Real property taxation in Mexico

Mexico Taxes when purchasing a property

U.S. and Canadian buyers of real estate in Baja California are surprised at how high “closing costs in Mexico” are at the moment of property title transfer. The seller pays almost no taxes for the sale if it is their permanent home and can demonstrate that with utility bills in their name and identification listing the property as their domicile. If it is income property or an unimproved lot, the taxes to the seller are a 26 percent tax (impuestos sobre la renta) of the sales price or property appraisal, whichever is highest. And the buyer pays 4.3% of the sales price. Appraisals are typically one half the sales prices.

Therefore, many sales contracts are written in the Notario’s office that reflects a sales price close to the appraisal and not the actual sales price. To reduce the tax burden, buyer and seller agree to pass the purchase difference “under the table”.

The buyer’s obligation is divided as follows:

Two percent (2%) is the government’s transfer tax. One and three tenths of percent (1.3%) goes to the department of public record as a registry fee and the final (1%) one percent is paid to the Notario. Notario’s are attorneys licensed to be gatekeepers of legal title transfer. They give “faith” (sp. dar fé) that the transaction has satisfied all the legal criteria for a safe transfer of title. In the U.S., this role is played by the escrow officer of the title company insuring the title.

Notarios require the following documents to satisfy the legal requirements for title transfer:

Certifications that no liens, outstanding property taxes or water bills exist. A certification from the planning department that the survey and property appraisal are consistent with property records. In addition to the closing costs listed, the buyer is also expected to pay for a survey of the property and appraisal of value. You can expect an average cost of $500 for these engineer/appraiser services.

Notarios should not be confused with notaries in the states. Notarios are lawyers with at least three years of litigation experience and three years of work assisting a licensed Notario. They must also pass a very tough written examination and agree to give up their litigation practice before given the right to offer their services as Notarios. Notarios can also act as escrow officers in Baja California, escrow is described in both civil and mercantile law in this state. Holding deposits and or payment checks until property search criteria have been met.

I recommend escrow to my clients but Notarios and realtors do not. Realtors often act as the escrow agent. Therefore, they will not recommend a true escrow because they want to use the clients money for the duration of what is typically a two to three month process. However, when there are title irregularities that need be solved, the wait can be a year.

A year is a long time in terms of risk; nasty problems are sometimes the result. Notarios don’t recommend escrow because Mexicanos are not familiar with the escrow process. In Mexico, the buyer accepts a deposit and the balance is due at the time of title transfer.

Unlike property sales taxes, annual property taxes are a real bargain in Mexico. Improved property is actually taxed less than vacant land. The mexican government maintains a philosophy of keeping yearly “prediales” (property taxes) at a low rate to encourage home ownership and improvements that will be taxed at the time of sale. For a $250,000.00 home, annual taxes will typically not exceed $150.00 per year. The low property taxes in Mexico more than compensate for the $500.00 annual bank fee foreigners must pay to maintain a beneficiary family trust on coastal property.

Notarios in Mexico typically become wealthy people by charging 1% of the value for each transaction. Notarios approve: wills, contracts, articles of incorporation, take depositions and approve the transfer of real property. Their income is insured by the fact that the number of notarios is controlled by population census figures. Ensenada has a population of 400,000, including 400 lawyers, and only five notarios.

Notarios in Mexico vary in their interpretation of property transfer requirements and costs. A majority of notarios in Baja California are very conservative in establishing taxes due at the time of sale. They will charge a foreign seller the maximum capital gains tax. Twenty six persent (26%) of profitability. Yet they will only charge a Mexican seller 5% of the sales amount. If a property was purchased for $100,000.00 and sold for $200,000.00 the capital gains tax paid by the foreigner would be $26,000 as opposed to $5,000 (five percent of the sales price).

The argument for charging capital gains is based on a tax law that states that if the property you are selling is not your primary residence then you are subject to the 26% capital gains tax whether the seller is a foreigner or a Mexicano. Conservative notarios believe that a U.S. citizen is a temporary resident by definition. Notarios who are less conservative argue that a foreigner can have his primary residence in Mexico; as long as he or she proves primary residency with an FM-3 immigration document and a light bill or telephone bill of the residence in their name. Our clients pay the 5% at the time of sale as long as it truly was their primary residence.

If a property owner, either a foreigner or Mexican citizen, does not use the property as a primary residence, the sale is subject to the 26% capital gains tax.

In establishing fees for service, notarios are expected to charge 1% of the value of the transaction. Property purchases of “big ticket” homes can accrue Notario fees that are ridiculous. On the sale of a one million dollar property the “standard” notario fee would be $10,000.00. Despite the fact that a transfer of title for a lot selling for a few thousand dollars requires the same amount of time and expertise as a million dollar transaction.
Notarios fail to mention that these fees are in fact negotiable. Our firm saves many clients tens of thousands of dollars by negotiating the notario fee and arguing for a five percent as opposed to a thirty five percent on capital gains.

Despite notarios who bless the title as “clean” and bank trusts for foreign ownership, title is not guaranteed by either entities. Title insurance is the only answer to assuring a safe investment in Mexico. We offer title indemnification on Mexican property insured by First American Title Company. First American escrow services included.