Purchasing and selling real estate in Mexico can be complex, and in some cases costly, if you don’t understand all the rules and practices. While the government and associations are working together to raise standards for property agents, buyers should use an independent attorney to make sure that they avoid pitfalls that could increase tax liability and other costs. See the following article from International Property Journal for more on this.
In many ways, Mexico is no longer the Wild West. Title insurance is widely available; the property rights of foreigners are generally acknowledged and respected by government agencies. And the Asociacion Mexicana de Profesionales Inmobiliarios (AMPI) is working with the National Association of Realtors to raise standards for property agents.
Mexico is essentially two different markets–coastal and inland property. The area within 50 km of the coast (and 100 km from borders, including all of Baja California) is known as the restricted zone, and there are prohibitions on foreign ownership of land. International buyers commonly use a fideicomiso, a bank trust, to buy near the water, which adds a level of complexity to the transaction, but it’s a widely-used and time-honored system. Most fideicomiso are good for 50 years and easily renewable and transferable. Annual administration fees on the trust are usually between $200 and $750.
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Inland, those rules don’t apply and transactions are fairly simple and straightforward. Ownership is on a fee simple standard and there are no special conditions for a foreign owner. The fees and taxes to transfer property usually range from three to six percent. Buyers are always advised to use an independent attorney and a notary public oversees the exchange of the deed and funds.
- Capital gains tax in Mexico can eat at rosy profit estimates. The tax can reach as high as 28 percent, although there may be ways to structure a transaction to avoid the hit, especially if the house is a primary residence.
- Escrow accounts are a relatively new concept, but some companies are establishing trust accounts to provide some buffer to transactions—and others are providing escrow accounts in the U.S.. However, bonds and errors and omissions insurance is not available.
- Although technically illegal, it is not unusual for sellers to record a much lower purchase price, in order to avoid taxes. Unsuspecting buyers can be shocked when they go to resell the property and are called upon to pay tax on the recorded increase in value.
- Some buyers are shocked to find closing costs can run as high as 10 percent of the value of a property, especially along the coast. Unlisted fees for condominium associations and upkeep may also add to the overall expense of a transaction.
- Tracking title to a property can be difficult. Large swatches of land, especially on the coast, are owned by ejido, land collectives that, in some cases, have existed for 100 years. Everything becomes complicated when an ejido is even remotely involved in a transaction.
- While foreigners don’t need to use a trust to buy inland property, many choose to go through the procedure in order to speed the probate process of passing the property to heirs.
- Possession of land is a key legal issue in Mexico, making it essential to confirm there are no squatters on the property before concluding a deal.
- It’s fairly simple to transfer the deed held in a trust, but if there is only a short time remaining on the trust (and the fees are high), it is often better to form a new trust.
This article has been republished from International Property Journal. You can also view this article at International Property Journal, an international property news and information site.