9 Basic Facts About Investing in Real Estate in Mexico Every Foreigner Should Know
By: José Carlos Romero Loaiza
We consider that investing in real estate in Mexico is a very profitable business, since the value of real estate and its development is increasing constantly in different areas of the country. Additionally, there are several matters that an investor should know before investing in real estate in Mexico. Below you will find 9 points that we consider essential to know before an acquisition.
1.How to start. In general terms, most of the real estate transactions in Mexico are triggered with the execution of a Letter of Intent, Memorandum of Understanding or any other kind of preparatory agreement among the involved parties, in which the parties agreed on the general terms and conditions for the possible transaction. In such preparatory documents, parties agree on a due diligence period to confirm the legal status of the real estate and/or certain conditions for the closing.
2. Advance Payment. Simultaneously with the execution of the preparatory documents described on item 1 above, it is very common that the purchaser advances to seller a payment equivalent to an amount in a range between 10% — 20% of the estimated purchase price as a commitment to formalize the transaction.
3. Due Diligence Process. It is recommendable to perform an exhaustive research of the legal status of the real estate, regarding the possession and property rights, prior the acquisition.
4. Formalization of the acquisition. If the result of the due diligence is satisfactory for the purchaser or meets the conditions agreed on the preliminary agreements, parties execute a public deed before a notary public to formalize the transaction. Afterwards, the notary public will coordinate the filing of the public deed before the local Public Registry of the Property corresponding to the location of the property.
Notwithstanding the above, the purchase agreement is in full force and effect as of the moment the parties agreed on the property subject to the transaction and its price, even if the property has not been delivered to purchaser and/or the price has not been paid to seller and/or the public deed has not been executed before notary public. Additionally, the transaction is effective before third parties as of the moment the public deed is filed before the local Public Registry of the Property.
5. Public Registry of the Property. All the transaction related to the acquisition and legal status of private real estate (including but not limited to, granting of mortgages, encumbrances, liens, use restrictions, domain and possession limitations), must be registered before the Public Registry of the Property and Commerce (Registro Público de la Propiedad y de Comercio) (“PRPC”), which is the formal register in Mexico, to be valid and enforceable before third parties. The PRPC is a public institution that aims to enhance legal certainty by publicizing commercial acts that, according to the law, are only valid and enforceable before third parties as of their registration date. Shared, public or common land (ejidos) are not registered before the PRPC.
The registry and submission of documents before the PRPC is performed by the notary publics or the parties involve in certain transactions, therefore, the information registered before the PRPC may be imperfect. In that sense, a good faith purchaser is quite protected with regard to the entries in the PRPC. Consequently, it is strongly suggested to perform a due diligence proceeding prior the acquisition of a real estate.
6. Taxes. The notary public before parties formalized the acquisition of the real estate will withhold and pay the corresponding taxes.
a. Taxes related to the selling of a property. Real estate transactions are principally charged with federal taxes, such as Income Tax and Value Added Tax, as follows:
i. Income Tax. When parties formalize a purchase agreement before notary public, the notary public will calculate, withhold from the price and pay to the Mexican tax authority the profit generated to seller derived from the transaction. This calculation implies detracting from the income the proven cost of acquisition (i.e. price paid for seller when acquired the property, expenses related to the acquisition, local acquisition taxes, commissions for brokerage, constructions, remodeling and improvements, notarial fees, appraisals), provided that an Online Digital Tax Receipt (Comprobante Fiscal Digital por Internet “CFDI”) is obtained.
The applied rate for non-residents (for tax purposes) in Mexico is 35% regarding the profit of seller. The representative of the non-resident shall submit to the notary public the applicable deductions. In certain cases, and provided certain conditions are met, the applicable rate may be 25%.
ii. Value Added Tax (“VAT”). The VAT is not applicable to the land, it is only levied over the constructions destined to commercial or industrial real estate. Residential constructions are exempted from the VAT.
VAT is caused by the non-resident selling the property and is transferred to purchaser. Therefore, the notary public granting the public deed in which the purchase agreement is formalized shall calculate, withhold from purchaser and pay an amount equal to 16% (and 10% in borders) of the value of the constructions as VAT.
b. Tax related to the purchase of a property. The acquisition of real estate is taxed by a local property acquisition tax. This tax may vary from state to state. The average rate is variable up to 3% of the higher value of: (i) appraisal value, (ii) fiscal value, (iii) cadastral value, and (iv) the real value of the transaction. This tax applies without distinction to residents and non-resident.
In exceptional cases, when the acquisition price is less than 10% of the appraisal value of the property, the differential is considered as an income for acquisition. In that case, a 20% withholding on the differential is applied.
The local property acquisition tax is calculated, withhold and paid by the notary public, at the moment of the formalization of the public deed containing the purchase agreement.
