A Guide to Buying Property in Mexico
YOU DON´T HAVE TO LIVE IN MEXICO TO OWN A HOME IN MEXICO
It does not matter what country you currently call home - Mexico is a great place to own real estate. Beautiful weather, oceanfront or hip city locations, and amenity-rich developments all at lower prices of what you'd pay for comparable property in the U.S. make it the ideal place to own a home or a condo or a ranch .
Best of all, you don't need be a resident of Mexico to own property there; no immigration requirements need to be met.
THE HISTORY OF PROPERTY OWNERSHIP IN MEXICO
While foreigners were always allowed to own property in Mexico, there were restrictions. Previously, the Mexican constitution banned foreigners from owning property within 62 miles of any Mexican land border and 31 miles of any coastline. These areas are known as the "restricted zone." Yet most vacation properties were built on prime land that fell into these restricted zones.
Since these restrictions were written into the Mexican constitution, and could not be changed, the Mexican government created a way to work around the system called "fideicomiso" (pronounced: FEE-DAY-E-CO-ME-SO). Roughly translated, the word means "real estate trust." By placing property in this trust, foreigners are allowed to own property within the restricted zones.
In essence, the trusts holds the deed to the property, while the buyer, and others whom the buyer specifies, are beneficiaries of the trust (and, of course, the property). The beneficiary has full control over the property and can rent, sell, improve and even give the property away if they so choose.
THE MEXICAN “TRUST” OR FIDEICOMISO
A trust is created with a Mexican bank and the title is submitted into the trust. The bank acts as a trustee in this case and the trust is formalized after receiving a permit from Mexico's Ministry of Foreign Affairs. The buyer is named as the beneficiary of the trust, and the beneficiary's rights are recorded by a notary public.
Banks charge around $2500 USD to set up the initial trust - which involves establishing the trust and writing the trust agreement. Then, a percentage of the value of the property is added on. As well, a small annual fee is charged by the bank to covers its services as trustee.
Within the trust deed, the current owner of the Mexican property acts as the settlor and conveys the title of the property to the trustee who will then hold the title for the life of the trust - 50 years, renewable in an indefinite amount of 50-year periods.
The trust may be transferred or sold like any interest in real estate. If the property in Mexico is sold to another foreigner, the Secretary Foreign Relations in Mexico must, by law, issue a new trust permit to the buyer. If the property in Mexico is sold to a Mexican national, the trust can be dissolved.
BUYING PROPERTY IN MEXICO
Buying real estate in Mexico is very similar to how one would buy property in the U.S. Lawyers, real estate agents, notary publics and banks all play a part in the buying process.
Required documents include a certificate indicating a title free and clear of any liens, statements from the local Mexican municipality outlining property assessments, water bills and other tax information, and finally a property appraisal to determine the property's value for tax purposes. It's common for the buyer of property in Mexico to pay all closing costs, including the transfer of acquisition tax. As in the U.S., the seller pays capital gains tax and real estate brokers' fees.
The transfer tax is typically between 1% and 4% of the property's appraised value - which is quite often less than the sale price. Closing costs (not including transfer tax) range from 3% to 5% of the appraised tax value. These percentages are applied to whichever is greatest:
- The property's sale price
- The official appraised value for taxes
- The value of the property as determined by the assessment authorities
THE MEXICAN NOTARIO (NOTARY PUBLIC)
Notary Publics in Mexico are first licensed attorneys in Mexico, then they apprentice in notary-ship law and practice with another notary public for a period of time, then pass a notary public examination and thereafter are appointed by the Governor of their state to act as a Notary Public in a given geographical location (a town, a district).
Notary Publics are invested with the "public faith" granted by government and can assert this Public Faith in reference to the existence of an event they witnessed, the existence of certain documents, the existence of official acts, the content of a contract, the signature of a party, and as well the due representation of an agent on behalf of a principal. As one can see, their authority is substantial.
