Legal & Tax Advice
Wolf Property Management can offer you strategies to have in order your rental income and comply with the Mexican tax issues. Remember that all taxes you pay in Mexico are deductible in the US and Canada. Feel free to contact and ask us anything regarding this matter. If you need to manage all your income individually, Wolf Property Management can recommend you professional and trusted Accountants that may assist you thoroughly.
*This article is only intended to provide general information. It is not intended to be relied upon as legal, accounting, tax or other professional advice or services. Please consult with legal counsel and a tax advisor to address your concerns.
Income Tax in Mexico
Mexico’s tax laws are patterned after those of the United States and Canada, and state that:
“Physical persons (individuals) and Legal persons (companies) who are residents of Mexico and who receive income in this country, are obligated to register with Hacienda (Mexican IRS), declare their income and pay their taxes, regardless of the source; and…Physical and Legal persons who are residents in a foreign country (outside Mexico) must declare their income and pay their taxes on all income generated in Mexico…”
If the property is held in a fideicomiso (trust), a Mexican accounting firm can perform all necessary tax and accounting services including the monthly filings and tax payments, and can also provide the foreign owner with accounting and documents for obtaining tax credits on their U.S. or Canadian taxes.
U.S. Income Tax Treatment For Your Mexican Home
In addition to filing Forms 3520 and 3520-A (this forms might change over time, please check with your home country accountant), additional US income tax obligations may arise, depending on how you use your Mexican home. As long as you are a US citizen, you are subject to US income tax obligations, even if you live in Mexico. Contrary to what you might read, living out of the US does not relieve you of your US tax obligations. Only giving up your US citizenship does that!
If you use your Mexican house as a second home, and you don’t rent it out or use it to generate any income, the IRS treats it as a personal vacation home. Real estate taxes, casualty losses, and mortgage interest are deductible on your US federal income tax return (see 26 U.S.C. Section 280A).
If you use the house yourself and rent it, you can still deduct rental expenses, if you stay in the home yourself for less than 14 days per calendar year or less than 10% of the number of days per calendar year in which you rent the home. How much rental income is includable as income on your US tax return, and how depreciation, maintenance expenses, operating expenses, mortgage interest, property taxes, and insurance are allocated between personal use and rental use on your tax return depend on how many days the property is used for each purpose (see 26 U.S.C. Section 280A4).
If your Mexican property is strictly a rental, the same rules apply as for US rental real estate. You can take deductions on Schedule E of your US federal income tax return for mortgage interest, insurance, operating expenses, repairs, and maintenance, and you can offset those expenses against gross rental income.
If you “actively participate” in the management of the property, you may be able to use up to $25,000 of real estate losses to offset other income on your US tax return. However, this benefit only applies if your adjusted gross income is $150,000 or less. If your Mexican home is your principal residence, you can take the same deductions that apply to a US principal residence. You can also deduct foreign property taxes (see 26 U.S.C. Section 164(a)(1)(3)).
Note: Information has been published with copyright authorization from Emerald Coast.
Complete and very useful information can be found at https://www.emeraldcoastinv.com/
Mexican Tax Reporting & Payment
In Mexico, talking exclusively about taxes related to the rental of your property, tax reporting is done once monthly basis and you will need to pay for two types of taxes:
a) ISR (impuestos sobre la renta or known as “income tax”), which basically is a tax over any income you generate from any “business activity” as for example renting out your property.
b) IVA (impuesto al valor agregado or known as “value added tax”), which is a tax charged in all goods and services from restaurants, to retail products, services, etc.
VAT or different from the Sales Tax but in the end in Mexico, as a consumer or tax payer you can escape from it. In any case here is an article explaining the differences:
https://tax.thomsonreuters.com/blog/what-is-the-difference-between-sales-tax-and-vat/
Other U.S. & Mexican Tax Issues
RENTAL INCOME GENERATED IN MEXICO
If you generate income in Mexico, for example by renting your Mexico house, you need to report that income on a Mexican income tax return. You do not have to pay double taxes, thanks to a tax treaty between Mexico and the United States and Canada (please always check with your home country accountant for the latests Foreign Trade agreements and benefits between Mexico, Canada and the United States as regulations change from time to time).