7. Financing & Coverage. Most of the time, investors finance the transactions with funds procured from financial institutions. When financing is procured from financial institutions, mortgages are the most typical and reliable security device of coverage for lenders, since mortgages are in rem guarantees created on a specific property and may include the constructions over the property, if any. For a mortgage to be effective against third parties, it must be registered before the local office of the PRPC in which the property is located. Other typical ways of coverage are, inter alia: (i) promissory notes, (ii) guarantee trusts, (iii) conditional sales in which seller reserves the domain of the property sold until complete payment of the price, (iv) joint and several liability constituted by third parties, and (v) bonds.
All guarantees can be granted through each real estate purchase agreement or by means of a side, ancillary, additional or accessory agreement, provided that the constitution of the guarantee meets the legal requirements for each type of guarantee.
8. Costs for holding real estate. The only tax directly involved when holding a property is the local property tax (“Property Tax”), which is bimonthly or annually paid for owning a piece of land or a house/building. The Property Tax is calculated according to the cadastral value of the property and the amount to be paid is determined depending on the value of the land (i.e. location, characteristics and infrastructure of the location, urban equipment, services, types of use of soil in the location), constructions (i.e. type of the property, floors, surface of the property, construction surface, years of the construction), topographic conditions, cadastral value ranks, among others.
The percentage to be paid as Property Tax is very complex to determine, since every municipality has its own tariffs depending on the characteristics and general concepts described above, but for general informative purposes only, we may say that the average percentage to be paid as Property Tax may vary from 0.025% up to 1.5% of the cadastral value of the property.
9. Restrictions. Acquisition of real estate in Mexico is regulated differently to: (i) Mexican individuals (ii) Mexican entities with foreigners’ exclusion clause, (iii) Mexican entities with foreigners’ admission clause (Calvo Clause), or (iv) foreign individuals and/or entities (non-residents).
a. Mexican individuals and/or Mexican entities with foreigners’ exclusion clause, have no restrictions to acquire private property, other than those regarding public order and illegal purposes.
b. Mexican entities with Calvo Clause are entitled to acquire private property, according to the following parameters:
i. For real estate located outside the Restricted Zone, which is the 100-kilometers (62-miles) strip along the borders and 50-kilometers (31-miles) along the beaches of Mexican territory, such entities do not have any restrictions other than those regarding public other and illegal purposes.
ii. Regarding real estate located within the Restricted Zone, ownership rights can be acquired for non-residential purposes, provided a notice is submitted before the Secretary of Foreign Affairs; if for residential purposes, title of the real estate must be held through a trust by a trustee (Mexican bank), with an authorization of the Secretary of Foreign Affairs.
c. The right of foreign individuals and/or entities (non-residents) to acquire real estate within Mexican territory depends on the location of such property:
i. Real estate located within the Restricted Zone, cannot be directly owned by foreigners. However, foreigners can acquire rights to the use and benefits of real estate located within Restricted Zone through a trust with an authorization of the Secretary of Foreign Affairs.
ii. Real estate located outside the Restricted Zone can be acquired by non-resident through a written notice submitted to the Secretary of Foreign Affairs.
We will be very glad to assist you in any matter related to the acquisition of real estate and establish-ment of businesses in Mexico. We provide integral and personalized consultancy to our clients in order to capitalize upon all business, commercial and investment opportunities that may arise, as well as to deal with any related contingency.
We have considerable experience in real estate operations, representing both real estate developers and private investors. Our services include legal consultancy in operations involving purchase, sale and lease of real estate. We also assist our clients in the creation and development of condominium re-gimes, timeshares, joint ownership, transformation of ejido lands to private property, real estate ad-ministration, and development and implementation of real estate trusts.
We will be very glad to assist you in any matter related to the acquisition of real estate and establishment of businesses in Mexico. We provide integral and personalized consultancy to our clients in order to capitalize upon all business, commercial and investment opportunities that may arise, as well as to deal with any related contingency.
We have considerable experience in real estate operations, representing both real estate developers and private investors. Our services include legal consultancy in operations involving purchase, sale and lease of real estate. We also assist our clients in the creation and development of condominium re-gimes, timeshares, joint ownership, transformation of ejido lands to private property, real estate ad-ministration, and development and implementation of real estate trusts.
Mexico City | Torre Esmeralda I, Blvd. Manuel Ávila Camacho 40, Piso 14, Lomas De Chapultepec V sección, Miguel Hidalgo, 11000, Cd de Mexico. + 52 (33) 1518 0445 + 52 (55) 6823 3004
Guadalajara | Américas 1500, piso 14, Col. Country Club, Guadalajara, Jalisco, México. +52 (33) 3627 5035 + 52 (33) 3121 3014
