Myths & Truths
Property Acquisition
ACQUISITION OF PROPERTIES IN MEXICO - MYTHS & TRUTHS
Foreigners may lease and own real estate and other properties in Mexico. However, there are several guidelines that must be considered before purchasing real estate: Article 27 of the Mexican Constitution grants the Mexican Nation ownership of the land and water within the territory and provides that the Nation shall oversee the transfer of ownership rights to individuals, by creating private property. Although Section I of the aforementioned article, grants the right to acquire the dominion of land and water only by Mexican individuals and companies, it also gives the State the power to grant the same right to foreigners, subject to the condition that these foreigners agree before the Ministry of Foreign Relations to consider themselves as Mexican nationals regarding the acquired property and not to invoke the protection of their country of origin with respect to the same. If the covenant is breached, all rights to such property shall be reverted to the Nation.
A foreign individual or company may directly own land in Mexico except in what is described by Article 27 of the Mexican Constitution as the "restricted zone." A zone within one hundred kilometers (sixty-one miles) of the international border and fifty kilometers (thirty-one miles) of the seacoast. Foreign individuals or companies and Mexican companies 100% owned by foreigners may purchase of real estate for residential purposes within this "restricted zone" has to be through a trust fund for fifty years. In this kind of trust fund the bank will retain the property title but the foreigner is the beneficiary and may use and enjoy such premises and may sell or even inherit the rights to it. However, all operations regarding the property must be notified and approved by the bank. Note: Mexican companies with 100% foreign capital may own property directly in the "restricted zone " for other non-residential purposes
Myth #1: Foreigners Can’t Buy Property in Mexico
Myth 1
Foreigners can own property in Mexico. It’s perfectly legal. Outside the restricted zones—50 kilometers (about 31 miles) from shorelines and 100 kilometers (about 62 miles) from international borders—foreigners can hold direct deed to property with the same rights and responsibilities as Mexican nationals. And inside the restricted zones, foreigners can control land through fideicomisos (bank trust agreements) again with the same rights and responsibilities as Mexican nationals. Alternatively, foreigners can hold land in these areas through a Mexican corporation. However, if it’s a residential property that the foreigner plans to use personally, rather than a commercial property or one used purely as an investment, it should be held in a fideicomiso. In the restricted zones, if a foreigner buys, the property title is held within a bank trust or a Mexican corporation—not directly. The trust is easily transferrable when an owner is ready to sell. This is a safe, legal, and extremely common vehicle for foreign ownership in Mexico.
Myth #3: The Government Can Just Take Your Land
Myth 3
This is simply untrue. No property controlled by foreigners through a properly constituted fideicomiso bank trust—the instrument used by foreigners to hold beachfront residential property in Mexico—can be repossessed by the Mexican government. There have been cases—such as in Baja California some years ago—when the Mexican government ‘repossessed’ property from foreigners. But when you dig a little deeper, it turns out the property titles didn’t hold up to scrutiny—they were essentially fraudulent. Yes, these expats were defrauded, but not by the government; the government was simply correcting the fraud, applying the law, and returning the property to the rightful owners. “Cases like these are good reminders that you need a competent, honest lawyer protecting your interests in a real estate deal…someone who can make sure a property title is legal, clear, and unencumbered. But IF there is a problem, you are protected as fully under the law as a Mexican citizen would be. Mexico’s legal system does work, despite bureaucracy and the occasional corruption.
Truth #2: A Step-by-Step Guide to Buying Property in Mexico
Truth 2
A Step-by-Step Guide to Buying Property in Mexico. Step 1: Make an Offer This is usually done in the form of a “promissory agreement” (contrato de promesa), which your attorney will draw up. Step 2: Set Aside 10% as Earnest Money in Escrow. Once your offer is accepted in writing, you’ll need to put a certain amount (usually 10% to 20%) of the purchase price aside as earnest money. This should be held in escrow with a third party. Whatever you do, don’t give this money to the seller. Notarios—while they might be the logical, neutral third party to hold this money—won’t hold deposits in their bank accounts, as they don’t want the tax liability on the funds. If you’re working with an attorney or real estate agent, they will likely have a system in place they can recommend. One arrangement is for the deposit to be held in escrow in dollars in the United States. When the deal nears closing, the deposit is transferred t at the current rate of exchange. This avoids the exchange rate problem—if the earnest money is transferred immediately into pesos and sits around several months and then the deal falls apart, someone will have to eat the currency fluctuations and the cost of the exchange…twice. And it will probably be you, the buyer. Another option is for you to have a cashier’s check drawn up in the seller’s name and have your notario attorney or a trusted third party keep it. If you are working with a title insurance company, they will usually provide escrow services. Tip: Buyer beware. In the U.S., escrow agents are licensed and legally responsible to see that the conditions of a contract are met before money is released. That is not the case in Mexico. If the real estate agent you’re working with is acting as escrow agent and he’s honest, there probably won’t be any trouble. But if he runs off with your funds, there won’t be much you can do about it. Step 3: Inquire About Title Insurance We suggest you get title insurance for your