Property taxes are very low in Mexico as a whole. The property tax, known as a predial is .1% of the assessed value. Taxes are paid annually, with the assessed value determined at the time of sale. If you purchase a property with an assessed value of $100,000US dollars your annual tax rate would be $100.00US dollars. The reason taxes are so low is due to the fact that they have never been a source of revenue for the Mexican government.
Real Estate Acquisition Tax (transfer tax): Individuals or companies purchasing real estate, consisting of land, or land and its improvements in Mexico, are subject to the payment of a real estate acquisition tax calculated at the rate of 2% of the value of the property (the rate may vary from state to state from 2% to 3.3%). All purchasers of real property must pay this tax whether the acquisition is carried out through a purchase and sale agreement, donation, trust, assignment, mergers of companies, split-off, or payment in kind.
Mexican real estate is subject to a 20% capital gains tax on the gross proceeds from the sales without any deduction. There is another option, net basis taxation up to 35% (depends on the state and the interpretation of the notary). Under this tax plan, gain is calculated by deducting from the gross proceeds (1) the original cost of acquisition, (2) the cost of improvements, (3) notarial expenses and other costs of sale, including appraisal costs, and (4) commissions. The original cost is separated between land cost and cost of buildings, with at least 20% allocated to land. The cost of buildings and any other improvements is then decreased at 3% per year between the date of acquisition and date of sale, but the cost is not decreased below 20% of the original amount. The cost of the land is increased based on changes in the National Consumer Price Index.
Formula for capital gains tax:
AV2(appraised value 2) -AV1(appraised value 1) ?Improvements - Cost of the Sale=Taxable Amount x 35%=Tax Due
Your FM2 or FM3 can help you to avoid capital gains taxes when selling your property. If someone proves they were living on their property for two years in Mexico, they can avoid paying any type of capital gains.
Individuals in the restricted zone, who are residents of Mexico (have an FM3), and who rent their rights in trust property (fideicomisos) must make provisional payments on their Impuesto Sobre la Renta (Tax on Rents) for income generated from cash deposits, credits, exchanges coming from rents or sub-rentals. The calculation will be based on one of two methods; one option is to pay 1% (on average, based on state) of the gross amount received during a three-month period, or you can opt to pay around 35% (on average, based on state) of your net profit.
In order for any authorized expense to be deductible, the taxpayer must obtain an official invoice, which is known as a FACTURA. This receipt must be printed on the press of a government-authorized printer and will contain the RFC number (taxpayer ID number) of the individual or company issuing the receipt.
Authorized items for deductions are the following:
- Property taxes, as well as any contributions or local taxes for improvements, planning or public works expenditures.
- Maintenance costs that are not related to improvements or additions; water payment when not paid by the tenant who occupies the property
- Interest paid for loans obtained for the purchase, construction, or improvements of the property
- Employees directly employed at the rental property. Salaries, commissions and /or fees are deductible, as well as taxes and benefits paid on those salaries.
- Insurance premiums on the properties
- Investment in construction, including additions and improvements (these expenses are amortized at the rate of 5% per year for construction and 10% for installation expenses or improvements.
Mexican residents must file a declaration with authorities by the 17th of each month. An annual declaration is due no later than April 1st the following year and the difference between provisional payments made and total tax due, based upon global Mexican income, is due with the annual return.
Mexico has signed a number of treaties to avoid double taxation with other countries and their benefit can be applicable depending on the type of transaction. Taxes that are paid on Mexican income are generally deductions on U.S. and Canadian income. It is wise, however, for the foreign taxpayer to check with his or her personal accountant to determine how to declare these foreign tax payments.