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How You Can Own Property in Mexico
What’s the number one reason that keeps Americans from buying property in Mexico?
The answer is: Ignorance.
And I’m not talking about ‘ignorance’ in the common sense of the word, I’m talking about complete and utter lack of information.
Not only do Americans buy Mexican property all the time, it can be easy if you know what to do.
And I’m going to show you that it’s not only easy, but it’s very profitable to the savvy speculator.
In the interior of Mexico, foreigners can own property—just like in the U.S.—with a direct deed title. No muss, no fuss.
But if you want beachfront property, the process is structured a bit differently, a bit more complex—but it’s worth every granule of the pristine, white virgin sand that you’ll be sinking your feet into. Every inch of that beachfront property is growing in value as you read this, and that value has been riding on a cusp…it won’t belong before it is the most prized real estate on this side of the globe…and the most expensive. Mexico real estate (and especially Costa Maya) is prepared to skyrocket! And it will….
It is attainable. But not for long….
History of Legislation
Here’s the history. Back in 1917, the Constitution in Mexico was drafted, signed and passed into law. One of the things this Constitution stated was that there was to be a provision that created what is called the “Restricted Zone.” In this Zone, only Mexican citizens could own the land. The Zone is 62 miles (100 km) from the Mexico border and 31 miles (50 km) from the coasts.
But, as time passed, the Mexican Government came to realize that in order to bring more money into the Mexican economy, it was crucial that they provide incentives to foreign investors.
So, in 1970, a Bill was passed into law. It was this Bill that created a legal loophole for foreign investors. It is this Bill that could be the ticket to your wealth.
The Bill stated that a trust (which is referred to as a Fidecomiso) could be established and that a foreigner could be the sole and exclusive beneficiary of this trust. And because a
Mexican bank holds the title and administers the trust, it satisfies the requirements for land purchase in the Restricted Zone.
The Bill also states that the beneficiary (i.e. the foreigner) could control the land. This includes renting it, improving it, selling it and so forth. The beneficiary could also name an heir, so that in the event that the co-owners die, another beneficiary is already in place.
The implementation of this Bill led to a massive growth period in Mexico. We saw Cozumel, Acapulco, Cancun, Puerto Vallarta and other cities explode with foreign investment, tourism and increasing real estate value.
You may be thinking, “This is too good to be true,” and in some senses, it is. As with every Bill, there are limitations.
The limitations to the Trust system are as follows:
Each property you own requires a separate trust.
The fees associated with creating a trust are about 1% to 1.5% of the total value of the land. Also, you will be assessed an administration fee (paid to the bank) of about $600- $700 USD per year.
Now, here’s where it gets even better for the foreign investor.
During the 1994 fiscal year, the latest Bill pertaining to the Restricted Zone was passed. This Bill stated that a Mexican Corporation could legally own property. And this Mexican Corporation could be entirely owned by foreigners. As owners and shareholders of the corporation, you have all rights to the deed and the property.
The additional benefit to the corporation method is that there are no annual costs or fees required by the bank. With your corporation you can own more than one property. Unlike the trust system, where you must create a new trust for each property, the corporation system allows you to lump separate properties together in one corporation.
When it is time for you to sell your Mexican property, you have the option of either selling the corporation or selling the land or property held by the corporation.
Once you buy land using the corporation system, you are allowed to file a ‘dormancy election.’ This means that your corporation is ‘asleep’ until you decide to activate it. This is useful in reducing the accountant filings that are necessary for active corporations, therefore lessening your accountant costs.
The Trust System vs. The Corporation System
If you intend to buy and sell numerous properties, or if you plan on starting a business on your property, then the corporation is the best choice. This way you can sell individual
properties that are owned by the corporation, sell the entire corporation, or sell shares of the corporation. Again, there are no annual fees with the corporation, but there are accountant fees that may cost you as much or more, unless you put the corporation in ‘dormancy.’
But how can you form a corporation if you plan to be the only shareholder? You can have your attorney hold 1% of the company and he/she will need to contractually agree not to participate in votes or profit from the corporation.
On the other hand, if your goal is only to purchase one, single property for residential purposes only, then the trust is better.
It is much simpler to establish a trust and does not require accountant fees. But there is an annual administration fee that you are obligated to pay to the bank in order to maintain the trust.
A trust has a term for 50 years and is guaranteed to be renewable at the end of that term.
Do You Actually Own the Land?
It is as simple as this: You own it in the name of your corporation or trust. And you own the corporation or trust. You do NOT need to have a Mexican as a shareholder.
Here’s the catch. It is believed that the ability to use a Mexican Corporation to purchase land is limited to commercial endeavors only, not residential.
This is true, but here’s the loophole. The term “residential use” means that the land already has an existing structure on it (i.e., a house) and you are living in that structure. Now, vacant or what is referred to as “raw” land is not considered by the government to be ‘residential,’ even if the land may be zoned to be residential.
Can Your Land be Stolen From You?
Mexico is not a savage country, there are laws, not to mention real estate and property laws. See, when you (meaning your corporation) are the registered owner of the land, the land is yours, not the government’s. Realistically, no foreigner would ever buy land in Mexico if there was this kind of risk involved.
But you must be very aware of the dreaded squatter.
The way it works in Mexico is that in order to be granted the title to land that you do not own but are living on (i.e., squatting on), you must be able to prove to the government that having been living on that property for 5 years in a ‘notorious manner.’ A ‘notorious manner’ means that you have made it known to everyone that you reside there. This is done by receiving bills and other mail there, having utility services in your name at the address of the property, etc.
