The law has not changed. Both residents and non-residents must declare their full income and enforcement will most likely be stricter than ever. For the non-resident, a Mexican person or entity must be appointed to collect, declare and pay taxes. No RFC is required. The tax is fixed, on the gross, it is a definite tax and no annual declarations need be made.
Evasion of tax is a criminal offense. Articles 150 to 178 of the Fiscal Code provide for imprisonment of up to six years for evasion of taxes. Not only is it a criminal offense but the taxpayer must pay the past due taxes and very substantial interest penalties which amount to 1.3% per month, compounded. Unless taxes and accrued penalties are paid in a timely manner the property can be seized and put up for auction.
Additionally, in a reform of Article 118 of the Fiscal Code, no landlord may demand payment of past due rent in the courts without submitting proof of tax compliance. This is not unlike tax evasion consequences in the US and Canada!
The good news on all of this is that Mexico has tax treaties with 32 nations, including the US and Canada. Thus, taxes paid in Mexico are a credit against income in both countries! Double taxation is never an issue!
Taxes on Vacation Rental Properties in Mexico – Your Questions Answered
What are the taxes you must pay on your rental income in Mexico?
- Value Added Tax IVA (excise tax)
- Income Taxes paid to SAT on a monthly basis
- When are these taxes payable? Monthly: filed electronically
- What happens if you fail to pay these taxes on your rental income?
Serious penalties and interest can be assessed by the SAT and other tax agencies as well criminal charges might be filed. If you manage the property for the owner, you as the manager may have liability for failing to file and pay these taxes.
How can I pay these taxes as a nonresident of Mexico on my income from my Mexican real property?
- If you are a tax resident of Mexico you can use your resident tax ID number and you have your Mexican accountant use your taxpayer identification number (RFC) to file and pay these taxes. However, if you are a nonresident of Mexico it is necessary to contact a Mexican professional or Organization How are these taxes treated on my US tax return?
- You must report your rental income and expenses on your US tax return on Schedule E (if you are an individual taxpayer). A Mexican rental is treated the same as US rental in most respects. You can as a rental expense deduct the IVA tax and local lodging taxes. You can claim the Mexican income tax paid on your rental income as as credit directly offsetting your US tax on the same rental income dollar for dollar. You do not get double taxed on your US tax return
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This article is based upon information from Linda Neil with The Settlement Company, legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review.