Earning Rental Income from Your Vacation Property
The fiscal implications of renting property in Mexico
Mexico…
a gorgeous land full of character and friendly people, no wonder many
choose it as a vacation getaway. Nowadays, vacations are not only
something a Hotel or Resort can offer you, but elite travelers can
choose from renting a small condo within a development, to a beachfront
home or villa.
This article written by Pedregal Escapes Manager, Kathinka Roesiger in Cabo San Lucas, Baja Sur to help those that are interested, or those that are already renting their properties in Baja California and Mexico in general. There are some very serious facts to know about taxation when renting your condos, houses or villas in Baja and she has provided a few alternatives for those foreigners who wish to do so legally.
It is important
to know that in accordance with Mexican law, at the moment of acquiring
property and the rights to use and enjoy it, if via fideicomiso or
another title, (regulated by the Secretaria de Relaciones Exteriores,
SRE) you will be considered Mexican in every respect concerning the
fideicomiso. In case of any failures to comply with Mexican laws, you
may lose your rights as the holder of a fideicomiso and the related
property, to the Mexican Government as beneficiary (so it is ruled under
the Second Title of the Foreign Investment Law and Regulations). The SRE
gives the permission to foreigners to be holders of a fideicomiso which
allows foreigners to acquire property in any zone. This brings with it
the obligation to comply with all laws concerning the property as the
object of the fideicomiso.
Taking into consideration the above information, it is important to contemplate that the foreigner, who rents the property of his fidericomiso, has to comply with the Mexican fiscal obligations. One of these obligations concerns the payment and or in some cases the withholding, of the ISR ( Impuestos Sobre Renta), which is the direct tax over the rent or profit no matter what it is called ( for example: rent, utility, profit, interest, product, participation, income, salary and so on…).At the moment this tax is 25% of the total profit. This should not discourage or alarm those foreigners who rent their properties held through a fideicomiso.
Various options and alternatives of commercial and fiscal strategies exist to stay on top of tax regulations. For example, one can create a Mexican corporation as a vehicle for such tax payments. Needless to say, this alternative brings with it an additional cost of hiring approved accountants and lawyers and other obligations such as quarterly and yearly fiscal reports.
Another
alternative could be to comply with fiscal obligations as the holder of
the fideicomiso as a physical person or foreigner. However in this case,
it would be necessary to register the fideicomiso at the Mexican Tax
Office, Secetaria de Hacienda y Credito Publico.
The
third and probably easiest alternative would be, to hire a company
specialized in the administration of rentals, which would then take care
of all fiscal obligations for the holder of the fideicomiso, who wants
to rent his property. Of course the reliability and seriousness of this
company is of upmost importance, as they will be in charge of the
complete payment of all taxes and will be obliged to produce the
necessary documents to prove the correct payment of such for the
fideicomiso.
In addition to that, a treaty to avoid double taxation exists between Mexico and the United States of America, which in its article 8 establishes that the taxation of rental profits will be treated as if the foreigner was a Mexican. However, if this tax is not paid, this will be treated as non-fulfillment of fiscal regulations and is thus as a fiscal evasion in both countries.