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The
following information offers a simple and concise summary about owning
real estate in Mexico.
It is supplied courtesy of MLS Vallarta.
Alternatives
It is
a common misconception that foreigners cannot own real estate in Mexico,
but the reality is that they can. Outside the Restricted Zone, defined
below, a foreigner or foreign corporation can acquire any type of real
estate, holding the property as a direct owner complying with Mexican
law.
However, there is the Restricted Zone. The Mexican Constitution regulates
ownership of the land and establishes that “… in a zone of 100 kilometers along
the border or 50
kilometers along the coast, a foreigner cannot
acquire the direct ownership of the land”. These areas are known as
the “Restricted or Prohibited Zones”.
Nevertheless, the latest Mexican Foreign Investment Law, enacted December
28, 1993, provides a solution in the form of a Fideicomiso.
Within the Restricted Zone, a foreigner or foreign corporation can obtain
all the rights of ownership with a bank trust, known as a Fideicomiso.
Any foreigner or Mexican National can establish a Fideicomiso
(the equivalent of an American beneficial trust) through a Mexican bank
to purchase real estate anywhere in Mexico, including the Restricted Zone.
For practical reasons, even in unrestricted zones, many foreigners,
and Mexican Nationals for that matter, prefer to hold their property
under a Fideicomiso.
To do so, the buyer requests a Mexican bank of his choice to act as
a trustee on his behalf. The bank, as a matter of normal course, obtains
the permit from the Ministry of Foreign Affairs to acquire the chosen
property in trust.
The Fideicomiso can be established for a maximum
term of 50 years and can be automatically renewed for another 50-year
period. During these periods you have the right to transfer the title
to any other party, including a member of your family.
The bank becomes the legal owner of the property for the exclusive use
of the buyer/beneficiary, who has all the benefits of a direct owner,
including the possibility of leasing or transferring his rights to the
property to a third party or pre-appointed heir.
The trustee is responsible to the buyer/beneficiary to ensure precise
fulfillment of the trust, according to Mexican law, assuming full technical,
legal and administrative supervision in order to protect the interests
of the buyer/beneficiary. Fideicomisos are
not held by the trustee as an asset of the bank.
Another alternative is to purchase non-residential property through
a Mexican corporation, which under certain conditions can be 100% foreign-owned,
with a provision in its by-laws that the foreigners accept being subject
to Mexican laws and agree not to invoke the laws of their own country.
Also, they agree that the real estate acquired be registered with the
Foreign Affairs Ministry and be used for non-residential activities.
In other words, under these conditions foreigners can directly acquire
properties destined for tourist, commercial and industrial use.
The Real Estate Industry
Status
The real estate industry in Mexico
is similar in many ways to that of the United States, which is probably the
most advanced in the world. It is developing quickly, taking advantage
of today’s technology; however, it seems to be paralleling the system
as it exists in the U.S.A.
The only national professional real estate organization in Mexico is the
“Associación Mexicana de Profesionales Inmobiliarios” (Mexican
Association of Real Estate Professionals) or “A.M.P.I.” with 24 chapters
in 38 cities. This organization is somewhat similar to the National
Association of Realtors (NAR) in the United States.
Licensing
At this time, there are no government license laws regulating real estate
brokerage and sales in Mexico.
Anybody can, in effect, offer properties for sale. Therefore, caution
should be taken to select an established and reputable real estate company.
A potential buyer may want to check with the local Chamber of Commerce
associations or a prominent law firm.
Financing
Historically, due to lack of capital markets and high Mexican interest
rates, most transactions were made in cash. In 1993 and 1994, the Mexican
economy picked up to such an extent that annual inflation went down
to one digit and interest rates were more or less accessible.
Banks introduced attractive mortgage programs and, consequently, sales
proliferated throughout Mexico.
Due to the devaluation in December 1994, the situation has reverted
and the few banks that offer mortgages do so at such high variable interest
rates that very few buyers are in a position to take advantage of them.
However, this is changing. Recently Scotiabank
Inverlat introduced long-term mortgages at rates between 15-17%.
These mortgages, however, are only available to foreigners with FM-2
immigration status.
Multiple Listing Service
A couple of electronic multiple listing services (MLS) are now operating
in Mexico.
