OWNING REAL ESTATE IN MEXICO FROM A TO Z

Transcription

1 OWNING REAL ESTATE IN MEXICO FROM A TO Z Owning property in Mexico while similar in some ways to ownership in Canada or the US is very different in other ways. The information within this document is meant to demystify and inform buyers about owership from A- Z including steps to be aware of when purchasing, tax implications associated with renting out your property and costs to budget for when purchasing and selling. Epic Real Estate Solutions, Inc St. Paul Street Kelowna BC Canada V1Y 2E5 toll free

2 By Linda Jones Neil The Settlement Company Your safety net in Mexico Types of Property In order to understand real estate ownership in Mexico, it is important to know some basic facts about the constitutionally mandated types of property and the regulations that impact them. The Constitution of Mexico defines four types of land within the country: 1. Original land of the Mexican state, which includes parks, forests, and the like. 2. Property of the Mexican nation, which includes minerals, oil, water, and the Federal Maritime Terrestrial Zone (a strip of land along all coastlines twenty meters in from the average high- tide line.) 3. Social land, which is land, owned communally or by an ejido. 4. Private property. The first two types of property have to do with publicly owned lands, such as national parks and natural resources, which seldom pass into private ownership, although an easement may be granted for the Maritime Terrestrial Zone. The third and fourth types of property, social and private, comprise the real estate that can be owned and transferred by individuals. Restricted Zones In addition to defining the types of property, the Constitution also states that only Mexican citizens may own land within 100 kilometers (60 miles) of a national border and within 50 kilometers (30 miles) of a coastline. Given this constitutional law, how can foreigner s own real estate within these restricted zones? 2

3 The answer is a bank trust, the fideicomiso. The fideicomiso was created to enable foreigners to own properties within the restricted zones without a constitutional amendment. The ley de fideicomiso was established in 1972 by President Luis Echeverría in order to encourage tourism and investment by buyers from the USA, Canada, and other countries, as well as to stop ownership abuses. Prior to the establishment of the fideicomiso, a common abuse was for foreigners to title restricted zone property in the name of a friend who was a Mexican citizen; a foreigner s continued possession and enjoyment of the property rested on a gentleman s agreement that might not be honored, for example, by the friends heirs. Briefly stated, the fideicomiso is a trust that is set up and maintained through a Mexican bank. The bank is the owner of record for the property and the deed is held by the trust of which the foreign owner is the beneficiary. The fideicomiso is set up for a term of fifty years and can be renewed for additional fifty- year terms. If the trust is terminated, the property is sold and the sale proceeds go to the trust beneficiary. The foreign owner of the property enjoys all ownership rights; the property can be sold, rented, pledged as collateral for a mortgage, bequeathed to heirs who can receive the trust property without going through a Mexican probate process, and the like. Outside of the restricted zones, real estate may be owned by foreigner s fee- simple. EJIDO LANDS Ejido lands are a frequent source of misunderstanding for foreigners who want to buy land in Mexico. The original concept of the ejido system was to make an equitable distribution of land to the campesinos who labored on it. The Agrarian Reform Act of 1915 and the Constitution of 1917 created the ejido system that is a uniquely Mexican form of land ownership. This body of law, la ley agraria, gave the federal government the right to expropriate land and redistribute it to communal groups, the ejidos. The group members, the ejidatarios, were each given the use of a parcel of land that they could pass to heirs but could not sell, rent, or use as collateral for a mortgage. The ejido system remained unchanged for most of the twentieth century with some presidential administrations viewing it as a 3

