voted by both LA Times and Money Magazine as one of the top three places for retirement in the world, and general real estate development and investment is growing at a incredibly rapid rate.
Baja offers numerous opportunities to developers looking for prime beach front land for resorts or hotels, as well as large parcel for sub-division and re-sale markets, as well as location from dream homes.
The desert of Baja California is one of the last unspoiled and little explored places on earth.
Partner with us to develop Baja responsibly.
You can visit sites of ecological and cultural interest. You may swim, snorkel, or dive in the Sea of Cortez, or get a tan on pristine beaches. You may also visit mysterious cave paintings, or the ruins of ancient gold and silver mines. Visit the first missions on the continent, or simply tour the desert, far away from any civilization. Where the desert meets the sea and the mountains is a magical place. Sun, Sea, Sand, and Palm Trees are always a Great Investment!
The Baja Economy is Growing!
Baja has a lower 10% value added tax compared to 15% mainland.
Baja property taxes are still extremely low and stand at about 0.2% per year over commercial value.
Baja population is growing at 3.8% rate.
For mere pennies on the dollar you could own your own ocean front lot and live there for much less than living anywhere else in the United States.
What is a FIDEICOMISO?
A Fideicomiso is a 50-year perpetually renewable and transferable Bank Trust through which Foreigners acquire irrevocable and absolute ownership rights to property in Mexico.This Trust is a legal substitute for deeded (fee simple) ownership and is provided specifically for non-nationals to own property in the formerly restricted zones (border and beach areas.) The Trust system of ownership is sanctioned by the Mexican government, provided for under the Mexican Constitution, and secured by the Central Bank of Mexico.
How did it develop?
In 1973, recognizing that many foreigners desired to own property in Mexico, President Echeverria approved the "Fideicomiso" form of foreign ownership of real estate; the "Fideicomiso is available to non-Mexicans. It is similar to a U. S. Bank Trust. The law governing ownership under a "Fideicomiso" was further expanded in the Foreign Investment Laws of 1989 and 1993.
Prior to 1973, ownership laws were different: Article 27 of the Constitution of the Republic of Mexico prohibited foreign ownership of real property within 50 kilometers of any coastline or 100 kilometers of either international border. This is referred to as the "restricted" zone. If the property you are buying is located outside of the restricted zone, you may own the property through a deed in your name.
Consequently, properties located within the restricted zone (including the entire Baja Peninsula) may be acquired by a foreigner through the "Fideicomiso", which designates the buyer of the property as the beneficiary of the trust. Legal title is placed in the name of the bank, selected by the buyer as his/her trustee. The bank administers the property in accordance with the instructions of the buyer/beneficiary. The buyer/beneficiary enjoys the same rights of ownership of a Mexican National. The buyer may build on the property, tear down existing buildings, modify them, rent, lease or sell at anytime, conforming only to the general laws of the country established for all persons.
It is your Trust and not the property of the government or the Bank. The Bank reviews all paperwork of the current owner/developer to ensure that the documents are complete and legal. The Fideicomiso is not an asset of the bank's. If the Bank should ever fail, the Fideicomiso is simply transferred to another authorized Bank.
The duration of the "Fideicomiso" is fifty years; however, it can be renewed for unlimited, additional, fifty-year periods. In other words, title to the property may rest in the beneficiary indefinitely, provided that it is renewed within the terms established by the law.
The procedure for establishing the "Fideicomiso" is as follows:
1. Application is made to the Secretary of Foreign Relations for the permit to establish the "Fideicomiso".
2. Upon receipt of the permit, the bank acting as the trustee sends instructions to the "Notario Publico" for preparation of the deed to the beneficial rights.
3. Applicable taxes are paid.
4. The deed is recorded in the municipality where the property is located.
The cost for the permit to establish the "Fideicomiso" is (as of 12.01.06) is approximately $2,400 USD. Annual bank administration fees generally range from $450 to $500 USD. Additional closing costs, such as an official appraisal, notario (attorney) fees, certificates, and registration costs must be paid for processing all required documents.
What is Title Insurance:
Title insurance is a special type of insurance that protects the insured from loss on a specific piece of property. A Title Insurance Policy provides security against the loss of land as a result of a title problem. Title Insurance can be purchased with or without limitations and exclusions. When purchasing property in the United States, most Banks and Mortgage companies require Title Insurance prior to granting a loan.
It is equally important when purchasing property in Mexico. A Fideicomiso (Living Trust) DOES NOT take the place of or exclude the need for Title Insurance. (A Fideicomiso can be dissolved in the event of Fraud, Errors and Omissions and certain Gov't and Ejido claims.) When purchasing Title Insurance in Mexico, be sure to read the master policy thoroughly and check for limitations and exclusions.
Some title insurance companies insure only the Fideicomiso (Living Trust) and exclude fraud, government and Ejido claims, even certain developer liens
When purchasing title insurance in Mexico make sure that the policy is on the land not just the Fideicomiso..
Several renown firms such as Stewart Title and First American can now offer Title insurance on your Baja property or project.