Producciones Viva, the company that publishes
the Real Estate Guide, has been offering MLS service to Vallarta since
1989, available in a print catalog and online at mlsvallarta.com.)
Escrow, Title Insurance and Home Insurance
It is the Public Notary who, in effect, acts as a “Holding Agent” for
the involved parties, so there are few escrow companies in Mexico.
At the present time there is no general use of title insurance in Mexico, although
some American companies are providing coverage in some resort areas
of the country. On the other hand, insurance companies do provide full
home coverage throughout Mexico.
The most commonly used title insurance company in Vallarta is Stewart
Title.
Purchase-Sale
Process
Most real estate transactions are “opened”
after a written purchase offer is accepted by the seller and when a
purchase-sale agreement (promissory contract) is signed by both parties.
In most cases, a deposit is required by the broker to transmit the offer
to the seller. (If the transaction is being conducted directly with
the seller, it is highly recommended that a real estate broker or lawyer
be consulted before signing any papers or handing over any money.)
In some areas it is common practice to deliver to the seller, as an
advance payment, the equivalent of 10-30% (including the initial deposit)
of the total price upon signing the purchase-sale agreement, which should
contain a penalty clause applicable in case there is a breach of contract
by any of the parties.
Normally, when signing the escritura or official
deed, which needs to be certified by a Public Notary, the balance is
paid and the property is delivered. This should not take more than 45
days. It is recommended that an escrow account be used for all real
estate transactions.
The Public Notary
A Public Notary is a government-appointed lawyer who processes and certifies
all real estate transactions, including the drawing and review of all
real estate closing documents, thus ensuring their proper transfer.
Furthermore, all powers of attorney, the formation of corporations,
wills, official witnessing, etc. are handled and duly registered through
the office of the Public Notary, who also is responsible to the government
for the collection of all taxes involved.
In connection with real estate transactions, the Public Notary, upon
request, receives the following official documents, which, by law, are
required for any transfer:
- A non-lien
certificate from the public property registry, based on a complete
title search.
- A statement
from the treasury or municipality regarding property assessments,
water bills and other pertinent taxes that might be due.
- An appraisal
of the property for tax purposes.
Closing Costs
It is common practice that the buyer pays the
transfer of acquisition tax and all other closing costs, including the
Notary’s fees and expenses, while the seller pays his capital gains
tax and the broker’s commission.
Since January 1, 1996, the federal law regarding the real estate transfer
tax, which was 2% for all the Republic
of Mexico, was
modified to allow each of the Mexican states to determine its own tax.
The range now may be from 1-4% of the tax appraisal value, which is
generally less than the sales value.
The rest of the closing costs, which exclude the transfer cost mentioned
above, vary from 3-5% or more of the appraised tax value, depending
on the particular state. These percentages are applied to the highest
value of the following:
- The
amount for which the property is sold.
- The
value of the official tax appraisal.
- The
value designated by the property assessment authorities.
Cost of the Fideicomiso
Based on the present tariff, the bank charges the person desiring the
Fideicomiso an initial fee (approx. $500.00 USD) for drawing
up the agreement and establishing the trust, plus a percentage based
on the value of the property. In addition, the bank charges an annual
fee (depending on the value of the property) to cover its services as
a trustee.
Real Estate Broker’s Commission
Most real estate companies in Mexico
charge a 6-8% commission based on the actual sale price of the property.
However, in resort areas broker rates are usually higher because of
increased broker expenses.
Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the same
way it is determined in the United
States. Here, the gain from the sale
of property is treated as normal income at a tax rate of up to 35%.
To determine the gain, the following costs and expenses are deducted
from the amount for which the property is officially sold:
- The
original land cost and the depreciated construction cost, based
on the number of years the property was held and adjusted for inflation
according to the official consumer price indexes.
- Additions,
modifications and improvements, but not maintenance, made on the
property (construction), adjusted as above.
- Commissions
paid to real estate brokers by the seller.
- The
closing costs, including all expenses, taxes and fees paid by the
seller.
The Notary will retain the calculated gain
after deductions, forwarding it to the Mexican tax authorities. The
seller will then deduct this amount against his annual tax return, which
becomes an adjustable tax credit in the U.S.A.
On the other hand, there is no capital gains tax in Mexico if there
is conclusive proof the seller has used the property as his primary
residence.
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