4 school for farmers and other administrations viewing it as a way to maximize use of the land through collective farming. Over the years, as parcels of land were handed down and divided repeatedly among heirs, the majority of ejidatario holdings shrank to below- subsistence level with average holdings, parcelas, of two hectares (about the size of two soccer fields) or less. In 1992 the ejido system was radically reformed by creating a process for privatizing the land holdings. Ejidos were given the opportunity to regularize (privatize) the land, and grant titles to members for their individual parcels so that privatized lands could be bequeathed to heirs, rented, used as collateral, and sold to other members. The expectation was that this reform would bring about a winnowing effect as some farmers bought additional parcels to increase their holdings. This regularization entails a lengthy application process during which at least seventy percent of the members of the ejido must agree on privatization, parcels of land defined, and undisputed titles established. Completion of the privatization process can take five to ten years. Even if the ejido land has been fully regularized, the group may maintain communal ownership of community development land as well as communal land for parks, markets, town squares, and the like. Ejido land must be fully privatized before it can be sold to outsiders. Once the title to private property has been issued, the first sale to anyone must include the right of first refusal. Thus, ejido land that has been privatized can be sold to non- ejidatarios only if all members with right of first refusal agree to the sale. This process, known as derecho al tanto, entails notification of intent to the ejido president who provides public notice of the intended sale. The property must be formally offered, in the following order, to the family of the seller, those who have worked the property for one year or more, neighbors, and other members of the ejido. If, after thirty days, no one among these groups has come forward to purchase the property or raise an objection, the sale may proceed. With members and their heirs scattered, a major challenge to selling or regularizing ejido land is simply locating all of the owners. Currently, an estimated 48 percent of Mexico s land is in ejido ownership. As urban areas grow in size and resort development increases along coastlines, some ejidatarios find themselves the owners of prime pieces of development land. It cannot be overemphasized that buyers should never make an 4

5 informal deal hoping that ejido land will be privatized or take someone s word that it has gone through the privatization process. What can happen? In an infamous 1995 case, 150 homeowners, most from the USA, were evicted en masse from a development called the Baja Beach Club in Punta Banda, Baja. Their homes were built on disputed former ejido land that had not been properly privatized. When the original owners of the land disputed the legality of the ejido s formation and won their case before Mexico s courts, the homeowners were evicted and received no compensation for their lost homes. Real estate professionals in Mexico caution against purchasing ejido land through an informal deal, on a promise, or on the cheap. There are many stories of a foreigner, who thought he had clear title to former ejido land, being surprised by a Mexican national knocking on the door and declaring ownership of the land on which the foreigner s house is built. The best advice is to avoid ejido land altogether until its privatization has been well established. Co- Propiedad Joint Ownership Co- propiedad is a form of joint ownership of private property within a family. It assures a share of the family property for every descendant. Clearing title to a piece of property that has been in the family for several generations can be a daunting task. Consider this example: if three brothers have co- propiedad ownership of a piece of land and each has five children there are fifteen co- owners in the second generation; if each of the fifteen children have five children the number of co- owners increases to seventy- five in the third generation; if each of the seventy- five grandchildren have three children the number of great- grandchildren co- owners increases to 225 in the fourth generation. Each of the co- owners has a right of first refusal if jointly owned land is to be sold. It should be obvious that by the fourth generation just locating all of the co- owners is the first challenge in obtaining an undisputed title. Steps in the Transaction For foreigners, the process of finding and purchasing a property in Mexico follows the same general sequence and principles as in the USA, Canada, and Europe. Purchasing real estate involves: 1. Finding the property 5

6 2. Negotiating an offer 3. Performing due diligence 4. Obtaining proper documentation 5. Arranging payment 6. Closing the transaction Within the transaction s sequence of events, there are key differences in procedures, documents, and people involved in the transaction. Buying south of the border, however, is not like buying property in the United States or Canada, and purchasers must always remember that the process is different than purchasing another house in their neighborhood. Even if you believe you are a savvy real estate person, take off your domestic blinders and prepare to look through a different set of glasses. That is not to say that real estate transactions (operaciones) in Mexico are totally different or more complicated but more awareness, street sense, and patience usually are needed. The Offer Process Making an offer to purchase real estate begins with an ofrecimiento, offer, which is an initial document that sets forth the price offered and general terms of the transaction. These preliminary documents are followed by the formal deed to the property, which must be drafted, in Spanish, by the Notario. If the property is located within the restricted zone, on the coast or near the borders, title must be placed in a fideicomiso, a trust; if the property is in the interior, a standard contrato de compraventa, purchase/sale fee simple deed, will be executed. Any deed must contain the full legal description of the property, the appraisal amount, and the value declared by buyer and seller. Because of the length of time required between ofrecimiento, offer, and signing the restricted zone required fideicomiso deed before the Notario, a promesa de compraventa, promissory contract, setting forth all of the terms of the sale including possession dates, is strongly recommended. It records the terms of agreement between the parties. It is very important that the promesa de compraventa accurately reflect all details of the transaction; it not only guides transfer of the property but is also the source of information for the escritura, deed of fideicomiso, or compraventa. The deed to the property can take the form of: 6