The Notary Publics normally perform their duties either in the issuance of a Public Instrument ("Escritura Pública") that will contain that sought by the parties or they will affirm to the signature of a party that signs a document before them.
In cases where title of ownership of real estate is transferred, the Notary Publics are charged with the preparation of the title transfer document/contract (their own document or a draft given by the intervening parties that they will review and revise as needed) which takes the form of a Public Instrument and with the acquisition and attachment (to the Public Instrument file) of documentation evidencing the seller's ownership, any power of attorney (in the event of an agent acting on behalf of a principal), the certificate of non-encumbrance and title-holding from the corresponding Public Registry of Property, an affidavit of appraisal, non-debt of water, and non-debt of land taxes. As well, the Notary Public calculates the taxation and fees that will be payable to government agencies and collect them from the intervening parties and (when the parties so request) performs the registry of the new title at the corresponding Public Registry of Property.
THE CLOSING PROCEDURE
Once your offer of purchase and sale has been accepted, the closing process begins. In order to validate the Offer of Purchase and Sale, a deposit (normally 10% of the purchase price) is required. The money is held either by your attorney, Notario, real estate agent or placed in an escrow account. These funds are held during the time needed to close. The balance is payable upon the signing of the trust deed or deed at the office of the Notario. Most real estate agents have one or two Notarios with whom they usually deal. In order to obtain the trust deed or deed, the Notario will;
- Ensure the property is free of any liens and clear by checking the Land Registry Office- This is guaranteed by obtaining a non-lien certificate and tax statement from the treasury. Additional checks are made for outstanding utility bills andmunicipat taxes.
- Obtain a permit from the Minister of Foreign Affairs to establish the trust deed.
- Prepare all documents for both buyer and seller.
How long does the closing process take in Mexico?
In most cases a real estate transaction can be closed in 30 to 60 days for a cash transaction and 90 days for a transaction involving financing. However due to Mexican holidays, permit delays, Tustee Bank paperwork, etc., delays may occur. These delays are not considered defaults by buyer or seller as they are events beyond their control.
What type of fees can be expected when purchasing a property in Mexico?
Closing costs are determined by the declared value which is usually slightly lower than the sales value. In new constructions, the sales value and declared value should always be the same. This value becomes the basis for all related taxes and fees. Generally the seller pays the real estate fees and the buyer is responsible for the transfer tax and the cost of establishing the bank trust (if it isn´t already in existence from a previous owner), notary fees, registration fees, tax appraisal fees and trust permit fees. The buyer´s total closing costs average between 4% - 6% of the purchase price.
TITLE INSURANCE, WORTH EVERY PESO
Title insurance for property is the responsibility of the buyer and is highly recommended, just to be safe. The title insurance company in Mexico will research the title and make certain that it is free and clear. If the title is ever disputed in the future, the insurance company will defend, and advocate for, the buyer in court if necessary.
Rates typically costs between $5 and $7 per $1,000 of coverage depending on the insurance company and the value of the property.
FINANCING IN MEXICO
As a foreigner purchasing property in Mexico, financing is readily available though Mexican lending institutions and banks. Many developers in Mexico work with specific companies and even offer incentives to buyers for working with preferred lenders.
U.S. lending institutions are starting to work their way into the Mexican real estate market, which should make it even easier for foreigners to get financing. Financing offers flexibility. Instead of being forced to pay cash, financing allows purchasers to put as little as 20%, making higher prices, potentially more appealing homes well within reach. Furthermore, mortgage interest is tax deductible off of your U.S. tax return. You may deduct the mortgage interest on your home or home site in Mexico. Per IRS Publication 936, mortgage interest paid on primary or secondary homes up to 1,000,000 USD aggregate is tax deductible. There are no limitations stating that the second home must be located within the United States.
REQUIREMENTS FOR OBTAING A LOAN
- Currently financing options are available to U.S., Canadian, Mexican, British and Spanish citizens.
- A minimum credit score of 650 with adequate credit depth.