What is the Mexican Capital Gains Tax?
The information provided here will help you understand the tax system in Mexico and the important issues related to it. Regardless, we recommend you meet with a tax professional prior to completing your purchase to confirm whether any of the laws have changed since this document was published in 2005.
Capital gains tax law in Mexico states that tax is owed on the profit you receive when you sell your home or property. By law, you have two options when it comes to capital gains, and you can use whichever is the better of the two options for you.
Option 1: 30 percent of the net profit. (There are a variety of deductions included in this option.)
Option 2: 25 percent of the gross sales amount with no deductions.
(Percentages reflect the 2005 Tax Code)
Although a 30 percent capital gains tax may seem high, Mexico does have several laws and procedures that will assist you in maximizing your cost basis, thereby reducing your net profit, and thus lowering your capital gains. The key is to understand these laws before you buy, not when you decide to sell.
Why should you take on the seller's capital gains liability?
The first step in calculating your capital gains is to subtract the value you have recorded in your trust (fideicomiso) from the sales price of your property. In the past, some real estate companies recorded values lower than the actual purchase price in an effort to "save" taxes for their client. They think they can save money on the 2 percent acquisition tax. This is a big mistake. Never record a lower value than what you actually paid for the property. Doing so simply establishes a lower cost basis for the property, which increases your capital gains tax liability.
An oversimplified example is: You wisely purchase a lot for $1 million, but unwisely record a value of $500,000. In the eyes of Mexican tax law, your cost basis is now $500,000. If you sell the lot for $1.2 million, you see a profit of $200,000. However, according to your recorded cost basis, Mexico sees a profit of $700,000, and your capital gains tax for Mexico will be 30 percent of $700,000 ($210,000.) You just lost $10,000 instead of making a profit.
Rule Number 1: Always record the full value of your purchase.
The best legal means to safeguard your investment is to record your real purchase price and proper documentation, in order to maximize your potential profits. The bottom line is to always secure a trust over your property as quickly as possible for the real value of your purchase.
Never allow anyone to convince you to record a lower value than what you have actually paid for your property, or you will assume the seller's capital gains tax liability. Recording a lower value today can cost you should you decide to sell in the coming years. If a seller can get a buyer to record a lower value, the tax liability simply is passed along, and eventually someone will have to pay. Don't let anyone tell you "That's how we do it here." Mexico is like everywhere else. The capital gains tax is the responsibility of the seller.
1) It isn't yours until you have the title in your name.
2) If you don't record the accurate value of your purchase, you're most likely taking on someone else's capital gains liability.
Recording the real value benefits you and establishes your cost basis in the eyes of Mexico.
The amount you pay for a property has no impact on your yearly property taxes.
Capital gains taxes you pay in Mexico can be applied to your U.S. taxes.
How do I know if my value is recorded correctly?
We will oversee the creation and completion of your trust. We review the documents with you and, to make certain everything is in order, we are present when you sign your trust.
You can verify the value yourself by examining the first page of the trust document and noting the amount written in text, which is always in Mexican Pesos. Simply divide the current exchange rate into the peso amount and make sure the result reflects the actual dollar amount you have paid. If you want to check an old trust, simply determine the peso rate for the day and year the trust was executed. We can assist you in finding the exchange rate, as can the bank and the Internet.
(Helpful hint: When you sign your new trust, ask the Notary to jot down the exchange rate on the document itself. This will come in handy years later.)
What about the two-year capital gain exclusion?
Mexico, as well as the United States, provides its residents a capital gains tax incentive for their primary home. The tax incentive in Mexico states that if you sell your "primary residence" after two years, you pay no capital gains. This law is in place for "residents" (Mexicans nationals or foreigners) of Mexico only, and there are several items required to establish residency status. In order to claim your home as your primary residence in Mexico, you must be able to prove that it really is your primary residence.
At the closing, you will be required to provide the Notary with a residence visa (FM2), as well as a bank account, water, phone and electric bills, paid tax receipts and your trust, all in your name, all with the address of the home and all in place for more than two years.
You cannot have two primary residences at the same time. Therefore, if you claim the home in Mexico as your primary residence, you give up your primary residency status in the United States.
The capital gains tax exclusion is intended for residents of Mexico, not for persons owning second homes or vacation homes.
There are no short cuts and no legal ways around taxes in Mexico any more than there are in the United States or Canada. Your home is a large investment, and following proper legal steps will ensure a safe and enjoyable experience in Mexico. If someone says, "This is Mexico, and that's the way we do it here," they have just thrown up a red flag and you should seek another agent.
If you plan on building a home or doing a major remodel to an existing home, make certain that all your expenses are added to your cost basis.
If you are considering a real estate purchase in Baja, make sure everything is done right by allowing us to work for you and supervise the transaction. Our only interest is representing you in a real estate transaction that is safe, solid and secure.
Don't blame your morning rush to the pot on those tacos, better chance it was the mass consumption of spirits that did you in. Street stand tacos could be just what the doctor ordered.