7 Contrato de fideicomiso, transfer of the property into trust for the beneficiary buyer, if within the "restricted" zone. Contrato de compraventa, fee simple deed, if outside the restricted zone. If a mortgage loan is involved, the deed will contain clauses reserving the title or the rights in the property until payment in full is received. Spanish is the official language of Mexico, therefore the deed to the property signed before the Notario will be written in Spanish. You and your client need to be fully knowledgeable of the content of the deed and any other agreements written in Spanish. Translations of transaction- related documents should be made; although not enforceable in a legal or court action, translations may be used as references. A bilingual attorney or a closing company, which acts as a neutral third party, should be engaged about the time the buyer makes the offer. Deposits and Escrow A deposit of earnest money is expected to accompany presentation of the offer to the seller. A deposit of five to ten percent is customary. There is no legal requirement that this deposit be placed in an escrow account; buyers should not assume that it is deposited in one. In its most rudimentary form, a deposit check may be held in the real estate office s safe. The most likely scenario is that the deposit check is immediately cashed by the seller, broker, or developer. Mexican brokers are often reluctant to use a third- party escrow because it means that they are not in control of the money. Developers, often lacking liquidity, want control of the money up front to cover construction cost. Generally, banks are not set up to handle escrow money and may co- mingle funds. Based on harsh past experiences, some would counsel buyers that they should be prepared to lose a deposit if a deal sails. Although the practice of escrow in Mexico is in an early stage, the good news is that it is developing rapidly. As mentioned previously, established companies, such as Stewart Title and Fidelity Title among others, offer escrow services. 7

8 Can a real estate company act as the escrow agent? Yes, it can and many do so. Generally, the real estate company represents one of the parties to the transaction and this can influence objectivity in carrying out escrow duties and maintaining confidentiality. A neutral third party is best engaged to act as the escrow agent. Keep in mind that not all escrow services are as equally professional or reliable, nor is there any licensing requirement, therefore it is wise to use the services of an established company. There have been a few infamous instances of owners of local escrow services absconding with the monies in their care but these are the actions of a few dishonest individuals not a reflection on escrow providers or the country as a whole. A check with PROFECO, the Mexican consumer protection agency, will reveal if there are any reported problems with the company. If escrow services are to be used, a separate agreement should be drawn up to cover the terms including when and how the funds will be disbursed. Performing Due Diligence The next step in the process is performing due diligence or, more simply put, doing your homework. This stage of the process includes: Establishing the status and transferability of the property Obtaining a statement of no liens Inspecting the physical condition of the property Obtaining an appraisal Obtaining a commitment for title insurance 8

9 Status and Transferability The ownership and transferability of the property must be determined. There are three basic factors that establish the transferability of a property: 1. Possession of a title in the owner s name 2. Right to sell the property 3. No liens It is a mistake to assume that mere physical possession of a title equates to ownership and the right to sell. A frequent source of misunderstanding is the belief that the person who has physical possession of the title document is the rightful owner of the property; the name of the rightful owner on the title is the important fact, not who has possession of the document. Furthermore, possession of a title and rightful ownership of the property does not necessarily mean that it can be transferred. Remember, an owner of ejido land can receive a title to his parcela, but that does not establish the right to sell it to a non- ejidatario. Land that is owned communally or co- propiedad runs the same risk as ejido land of having someone knock on the new owner s door and announce that they are the rightful owner of the land. If the seller is a Mexican individual, it is wise to obtain the consent of his/her spouse since property may have been acquired as community property, sole and separate property, or jointly owned property. It is not always clear on the seller's deed how title is held. It is best to make sure the holder of title signs the new deed with the spouse signing consent. Condominium developments are required by federal law to have a recorded regimen de condominio; lacking this required regimen, ownership of a condominium unit cannot be legally transferred. A condominium development is required to have an administrator and an executive committee as well as established procedures for meetings of unit owners. The regimen must also cover the method for 9