- Employment history
Similar to financing in the U.S., financing your home in Mexico requires your tax returns, pay stubs and/or W2 forms in order to verify your income. Alternative documentation programs are also available that allow the use of bank statement deposits for verifying income.
HOW LONG DOES THE FINANCING PROCESS TAKE?
The initial credit approval process takes 3-7 days from the time you have provided the necessary documentation. Next, the appraisal is ordered by the lender- this takes roughly 2-4 weeks. When the appraisal has been completed and all conditions of the loan satisfied, the closing process begins- this takes anywhere from 60-90 days. Once the municipal tax appraisal and required permits have been received, we will begin the process of drafting your closing documentation, at which time you will be ready to sign and close your loan.
WHY ARE TWO APPRAISALS REQUIRED?
Two appraisals are necessary when financing property in Mexico. The first is a commercial appraisal similar to the one utilized in the U.S. This appraisal establishes fair market value. The second necessary appraisal is the cadastral, or tax appraisal. This is required by the municipality and is obtained in order to validate an accurate property tax base. This appraisal is derived from the cost of construction or land value and location. The chosen lender will send the appraiser out to complete the process. The Notario will order the cadastral appraisal once the closing process has begun.
CAPITAL GAINS IN MEXICO
Understanding Mexican tax law is an integral part of the purchasing process. What you do today dictates your tax liabilities tomorrow.
The following is an overview of the capital gains tax regulations currently in place for individuals. Note that the information is intended for individuals, not corporations. Over time these regulations may change, therefore it is important to make sure that the process outlined here is still in effect by contacting a certified accountant or Mexican Notario.
Capital gains tax law in Mexico states that tax is owed on the profit you receive when you sell your home 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:
- You pay 28 percent* of the net profit. (There are a variety of deductions included in this option.)
- You pay 25 percent* of the gross sales amount with no deductions. Although a 28 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 lowering your capital gains. The key is understanding these laws before you buy, not when you decide to sell.
*Percentages reflect the 2007 Tax Code.
PRIMARY RESIDENCE CAPITAL GAINS EXCLUSION
Mexico, as well as the U.S., 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” you pay no capital gains. This law is in place for “residents” (Mexican nationals or foreigners) of Mexico only, and there are several items required to claim your home as your primary residence in Mexico.
One must be able to prove residency status for 2 years in the property. At closing you will be required to provide the Notario with a residence visa (FM3 or FM2), as well as water, phone and electric bills – all in your name- all with the address of the home. Please keep in mind that this is just a guideline of the requirements. It is necessary to consult your attorney and the Notario prior to closing your transaction in order to know if you are eligible for the exemption.
FINDING A LAWYER
An attorney based in Mexico should be hired to write contracts and review all of the conditions and terms regarding the sale of property in Mexico. Also, the attorney is capable of doing a title search and point out any issues or areas of possible concern.
To protect their own best interests, buyers should have their own attorney and should be dissuaded from using the attorney of the seller simply because that lawyer's services were offered for free as an incentive.
All attorneys licensed in Mexico should be able to produce a "cédula profesional" - a document signifying a registered license to practice law in the document includes a photo of the attorney and his signature.
To ensure an attorney is licensed to practice in Mexico, a foreign buyer should request to see the attorney's license, and have the attorney's license number added into any retainer agreement before employing any services.
LIVING YEAR ROUND IN MEXICO
If you've decided to purchase real estate and live in Mexico for more than six months at a time (or permanently) you must apply for your FM3 immigration papers.
The FM3 is very easy to obtain, and you can complete most of the paperwork on your own.
The FM3 grants you non-immigrant status. You apply for it through the local immigration office. The FM3 must be renewed on a regular basis.
After you've held your FM3 for a minimum of five years, you are eligible to apply for your FM2. The FM2 grants you immigrant status and is applied for at your local immigration office
NEED MORE INFORMATION?
If you have more questions about purchasing property in Mexico, don't hesitate to contact me. We have the knowledge, the contacts and the integrity to answer all your questions and handle your real estate needs.