Mexico Property Taxes and Tax Regulations

Property tax is a tax paid by an individual who owns a property or any other legal establishment. Property tax is considered a Real Estate ad-valorem tax, which means that the tax corresponds to the underlying asset’s value. “Predial” is the term for annual property tax in Mexico. The local government where the property is located is responsible for calculating the property tax paid by the owner. The tax depends on the property’s value as well as the land. Moreover, property tax is standard in most countries and is collected annually. Properties that are included in property tax are building, land, machinery, and land or building improvements. Property tax is implemented to provide a foundation for local governments and to advance decentralization. In addition, property taxes are used to improve public infrastructure and other services that benefit the community. Property tax in Mexico is low. It ranges from 2 percent to 5 percent of the purchased property’s assessed value. However, it also depends on the owner’s income, deduction, property’s location, size, age, and construction type. Furthermore, Mexico has a tax regulation where owners can have a 25 percent discount if the tax is paid in advance. Predial or annual property tax is usually due every January, and a 20 percent discount is still offered to owners who pay the tax immediately in January.

Property owners in Mexico are Mexican nationals and companies that own property. According to one of Mexico’s laws, foreigners owning land in a prohibited zone are prohibited. Foreigners must obtain a Fideicomiso, a bank trust that permits individuals to invest or buy any property in Mexico. Mexico’s property tax has three different types, the Acquisition Tax, Annual Property Taxes or Predial, and the Capital Gains Tax. Acquisition Tax is paid when buying any Mexican property, which ranges from below 2 percent up to 5 percent of the property’s estimated value at the purchase time. The level of tax differs in every Mexican state. On the other hand, Annual Property Tax (Predial) is quite a low tax paid before the 31st of March. The calculated amount of the tax depends on the property’s location, size, age, and construction type. In addition, the Mexican government offers a 10 to 25 percent discount to every property owner that pays tax on or before March, depending on the property’s location. Meanwhile, Capital Gains Tax is only required to pay when owners sell their property. The owed capital gains tax will be calculated based on how much profit the owner made from the sale, how long the owner lived in the property before selling, and other factors. Moreover, the tax is equivalent to around 25 percent of the offered value of the transaction,this amount can be lowered substantially with tax deductions. The Federal Tax Code regulates property taxes in Mexico.

US citizens are taxed by the United States on their worldwide income. Canada taxes citizens on global income, not until citizens officially transfer their legal residence outside Canada. However, the income must be reported on the Canadian or U.S. tax return if US citizens earn any profit in Mexico. Additionally, the taxes that US citizens already paid in Mexico will be credited on their home-country return.

Mexican Tax Administration Service (Servicio de Administración Tributaria, SAT)  is a federated agency of the Ministry of Finance and Public Credit that implements fiscal and customs legislation, ensuring that individuals and businesses contribute evenly to public spending. In addition, SAT is responsible for auditing taxpayers to ensure they comply with tax and customs rules, facilitating and encouraging voluntary compliance, and producing and providing the necessary information for the tax policy’s design and evaluation. Mexico’s official laws include the Federal Revenue Law (FRL), the Mexican Income Tax Law (MITL), and the Value-Added Tax Law (VATL).

The property tax rate in Mexico rarely changes or increases, but hardly ever exceeds $500. The property tax rate varies depending on whether the property owner is a Mexican resident. A non-Mexican or a foreigner that buys under their name they must pay 35% on the Net gain, should be under their name and not under a corporation or a company. The foreign buyer is able to make a deduction as a benefit. In contrast with Mexican residents, property taxes are quite low. However, the tax rate for the property for sale in Mexico in time increases because the owner owes capital gains tax. There are two methods to calculate capital gains tax. The owner buys a property via a corporation or shares, they must forcefully pay 25% of the total amount of the transaction, or 35% of the NET gain without being eligible for deduction.

Condo and Apartment Property Acquisition Tax (ISAI) rate ranges from 2 to 5 percent; these tax rates differ in each Mexican state. However, tax rates depend on whether the condo and apartment are owned or rented. The tax on these transactions is 30% of the difference between the value declared in the deed and the value of the new sale, less allowable deductions or 25% of the entire transaction amount, whichever is less. It is essential when acquiring property to insist upon having the total amount of the sale declared in the deed to avoid overpaying taxes upon sale. Moreover, condo sale in Mexico is under the capital gains tax, which is taxed from 20 to over 30 percent depending on the final sale price.

Residential property is taxed approximately 6.5 pesos for every 1000 pesos assessed value, equivalent to 0.33 dollars for every 50 dollars. Like other properties, the tax rate for houses and villas in Mexico ranges from 2 to 5 percent. However, the tax varies differently in every Mexican state. Selling houses or villas in Mexico should have taxes to pay by following the law for capital gains tax.

Article 74 of the Mexican Tax Law stipulates that to qualify for the “Agricultural, Forestry and Fisheries Regime” (AGAPE), at least 90 percent of gross income must be generated by agricultural activities. In 2019, very small farming units with yearly incomes of less than 8 Units of Measures (UMA must draw at least 25 percent of their income from the agricultural operation to be eligible for the AGAPE regime. Additionally, individuals, corporations, and/or other types of organizations are included under the AGAPE.

