Viewpoint 2008
to seek and find those not reporting income.
The international accounting firm, Deloitte, recently gave a seminar to AMPI agents on the subject of renting Mexican properties and the reporting of income.
For years, some owners of homes and condos in Mexico, both foreigner and national alike, have not reported their rental income. The law has become more formal over the years and the procedures the country has now to seek and find those not reporting income, has become more strict and encompassing.
What property applies to the current law?
All properties which are rented and generate an income for their owners are income properties for the length of time they are rented. When the owners are occupying them personally, and not charging their guests, it is not rented.
Does it matter if the money goes directly to a foreign country?
No, rental income on a Mexican property requires taxes paid, regardless of where the money is sent. The income generator is the property itself and where it is located is the jurisdiction of where the first tax is due and payable.
What tax is due?
IVA tax is due, which is like a sales tax. It is 15% in the Bay of Banderas, and some border states charge 10% IVA. So the IVA tax is due on the gross amount of the rent charged for the rental term. In addition, income tax is owed. US citizens may elect to pay 25% of the gross or 28% of the net. Expenses can be deductible with the correct receipt or factura.
Canadian citizens pay 25% of the gross. With proof of the purchase with a proper invoice, the net basis can be used.
What is deductible against income?
It is wise to get a list from your Mexican accountant, but basically expenses which are part of the normal cost to do business are in the deductible category: utilities, repairs, cleaning supplies, staff salaries, management charges, property taxes and trust payments and replacement of equipment.
Does it matter what kind of receipt I receive as long as the the type of expense is allowable?
Absolutely it matters! An acceptable receipt has 10 characteristics to it, including a permit to be printed, an expiration date, a stamp of the tax ID of the property or tax payer. The term used most often is “factura”. Get to understand which makes a factura different from a credit card receipt, etc.
If I rent my own home out personally and don’t use an agent or a rental company, aren’t I exempt from paying taxes?
Absolutely not! You still owe IVA and tax on adjustable income after expenses. In fact, the expense of the agent commission or the management company is a deduction you will want to include in your expenses.
What about developers who mange their Home Owners Association or rental pools for their owners within their development?
Compliance of the tax laws is an important factor and applies to these developers, as well.
How do I pay taxes? My American or Canadian account doesn’t know how to do this.
You must register with Hacienda, or Mexican IRS after you have notified Immigration that your home is earning income. Immigration will give you permission to rent and will issue you a permit. You will need then to go to Hacienda and make application to be within their tax structure and receive an RFC or tax id number.
What do I do then?
You will need to use a Mexican accountant or an accountant qualified to file your returns and pay your taxes or learn to do this yourself.
What if I decide not to get involved with a tax number and payment of these taxes?
If Hacienda finds out your situation and determines you are renting the property illegally, you can be fined and charged for unreported income back 5 years at a rental rate established by the government tax authority.
How would Hacienda find out?
The same way we know IRS operates in the US. If you are advertising in any printed material or on the internet, you are vulnerable. If someone knocks on your door and asks who the people are who are occupying the property, they can determine these are renters.
What does the recent law on bank accounts in Mexico mean exactly?
If you have an account in your name in a bank (and soon to be investment houses), you have to prove if you asked, the income in that account has already paid tax from the country where it was earned. If your bank account has money from your foreign income after taxes, you will have to prove it with acceptable tax returns and a “trail” of the money flow. The burden of proof is on you.
Do I have to report and pay additional taxes in my home country on my Mexican income?
The US has a treaty with Mexico whereby the taxes paid in Mexico can be applied as a credit toward taxes due in the US. You must get your American accountant to work with you on this.
Canadians don’t have the same treaty with Mexico, so it is wise to check this out while you are doing your fiscal planning.
Why is all of this tax important?
It is important for many reasons, but you already know what they are. Modern governments raise money to run the country by taxing income. You have a responsibility to the country where you use the goods and services and benefits of income derived from the amenities of your property and location.
You are also receiving a benefit of the net income to pay your operating expenses of your property and keep it in good repair. You also may be receiving an economic return on your investment. It is really a win-win situation. You are a partner with the country where you receive these benefits.
Harriet Cochran Murray
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller conduct his own due diligence and review.
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