BUYING MEXICAN REAL ESTATE
Between significant changes in Mexican laws in 1989 and again in 1993, the NAFTA treaty of 1995 and investor-friendly laws in the state of Quintana Roo -- where Cancun is located -- buying real estate in Mexico is easier then ever, particularly in the restricted zones.
Be that as it may, there still is a purchase process and the laws and procedures in Mexico are often quite different than in other countries. Hopefully the following will provide all of the information needed to understand what one would need to buy with confidence.
Can Foreigners Really Own Land?
Americans and other non-residents of Mexico may purchase and obtain ownership of property in Mexico , without any restrictions other than those imposed on Mexican residents.
However, it is a bit more difficult to do so within the so-called “restricted zone”. The restricted zone is defined as any land within 62 miles of Mexico 's borders and within 31 miles of the Mexican coast ( Cancun is obviously located within the coastal restricted zone).
The Mexican government has made it relatively easy to circumvent those difficulties with the aim of encouraging foreign real estate investment in the restricted zones. So, even though Cancun is on the coast, foreigners absolutely can own land.
In the restricted zones there are two ways to do this – form a Mexican corporation (which can be 100% foreign-owned) or, in case of residential property, set up a real estate trust (called a fideicomiso). This form of bank trust is specifically used to help foreigners buy real estate.
Can the Government Confiscate the Land?
Perhaps you've heard horror stories regarding the Mexican government “re-possessing” property owned by foreigners? The only such incident we know of happened near Ensenada and in that case the seller sold land he didn't own! The unsuspecting buyers were Americans who, it turned out, had no legal rights to the property.
Not only is it a violation of the NAFTA treaty to confiscate property, it is a violation of the Mexican Banking Act. And, since tourism is the #3 generator of income for the country, changing existing laws would be suicide for a nation experiencing a solid financial growth, due in large part to foreign investment capital. (We've heard that nearly 10% of Mexico 's GNP in generated in Quintana Roo, Cancun 's state.)
While we caution potential clients not to leave their brains at the border, so many foreigners are buying real estate in Mexico because wonderful opportunities abound. Thousands of people from the North America, Europe (and elsewhere) are realizing that there are outstanding housing values available in a American-friendly, exotic setting which is safe, has all the amenities one could want and is really not that far away.
FONATUR - Protection for Foreign Investors
But a scam is a scam no matter where is takes place. That is one of the reasons the Mexican government established FONATUR, an agency whose task it is to safeguard foreign investments. For instance, when a client decides to buy a home site lot, the money they pay for that property goes into a Fonatur account and is not released to the developer until the land becomes deedable (infrastructure in, land ready to build on). Fonatur is involved in every real estate development in Mexico where foreigners buyers might be involved.
What is the Fideicomiso (fee-day-co-me-so)?
It is a real estate trust -- the initial term of which is 50 years -- similar in concept to trusts set up in the United States . Under this inviolate type of trust, a Mexican bank must be designated as the trustee and as such, holds legal title to the property and is owner of record.
But it is important to know that beneficial use is held by the property buyer. The beneficial owner may enjoy the unrestricted use of the property , including the right to reside on the property, sell the property, rent/lease the property, improve the property, etc.
For all intents and purposes a fideicomiso grants the same rights and obligations regarding land ownership as those enjoyed by Mexican citizens.
Another very important point is that while the bank holds title, the fideicomiso does not become a part of the banks assets and can not be attached by a bank creditor.
The costs for establishing a fideicomiso are relatively modest…, approximately $1200. The trustee (the Fiduciario) also charges a yearly administration fee which, in practice, is not very high (usually $250-$750 per annum) but depends on the property's value.
Can The Government Take your Land after those 50 years?
Not if you (or your beneficiaries) re-new the lease for another 50 years (and 50 years after that, and so on).
This 50-year renewal process can be continued indefinitely, enabling the investor to obtain long-term control over the property. If the beneficial owner dies anytime during the 50 years of a trust period, a named substitute beneficiary (a list of beneficiaries can be submitted) will receive all of the rights and obligations that arise from the trust contract.
It is important to understand that the 50-Year Title is NOT a lease, as some people seem to believe. It is simply another way to hold title.
Should I have a Lawyer?
Under Mexican law, you must utilize a special-type of lawyer to purchase real estate. Such an attorney is called a Notario Publico and likened to a combination of real estate lawyer, tax assessor and IRS agent. Notarios are the most powerful attorneys in Mexico (like U.S. lawyers are officers of the court, Mexican Notario Publicos are also agents of the federal government of Mexico ) and are appointed after a stringent approval process (think Bar and CPA exams at the same time!).
NOTE: Do not think of notary publics in the U.S. !
Notarios must be involved in all real estate transactions and actually can streamline what is often a daunting process. The essentially determine many of the fees associated with real estate sales as well as preparing the deed of conveyance. The Notario brings the seller and buyer together for the formalization of the property transfer and also authorizes the execution of the deed (escritura) as well as recording it with the public registry of property.
The Notario examines all real estate documents for authenticity, verifies title and collects all applicable property and transfer taxes, among other tasks involving in real estate transactions.
Do I Need a Mexican Real Estate Agent?
Mexico does NOT license or regulate real estate agents. Be aware who you working with.
A foreigner buyer might consider hiring a “regular” lawyer in Mexico to handle their affairs if they're not comfortable with, or unsure of, the process. If hiring one though, make sure to examine the lawyer's “cedula professional”, their license to practice law in Mexico (which includes their picture).
By law all contracts must be in Spanish, though approved English translations are also provided as part of the process of purchasing real estate in Mexico .
Buyers must make a down payment and then have at least 30 days to finalize the contract (with that deposit/down payment fully refundable if a letter is sent informing the seller of the change of heart).
What are the Transactions Costs for Buying Real Estate?
There are a number of fees related to buying real estate in Mexico. These costs include a fee for setting up the fideicomiso, a 2% property transfer tax, fees for fees for the Notario, a bank appraisal fee,first year trust costs, plan title registration and closing fees.
On average, you should figure all fees will total 5 to 8% of the declared value of the purchase price.
Can I Get Title Insurance?
Title insurance has been available in Mexico since 1993 and can be purchased on an optional basis if desired. We encourage it and normally use Stewart Title which has offices in most Mexican cities which cater to foreign real estate buyers, including Cancun.
How About Mexican Property Taxes?
In Mexico the rate is .003% of assessed valuation whether the land is undeveloped or not. So, if you buy a lot for $300,000.00, your property taxes would be $900.00 per annum until a house was built at which time the tax would be against the value of your house and property, but still at the same rate.
Are there taxes on rental income?
If a professional management company handles the renting of your property for you, they will issue a “factura” – which is a legal receipt. This document is required by the Mexican government for one's annual tax return and can only be issued by a management company. Rental income is taxable at a rate of 22.75% per annum.
How About Capital Gains?
There is no such term in Mexican law. Profits made from the sale of a residence would be treated like regular income. However, if one were to only sell one residential unit in a 12-month period, and use the net profit to buy another piece of real estate in Mexico , there are no tax consequences. So it really doesn't matter if you roll the profits from one property into another.
If more than one residence is sold in that period, not roll the profits into another Mexican property, the seller would be liable to pay taxes on all units sold in that time frame at 32% rate (2005). Mexico is phasing out this segment of their tax structure by one percent a year.
IMPORTANT: We, at Realty Executives, are not attorneys. The above information was obtained from various legal and government (both U.S. and Mexican) sources and we cannot personally vouch for its authenticity.