property, if you can. Though a notary will investigate a property’s title to be sure it is free from immediate encumbrances and that the taxes are paid, that research may not extend back through the entire chain of ownership. A title insurance company, however, will dig to be sure that there are no surprises lurking. If the title search tells you that title is not clear, don’t buy the property. Sometimes brokers, and even attorneys will tell you that title insurance is not necessary. We, however, recommend that you buy title insurance if it is available. While most likely you’ll never need it, you just never know. Title insurance will cover you if anyone else claims your property, by either reimbursing you or fighting your case in court. If you don’t have title insurance and something goes wrong, you have little recourse…and what recourse you have will likely be very expensive and take a very long time. Step 4: Wait While the Notary Investigates the Title, Gets an Appraisal, and Puts the Closing Papers in Order. You need to have a purchase sales agreement (contrato de compraventa) drawn up at this point. Normally, you’d have your attorney do this. The legally binding version of the contract is Spanish. Even if you have a side-by-side translation to English, it may not be accurate. So, have your attorney check the Spanish version and explain it to you. Depending on the way that you’re purchasing the property, your attorney can draw up the papers for a direct deed or help you form a Mexican corporation or create a bank trust, and he’ll get the papers in order to register your purchase with the Ministry of Foreign Affairs. In the meantime, your title insurer and the notary will verify the property’s title. In doing so, they will request a copy of the title deed and also documents such as the lien certificate (certificado de libertad de gravamenes), which will show the name of the owner of record as well as the details of the property, including the lay of the land (its size) and its status (commercial or residential, for example). They will also request from the local tax authority a non-lien certificate (certificado de no adeudo), which, if issued, will show that either no taxes are due or will reveal unpaid back taxes. In addition, they will make sure that no other property-related bills such as water or electricity are outstanding. You can also have the property appraised at this stage to establish its assessed value. Other Papers You Should Have in Hand. If you are purchasing a home, make sure you have copies of the paid water, electricity, telephone, homeowner’s association, cable, and other utility bills from the seller. Unpaid bills remain attached to an address. They will be your responsibility—not that of the prior owner. This applies to unpaid mortgages, too, so make sure that any mortgage debt is paid off by the seller before the property title transfers to you. If the seller had household help—a maid or gardener, any others—then you should have from each a signed letter stating that they have received their severance pay and that their rights have been satisfied. If you want to keep them on, start afresh with a new employment contract drawn up by your attorney. Step 5: Close on the Property. Once you have assurances from your attorney, notary, and title insurer that the property’s title is good, and the purchase of sales agreement is ready for you to sign, you’ll meet with the notary, the seller, and your attorney or broker for the closing. You get the deed (escritura), and you either bring a check for the remainder of the payment or have the funds transferred into the escrow account and have whoever is acting as escrow agent release them once you have the deed in hand. Step 6: The Notario Registers Your Ownership. Though you’ll have a copy of all the paperwork associated with the property, the transaction isn’t really complete until the notary registers your deed with the land registry office. We’ve heard all sorts of horror stories over the years (from all over the world) about notarios not completing this last step properly. So, you must follow up with the notario to ensure this has been done. When you have your (presumably registered) deed in hand, look for a seal on each page and for a certificate of registration, which should be included with the documents. With these papers in hand, you can go to the land registry office, where they will look at the registration number on the certificate and show you how the transaction has been listed in their books. Step 7: Have Your Attorney Draw up a Mexican Will for You. Tip: While your Mexican property can be transferred to your heirs as requested in your U.S. or Canadian will, it is by far the least desirable way to ensure they’ll get it. Guaranteed, if other arrangements have not been made, your heirs will spend months, if not years, wrangling with Mexico’s bureaucracy over your estate. You can save them the torment, time, and expense by having your attorney draw up a Mexican will in Spanish that disposes of your Mexican possessions and property. Step 8: Don’t Forget the Ministry of Foreign Affairs. No matter how you plan to hold your property in Mexico, you’ll need to alert the Ministry of Foreign Affairs that you intend to make a purchase. As we mentioned before, it is usually your attorney or the notary who applies for the permit on your behalf before the closing. It’s standard practice to issue these permits, so you needn’t worry that you’ll be waiting months for the paperwork to go through. In fact, the government pledges to have them issued within a few days. If you’re buying through a trust and you apply for your permit through the ministry’s central office in Mexico City, you’ll have it within five working days. If you apply at one of the state offices, the permit must be granted within 30 days. If you’re forming a Mexican corporation that will hold title to the property, you need to register that company with the Ministry of Foreign Affairs. The Ministry has 15 days to get the registration done. In any of those cases, if the ministry’s deadline passes and you still have heard nothing, then the trust permit or the registration are automatically considered authorized.