In other words, if you rent your Mexico house, you’ll need a Mexican accountant. Many good ones are available. We recommend using one with existing American, Canadian or foreign clients who are already familiar with the particular issues pertaining to the filing of Mexican income tax returns by non-Mexicans.
Another alternative is to hire Wolf Property Management. Our programmes and service include taking care of everything for your from maintenance to renting your place and even paying your Mexican taxes, so you don’t have to sweat the details.
Working with us some of your benefits here would be:
1.- No need to hire an accountant and additional monthly fees, get documents, communicate with your accountants, make payments, etc.
2.- No additional fees for helping you process and reporting your tax payments (we throw this in as an added value for our clients)
3.- You will get an annual tax statement with all your taxes paid during the fiscal year which you can use to offset (pay less) taxes in your home country (you will need to validate with your local accountant on the Trade Agreements with Mexico to avoid double taxation, etc.).
4.- You will be compliant and risk free for any potential audit from the Mexican tax authorities (SAT or known as a Hacienda too).
5.- A few extras, but better find out once we work with you!
US GIFT TAXES IN RELATION TO YOUR MEXICAN REAL ESTATE
Besides income tax, you may also want to consider US estate and gift taxes. Under current US law, if you are a citizen or resident of the US, your Mexican real estate will be included in your gross estate for tax purposes whether you hold title to the property outright or in a bank trust (see 26 U.S.C. Section 2033). If you give your property away, say to a family member, or allow them to live there rent free, these are considered gifts. If the annual value of the gifts is greater than USD $12,000, you will be subject to gift taxes (see 26 U.S.C. Section 2503(b)). Consult your tax preparer or financial planner to make sure you get the full benefit of your Mexican investment.
Note: Information has been published with copyright authorization from Emerald Coast.
Complete and very useful information can be found at http://www.emeraldcoastinvest.com
National Immigration Institute & Ministry of Foreign Affairs in Mexico
Note: Please consult the official website of the National Immigration Institute (INM in Spanish) of Mexico at http://www.inm.gob.mx/EN/index.php for any migration matter.
You can also consult the official government information at the Ministry of Foreign Affairs of Mexico (SRE in Spanish) official website at http://www.sre.gob.mx/english
The National Immigration Institute (Instituto Nacional de Migración – INM) is the only official organism allowed to register any kind of migration status in Mexico.
Their website http://www.inm.gob.mx/EN offers comprehensive and very useful information in English to any non-Mexican who would like to:
- Visit Mexico as a tourist
- Live in Mexico
- Marry a Mexican citizen
- Renew or Process your Temporary Residence Visa Card or your Permanent Residence Card
- etc.
If you want to:
- Acquire a Mexican Citizenship….
…you may want to have a look at the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores – SRE) website http://www.sre.gob.mx/english/ which is the official Mexican organism in charge of this process.
For those of you who lease lots, rent houses, or have purchased property through a Fideicomiso Irrevocable (“trust”), you must have Temporary or Permanent Residence Visa Card. Once you have signed any sort of contract, you are no longer a tourist.
If you don’t have a Temporary or Permanent Residence Visa Card and you find yourself in a property dispute or other entanglement, which puts you in the arms of jurisprudence, you literally have no rights as an “illegal alien”. This means your property, bank accounts, vehicles and personal belongings, are in jeopardy. The very minimum you need for owning or leasing property is the Temporary or Permanent Residence Visa Card which is renewable every year for 5 years.
To obtain your Temporary or Permanent Residence Visa Card we recommend you to consult the official INM website, your nearest Mexican consulate or your attorney.