A warehouse is considered a commercial property. Thus, the corporate tax rate for warehouses in Mexico is 30 percent. Thus, selling commercial properties results in lower capital gains tax than residential property. The predial or the actual annual property tax is quite low, it is due every first month of the year. The amount of tax is predetermined depending on the location of the property and its size. The advantage of paying tax earlier prior to the due date give the owner a 25% discount by the government. For capital gains tax, it is only necessary when selling real estate in Mexico. The tax is determined by some factors such as, the profit made from sale of property and years of residency. Eventually, the range of general tax is equivalent to 25% of the profit made from the sale. Moreover, it is advisable to seek advice with an attorney that is knowledgeable in Mexican tax law.

The property tax rate change for buying and selling is different in Mexico. Acquisition Tax is a Mexican tax that requires payment from every buyer upon purchasing a property. Every Mexican state imposes taxes at a different rate that ranges from less than 2 percent to 4 percent of the property’s assessed value at the purchase time. Meanwhile, Capital Gains Tax is a requisite tax only when the owner sells a property. Factors including sales profit, length of time the owner lived in the house before the sale, and other factors are considered to determine and calculate the amount payable. Thus, approximately 25 percent of the profit made from the sale is the equivalent of the tax. Moreover, residents in Mexico renting a property are subject to deducting the same expenses on the Mexican tax return for the rental income. Then, a flat rate of 25 percent is charged on gross rental income if an individual is a nonresident renter.

Real estate investment is one of the best methods to increase wealth and lower taxes. Various benefits also include opportunity. However, the tax burden for property owners sometimes won’t be avoided. Several methods decrease the tax burden for property ownership in Mexico, such as staying in a lower tax bracket, and harvesting the losses. For capital gains tax in Mexico, there is a way to reduce the tax if the owner is able to provide residency in the property. The owner should provide a proof that they are living in their property. The other way is to use the fideicomiso and notary wisely. Lastly is do not register as a seller to reduce capital gains tax. For example, buying old buildings or infrastructure, improving them, and managing them as residential properties is one of the most high-yielding methods to decrease a tax burden.

A property tax discount is a deduction in federal income taxes that are paid on real estate and personal property. Enumerating personal deductions on a tax return when a person pays property taxes are all that necessary to claim a tax discount. In Mexico, the annual property tax or predial is calculated every January, and the Mexican government offers up to 25 percent discount if a taxpayer pays in advance. Then, the government still provides a 20 percent discount if the taxpayer pays immediately in January. Additionally, one of the Mexican laws offers up to 50 percent discount for homeowners that are 60 years old or considered senior citizens and disabled individuals, depending on their municipality.

Predial, or Mexican property taxes, are calculated annually or are due every first month of the year. It is common in most places or countries and utilized to operate local governments. The total number of taxes depends on the property’s size and location. Predial or Annual Property Tax in Mexico is reasonable, unlike in any other country. One of the standard processes of predial in various communities of Mexico is the use of the “assessed” value of the property, which is approximately 0.1 percent. However, based on Mexican law, the assessed value should not be less than the actual commercial value, and using it for tax purposes is considered illegal.

Listed below are the most convenient property investment regions for tax rates in Mexico.

• The Riviera Maya: The number one convenient destination for real estate investment is the Riviera Maya because it is the most popular tourist destination in Mexico. It is the best location in Mexico for investors to purchase real estate, since it is the area with the highest return on investment in Mexico. This area sits on the Caribbean shore, consisting of the unmatched natural beauty of the underground natural places. Moreover, ideal locations for real estate investment in Riviera Maya include Tulum, Playa del Carmen, Akumal, and Puerto Aventuras because of the remarkable rise in development and infrastructure. 
• Los Cabos – Baja California: One of the most popular beach and golf locations in all of Mexico is Los Cabos, which has world-class golf courses, opulent resorts, undeveloped beaches, and a breathtaking coastline. It is one of the ideal destinations for Real Estate investment in Mexico, whether for retirement or as a rental property, because of its excellent property market, international cuisine, and hospitable locals.
• Puerto Vallarta: The allure of Puerto Vallarta rests in the winning combination of a traditional Mexican environment with a top-notch gastronomic selection next to extensive expanses of beaches with golden sand. The cobblestone lanes and colonial-style structures with boutiques, art galleries, and fine dining establishments made Vallarta famous. Moreover, Puerto Vallarta was awarded as “The friendliest city in the world”, “The best gourmet destination”, “The best place to retire”, and “The best vacation destination in Mexico,” resulting in one of the ideal cities in Mexico to invest real estate or any property. 

La Paz: The breathtaking scenic route of La Paz is witnessed when traveling to the destination two hours away from Los Cabos. The scenery of beaches is in the list of the most beautiful worldwide beaches, even though its name is not widely recognized. La Paz is a prime real estate destination where residents enjoy a cozy and relaxed lifestyle. It is one of the most convenient property investment regions for tax rates in Mexico because the cost of properties is less expensive than those in Los Cabos. Now is considered the great time to purchase a retirement or vacation house in La Paz because it is still relatively unknown to real estate investors and maintains a low profile.