Ever since the Mexican government made it possible for international investors to own property near the beach in Mexico, foreign buyers have been snatching up beachfront property and other prime real estate near the coast, often with the intention of collecting ongoing vacation home rental income. But what does this mean for your taxes locally and federally in Mexico? Read on to see what you can expect from Mexican tax laws and how to make sure you stay on the right side of the law.
Owning a Vacation Home Rental in Mexico
Whether you intend to invest in Mexico, do business in Mexico or hope to someday retire in Mexico, it’s important to understand the Mexican tax system and advisable to work with a reputable real estate investment advisor and tax attorney in Mexico when you buy an investment property or decide to purchase a vacation home rental. For starters, it’s important to note that the Mexican Federal Government requires foreign property owners to follow all applicable tax laws that relate to owning real estate in Mexico.
Also, every type of rental property in Mexico - from small suites to luxury condominiums, private homes and villas – requires foreign owners to abide by Mexican tax laws, whether you intend to live there part time and rent it out the rest of the year, or plan to use it strictly as an investment property to generate ongoing vacation home rental income. Although you might encounter some foreign homeowners in Mexico who are not complying with the laws, the reality is you cannot escape paying taxes in Mexico and avoiding these laws will ultimately put your home at risk.
Other foreigners who own property in Mexico might mistakenly believe that it’s not necessary to pay taxes on income from the property if that income is paid into a bank account in a foreign country. This is definitely not the case, however, and the reality is that all rental properties in Mexico are subject to taxes in Mexico, no matter where the money winds up.
Tax on Rental Property in Mexico
Mexican tax laws have become even more regimented in recent years, and today the government has procedures in place to take action against anyone who fail to report income from vacation home rentals and other investment properties. Since most rentals today are listed on Airbnb and other forms of social media, it’s easier than ever for government officials to determine which properties are being used to generate vacation home rental income. Finally, keep in mind that the authorities are likely to base taxes and penalties on a perceived rental income by using the area’s occupancy rate, which - along with tourism numbers - is usually very high, so avoiding paying taxes will ultimately be more expensive in the long run.
Fortunately, since your income from the vacation home rental property will be accounted for on your home country’s tax return as income, you will not have to pay a double tax on that money in Mexico if you live in the United States or Canada, thanks to tax treaties. Just remember that all three of these countries regularly share information about investments and income taxes, so it is essential to consistently report your investment income and / or rental income at home and in Mexico. To avoid being double taxed, your Mexican tax attorney or real estate investment advisor will simply provide a copy of your most recently filed income tax return to the Mexican government, proving you are a resident and have paid the proper taxes at home.
Have questions about buying investment property in Mexico? Post them in the comments!
Want to know more about Mexico tax law? Read 3 Key Benefits of Mexico’s Capital Gains Tax and see how the Mexican tax code affects U.S. investment property owners.