Buying Real Estate in Mexico
Published Nov 5, 2007 - (Updated Aug 18, 2012)
It is a common misconception that foreigners cannot own real estate in Mexico, but the reality is that they can. It is perfectly legal for a foreigner or foreign corporation to acquire any type of real estate, holding the property as a direct owner, with the exception of properties located in the Restricted Zone.
The Mexican Constitution regulates the ownership of land and establishes that “… in a zone of 100 kilometers along the border or 50 kilometers along the coast, a foreigner cannot acquire direct ownership of the land”. These areas are known as the “Restricted Zones” or “Prohibited Zones”.
Nevertheless, the latest Mexican Foreign Investment Law, enacted December 28, 1993, provides a solution. Within the Restricted Zone, a foreigner or foreign corporation can obtain all the rights of ownership with a bank trust, known as a Fideicomiso.
Any foreigner or Mexican National can establish a Fideicomiso (the equivalent of an American beneficial trust) through a Mexican bank to purchase real estate anywhere in Mexico, including the Restricted Zone. For practical reasons, even in unrestricted zones, many foreigners and Mexican nationals prefer to hold their property under a Fideicomiso.
To do so, the buyer requests a Mexican bank of his choice to act as a trustee on his behalf. The bank, as a matter of normal course, obtains the permit from the Ministry of Foreign Affairs to acquire the chosen property in trust.
The Fideicomiso can be established for a maximum term of 50 years and can be automatically renewed for another 50-year period. During these periods you have the right to transfer the title to any other party, including a member of your family.The bank becomes the legal owner of the property for the exclusive use of the buyer/beneficiary, who has all the benefits of a direct owner, including the possibility of leasing or transferring his rights to the property to a third party.
The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary. Fideicomisos are not held by the trustee as an asset of the bank.
Another alternative is to purchase non-residential property through a Mexican corporation, which under certain conditions can be 100% foreign-owned, with a provision in its by-laws that the foreigners accept being subject to Mexican laws and agree not to invoke the laws of their own country. Also, they agree that the real estate acquired be registered with the Foreign Affairs Ministry and be used for non-residential activities. In other words, under these conditions foreigners can directly acquire properties destined for tourist, commercial and industrial use.
The Real Estate Industry
The real estate industry in Mexico is similar in many ways to that of the United States, which is probably the most advanced in the world. It is developing quickly, taking advantage of today’s technology; however, it seems to be paralleling the system as it exists in the US.
The Associación Mexicana de Profesionales Inmobiliarios (Mexican Association of Real Estate Professionals), or AMPI, is a reputable national professional real estate organization with many chapters throughout Mexico. This organization is similar to the National Association of Realtors (NAR) in the US, and in fact has a joint venture with the NAR, such that AMPI membership automatically confers membership in the NAR, as well. In the Vallarta area, there are three AMPI chapters, AMPI Vallarta, AMPI Riviera Nayarita and AMPI Compostela. At this time, there are no government license laws regulating real estate brokerage and sales in Mexico. Anybody can, in effect, offer properties for sale. Therefore, caution should be taken to select an established and reputable real estate company. A potential buyer may want to have a look at www.mlsvallarta.com, which lists most of the real estate agencies in the region, as well as providing access the Multiple Listing Service (MLS).
Historically, due to lack of capital markets and high Mexican interest rates, most transactions were made in cash. That is changing rapidly, however, and many local and foreign banks are now offering financing options. Loan terms can vary significantly, so it pays to shop around a bit.
Multiple Listing Service (MLS)
The Vallarta Lifestyles Publishing Group provides Multiple Listing Service that serves all of Costa Vallarta, and has been doing so since 1989. These MLS properties are available to real estate professionals in a monthly catalog and as well to the public in general at www.mlsvallarta.com. There is another site that offers both MLS searches plus searches for development properties at www.vallartarealestateguide.com. As well, the real estate association, AMPI, has an MLS service that’s available at www.vallartanayaritmls.com.
Escrow, Title Insurance and Home Insurance
It is recommended to use an escrow account for real estate transactions. There are a few companies available that provide this service. They also offer title insurance, which is relatively new to Mexico. Many insurance companies provide full home coverage. Your broker can recommend some good options.
Most real estate transactions are “opened” after a written purchase offer is accepted by the seller and when a purchase-sale agreement (promissory contract) is signed by both parties. A deposit is required by the broker to transmit the offer to the seller. (If the transaction is being conducted directly with the seller, it is highly recommended that a real estate broker or lawyer be consulted before signing any papers or handing over any money). It is common practice to deliver to the seller, as an advance payment, the equivalent of 10-30% (including the initial deposit) of the total price upon signing the purchase-sale agreement, which should contain a penalty clause applicable in case there is a breach of contract by any of the parties. Normally, when signing the escritura (the official deed, which needs to be certified by a Public Notary) the balance is paid and the property is delivered. This should not take more than 45 days. It is recommended that an escrow account be used for all real estate transactions.
The Notary Public
A Public Notary is a government-appointed lawyer who processes and certifies all real estate transactions, including the drawing and review of all real estate closing documents, thus ensuring their proper transfer.
Furthermore, all powers of attorney, the formation of corporations, wills, official witnessing, etc. are handled and duly registered through the office of the Public Notary, who is responsible to the government for the collection of all taxes involved.
In connection with real estate transactions, the Public Notary, upon request, receives the following official documents, which are required by law for any transfer:
- A non-lien certificate from the public property registry, based on a complete title search;
- A statement from the treasury or municipality regarding property assessments, water bills and other pertinent taxes that might be due;
- An appraisal of the property for tax purposes.
It is common practice that the buyer pays the transfer of acquisition tax and all other closing costs, including the Notary’s fees and expenses, while the seller pays his capital gains tax and the broker’s commission.
Previously, the real estate transfer tax was 2% nationally. But in 1996, the law changed, giving individual states the right to set this tax level. The range now varies from 1-4% of the tax appraisal value, which is generally less than the sales value.
The rest of the closing costs, which exclude the transfer cost mentioned above, vary from 3-5% or more of the appraised tax value, depending on the particular state. These percentages are applied to the highest value of the following:
- The amount for which the property is sold,
- The value of the official tax appraisal,
- The value designated by the property assessment authorities.
Cost of the Fideicomiso
Based on the present tariff, the bank charges the person desiring the Fideicomiso an initial fee ($400-500 USD) for drawing up the agreement and establishing the trust, plus a percentage based on the value of the property. In addition, the bank charges an annual fee to cover its services as a trustee.
Real Estate Broker’s Commision
Real estate companies charge a commission (plus tax) for an exclusive listing, calculated on the sale price of the property.
Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the same way it is determined in the United States. Here, the gain from the sale of property is treated as normal income. To determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:
- The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes;
- Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above;
- Commissions paid to real estate brokers by the seller;
- The closing costs, including all expenses, taxes and fees paid by the seller.
The Notary will retain the calculated gain after deductions, forwarding it to the Mexican tax authorities. The seller will then deduct this amount against his annual tax return, which can become an adjustable tax credit in the U.S.A.
On the other hand, there is no capital gains tax in Mexico if there is conclusive proof the seller has used the property as his primary residence. Restrictions apply, and it is strongly advised to consult a tax lawyer and/or a professional real estate broker. In coordination with a Public Notary, these professionals can calculate the taxes due on any real estate transaction.