Myth #2: It’s Best to Hold Title in Your Own Name
Myth 2
An article in the Mexican Constitution of 1917 states that no foreigner can own property in Mexico’s “restricted zone.” In 1973, however, the government saw the economic wisdom of allowing foreign investment in the “restricted zones” and established the fideicomiso, or bank trust, as an instrument to allow such investment in residential real estate. Since 1973, most foreigners who have bought residential property in “restricted zones” have therefore done so through a fideicomiso. This sort of bank trust grants the title for a piece of property to the bank (the trustee), which in turn is obliged to follow any instructions given by the trust’s beneficiary—you, the foreign owner. You retain use and control of the trust and make all investment decisions regarding the property: that is, to sell it, rent it, build on it, live on it, or pass it down to your heirs. The fideicomiso is very secure—only banking institutions authorized and regulated under Mexican banking laws can serve as fideicomiso trustees. And with the fideicomiso you effectively have all the rights you’d have if you owned the property via direct deed. Fideicomisos do add some time and cost to the buying process. But they are a useful instrument, and many people buying outside the restricted zone— such as expats in the colonial cities, for instance—have chosen to own their property through fideicomisos/bank trusts. Owning property through a trust deed offers several advantages. First, you can list more than one person as beneficiary. This means, for example, that a husband and wife can essentially be “co-owners.” You can and should structure this in such a way that if one partner dies, the other has immediate, 100% control over the property. Second, you can list an “heir.” This means that, should both co-owners die, a new beneficiary is already in place—a beneficiary who, incidentally, needn’t be related to the original co-owners. Essentially, you write a letter of instruction to the bank naming this heir. When presented with the death certificate(s), the bank immediately and seamlessly passes title to him or her, and they don’t even need to be in Mexico for this. For gay couples, friends who own a property jointly, or for couples in a second marriage with different children, this is a very desirable option. All this is important because it allows the simple and easy transfer of control over the property and avoids the messiness of sorting out ownership in the Mexican courts. Plus, it allows you to avoid inheritance taxes. Trusts are issued for renewable 50-year periods. If you are buying property currently held in a trust, you can either establish a new trust for the next 50-year period or take over the existing trust deed. Trusts are renewable at any time by simple application. Maintenance fees for this kind of trust are typically $700 to $800 per year. Initial set-up may run a few thousand dollars.
Truth #1: How to Own and Purchase Real Estate in Mexico
Truth 1
There are three ways of owning Mexican property: First, via direct deed (all property in the interior), Second, through a Mexican corporation (commercial or residential property), or Third, through a bank trust called a fideicomiso, for residential property in the restricted zones. All three ways of property ownership are safe.
Truth #3 What are the Property Taxes in Mexico
Truth 3
Transfer Tax A 2% acquisition tax is payable by the buyer when property changes hands. Inheritance/Gift Tax Although Mexico does not impose an estate or inheritance tax, there is a tax on certain gifts involving real estate (payable by the recipient). Gifts between spouses and direct family members are not taxable. Property Tax The property tax on Mexican real estate is called predial. Compared with property taxes in the U.S., the cost of the predial is quite reasonable. It is a local tax and in most areas is payable quarterly. The average is approximately 0.1% of the assessed value of the property at time of sale. It is very common in many communities in Mexico to use the “assessed” value of the property as the basis for these taxes, and the official assessment can be considerably lower than the market value of the home—often only 30% or 40% of the actual sale price. You should know though that under Mexican law, using an assessed value less than the actual commercial value for tax purposes is illegal. And it means you’ll likely pay more capital gains tax when you sell. Rental Income Tax If you do not reside in Mexico, but rent out your Mexican property, your rental income is subject to tax at a rate of 25%. For residents, rental income is taxable at the regular income tax rates. Capital Gains Tax If you sell the property, you’ll owe capital gains tax. This can be up to 35% of the profit, but can be lowered based on how long you have held the property, authorized deductions, etc. To ensure that capital improvements you make to a property can be deducted, make sure you get the correct receipts. In Mexico, you can only claim deductions for services and materials that are recorded on official receipts and invoices called facturas. Facturas must be printed on a government-authorized press and have the tax ID number (RFC number) of the company or individual issuing the receipt. No factura, no tax deduction. The closing costs in Mexico are usually paid by the buyer. Fees for closing, in a regular transaction, usually come to between 5% and 8% of the cost of the property. The fees will cover an acquisition tax, property-registration fee, a fee for the tax certificate, the title-search fee, the property-appraisal fee, the notary’s fee, and any miscellaneous clerical fees, as well as a value-added tax on anyone whose services were engaged in facilitating the transaction (the appraiser, the notary, etc.). You can get an estimate of these fees from your notary and/or real estate agent when you make your offer. The seller pays the real estate agent’s fee, usually somewhere between 6% and 10% of the sale price.