A 2% acquisition tax is payable by the buyer when property changes hands.
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.
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. So on a $100,000 home that has an official “assessed” value of $40,000, you’ll pay $800 in acquisition tax and something between $50 and $150 annually for your property tax. You should know though that under Mexican law, using an assessed value less than the actual commercial value for tax purposes is technically illegal. But we don’t know anyone who doesn’t do it.
If you do not reside in Mexico, but rent out your Mexican property, your rental income is subject to withholding tax at a rate of 21%. For residents, rental income is taxable at the regular income tax rates.
If you sell the property, you’ll owe capital gains tax. This can be figured two ways in Mexico:
1) You can pay 25% of the declared value of the transaction.
2) You can pay 35% of net value—the difference between the assessed values at the time you bought the property and when you sell it, taking into consideration the time the property was held, any improvements made, any commissions paid and other allowable expenses. (If there is a significant difference between the assessed value recorded for the property when you bought it and the value you claim when you sell it, you could be in for a big tax bite.)
You should calculate your capital gains tax both ways with the help of an accountant or notario, and pay the lower one.
You may be able to avoid capital gains tax altogether depending on the type of property, the structure of ownership, and how long you have owned the property. If you own a home or condo via fideicomiso or direct deed, for instance, and you have documentation (utility and phone bills, etc. in your name) as well as an FM-2 or FM-3 visa, and you have owned the property for at least six months to two years (again, depending on the municipality or notario) you may not owe any capital gains tax. Capital gains tax will always be owed on raw land and properties owned in a corporation.
Again, it is important to have a good attorney on your side and to understand that the laws are changing in Mexico. Sometimes laws are interpreted differently by different attorneys. Our advice: if you get an answer you don’t like, ask another attorney.