You cannot set up a tent on the land, hide out for over 5 years and then petition the government for a title.
If you, as a foreigner, allow squatters the use of your land for 5 years, then technically a squatter can petition the government for your deed. It is important to know that if such a thing happens, the government is required to make every attempt to contact you, by phone, mail or by placing an ad in a popular newspaper. Once they contact you, they will ask you if you are willing to consent to having your deed transferred over to the squatter.
If you do not respond, the government will allow the squatter to reside on your land for another 5 years. After this, the squatter has 10 years of notorious use of the property and can then petition for the deed again. Like before, the government must make every attempt to contact you. If they do not reach or, or if you fail to respond, only at that point will the government authorize the transfer of the deed to the squatter.
In order to prevent squatting, many people build a fence around their property. This may not totally stop the problem, but it does send a very strong message that the land if off limits.
Beware of Ejido Lands
Ejido Lands are nothing more than a land ‘use’ grant from the government to a group of families for the purpose of living off the land. The government owns the land. These Ejido Lands are ONLY FOR MEXICANS. It is specifically for the goal of creating affordable living for Mexican citizens. If you are a foreigner in Mexico, then you have absolutely no rights to purchase or use Ejido land. Remember: always stay away from Ejido land.
Title and Land: Make Sure You Get What You Pay For
You should always double check that the title you are getting is for the land that you saw. You do this by comparing the survey of the land to the legal description on the closing document. You should have your attorney with you at closing for this reason. By comparing the survey to the corner markers on the ground, you can determine that the property and the survey are the same.
Plus, your attorney should match the legal description on the survey and on the deed to the legal description in the Notario’s books and the legal description in the Land Registration Office and the tax ID number.
This process is very similar to how it’s done in the U.S.
Closing Costs
These costs include everything needed to give you legal ownership of the property including taxes, Notario fees, legal fees for the attorney, registration with the Ministry of Foreign Investment and the costs to establish the Mexican Corporation (or trust).
So, let’s say you found a property you want to purchase. Here’s your first step:
As a buyer, your first step is to sign a contract of sale (Contrato de Promesa de Compraventa) which specifies all the terms, conditions and price that both parties agree on. The seller will also need to sign this same contract and it is a binding agreement to the terms. You can obtain the form by contacting your agent or broker. It is crucial that you insist on this.
After you sign the contract of sale, you will need the help of an attorney to begin the closing process. Usually, the attorney will send you a cost estimate of their services and fees. It is important to get estimates from several attorneys to compare prices.
Then the attorney’s job is to review the property and certify that there are no liens or encumbrances. Unless you specifically ask for it, the attorney does not usually perform a title search.
Why You Need a Title Search and Title Insurance
A title search is done to ensure that the property you’re buying has a clear title.
The chain of title can go back many years, and if the property was conveyed without all the required signatures of past owners, you could end up with a property that a former owner has a legitimate claim to.
Also, title insurance is always strongly encouraged. It is worth the extra cost. Legal fees for title insurance will run you between $1,000 and $1,500. A title insurance policy will usually cost $1,000 per $200,000 of coverage.
Calculating Capital Gain Tax
You will be responsible for Capital Gain Tax, paid to the Mexican Government, if you sell your property in Mexico. This CANNOT be avoided. This tax is based on the difference between two stated values.
These values are as follows:
The first value is the one stated in your deed (escritura). It is known as the avaluo.
The avaluo is set at the time of purchase and is based on the existing value which can be found on the official assessment (cedula catastral). Keep in mind that this value has nothing to do with the price you paid for the property.
The second value is determined at the time of sale. If you’ve seen the property value increase, the assessed value has also increased (shown on the cedula catastral). Depending on when the latest assessment was done, it may be necessary for the assessor to increase this value at the time of sale.
So, your capital gain would be the difference between the first value and the second value.
The tax rate for this capital gain is 33%.
Example: (in pesos, as this currency will be used in all real estate deals in Mexico)
$80,000 – assessed value at time of sale
-$55,000 – avaluo at time of purchase
-----------
$25,000 Capital Gain
Then to figure out the amount of capital gain tax:
$25,000 Capital gain
x .33 Tax Rate
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$8,250 Cost of Capital Gain Tax
Another way to look at the same example:
($80,000 minus $55,000) x .33 equal to $8,250 pesos.
About Paying Mexican Taxes
Be aware that the Mexican Government does not send out tax notices. Your attorney or accountant can ask for them (each year) and advise you the amount to remit. You can also go to the state capital or one of the local offices to pay your annual property taxes.
Now, annual property taxes differ between states. In Costa Maya, they are quite reasonable. They are based on the stated value on the cedula catastral. Typically, property taxes will be from 0.15% to 0.25% of this stated value. Yearly taxes for most properties on the Costa Maya for example range between $150 and $250 USD.
Taxes are due annually and can be paid at anytime during the year. If you pay your taxes in December of the previous year, a discount of up to 25% is granted.
Remember, these loopholes are legitimate. They were established to encourage foreign investment into Mexico and the brightest of the bunch will take advantage of system by abiding by the system.
In closing, I’d like to remind you that it is crucial to get the advice of a certified financial advisor, lawyer or accountant and a bilingual one would be of great assistance to you in this situation. Remember the proverb: “A fool and his money soon part.” Allow other people’s expertise to work for you……The world is yours, now go get it.
Jeff Musto
3206 Red Oak Dr.
Eagan, MN 55121
Tel.# 612-424-5445
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