10 setting assessments and a system for resolving conflicts between owners. In addition, some condominium developments require a right of first refusal to other unit owners. Plans for local and state authorities in must approve subdivisions, fraccionamiento, in order to be legally conveyed; this applies to both the land and the house. Title Insurance How can a buyer be sure of a clear title and transferability of the property? The best solution is title insurance which will protect the buyer from financial losses resulting from title defects and prior liens, although not physical defects. The leading U.S. based companies who offer title insurance for properties in Mexico are Stewart Title Guaranty de Mexico S.A. de C.V, First American Title, and Fidelity National. Title insurance costs approximately $5 $7 per $1,000 valuation. Before issuing the policy, the title insurance company will conduct a search for title defects and liens. A title search will cost $500 $3000, depending on its complexity and the location of the property. Title searches in some areas may be completed within a couple of days. On the other hand, It can take about 30 days to complete. The buyer s intent and ability to obtain a title insurance policy should be reflected in the purchase offer. In the search process, any condition that may prevent conveyance of the property or encumber a new owner will be discovered. The title policy also protects the buyers if previously undiscovered circumstances come to light and threaten the buyer s ownership of the property. Considering the low relative cost of this coverage, real estate professionals should recommend it to clients who want to purchase in Mexico. Title insurance companies, like all insurance companies, are in the business of managing risk; therefore it is in their best interest, as well as that of the policy purchaser, to conduct a thorough title search and uncover problems with conveyance of the property. It should be obvious that the buyer benefits both from the title company s examination of the title records and protection from financial loss. Guarantees established through a title policy include: Title to the estate or interests 10

11 No defects, liens, or encumbrances Marketability of the title Right of access to and from the property Exclusions from coverage include: Laws, ordinances, or regulations restricting the use of the property Rights of eminent domain unless recorded prior to the date of the policy Defects, liens, encumbrances, adverse claims: created, suffered or agreed to by the claimant, known by the claimant but not a matter of public record, or created subsequent to the date of the policy Taxes or assessments not shown as existing liens Facts, rights, interests, claims, easements, liens, encumbrances, discrepancies or conflicts in boundary lines, shortage in area, encroachment or other fact which could be ascertained by a physical inspection of the property or making an inquiry of those in possession of the property, or which a correct survey would disclose. Water rights (Mexico only) Mineral rights (Mexico only) Confiscation, expropriation or taking of land by the agrarian reform, insurrection, revolution, or political action (Mexico only) 11

12 the settlement company BUYER S ESTIMATED CLOSING COSTS PROPERTY: DATE: OCTOBER 4, 2012 BUYER: ORDER # FINANCIAL: Total Consideration $250, DEBITS PRORATIONS AND ADJUSTMENTS Property Taxes from 00/00/00 to 00/00/00 PENDING Homeowners Association Dues FOREIGN RELATIONS, TRUST FEES Permit Foreign Relations $ * Incl. Registry, Foreign Inv. $ * Bank Annual Fee $ Bank Signature Fee $ CERTIFICATES AND APPRAISAL Official Appraisal $ * Certificate of No Liens $35.00 * Certificate of Property Taxes $10.00 * TITLE SEARCH AND INSURANCE (optional) Title Investigation fee Title Insurance Policy Premium CLOSING CHARGES Fee to The Settlement Co. $1, I.V.A. 10% $ Notary Public fee $1, Power of Attorney (optional) Financing documents TAXES AND REGISTRATION Adquisition tax (2% of purchase price) $5, Public Registry of Property $ Property Code Department $10.00 OTHER EXPENSES Attorney, Clossing Officer, Auxiliar Services $0.00 Telephone/Fax/Courier/Bank Services $ * CREDITS FUNDS REQUIRED TO BEGIN (*) (Wire immediately) $3, FUNDS REQUIRED PRIOR TO REGISTRATION. $9, TOTALS $12, $12, (All figures quoted in U.S. dollars PRICES SUBJECT TO CHANGE WITHOUT NOTICE) THE ABOVE FIGURES ARE ESTIMATES ONLY. ACTUAL AMOUNTS, TOGETHER WITH RECEIPTS FOR SAME,WILL BE PROVIDED WITH THE FINAL CLOSING STATEMENT. The above estimate includes completion of the above under normal circumstances and up to one hour of client attorney consultations, in person, via telephone or fax. Special services, negotiations or additional investigations are provided as required. These services are charged at the rate of $ dlls. for a closing officer and $ dlls per hour for an assistant. Research activities as required are billed at $25.00 to $75.00 dlls per hour depending upon complexity of the matter. All fees plus IVA-10% This estimate expires in one month. I Hereby Accept this estimate and autorize The Settlement Company to place the above payments and proceed to Close this Transaction. SIGNATURE: DATE: 12

13 the settlement company BUYER S ESTIMATED CLOSING COSTS PROPERTY: DATE: OCTOBER 4, 2012 BUYER: ORDER # FINANCIAL: Total Consideration $250, DEBITS PRORATIONS AND ADJUSTMENTS Property Taxes from 00/00/00 to 00/00/00 PENDING Homeowners Association Dues FOREIGN RELATIONS, TRUST FEES Permit Foreign Relations Registry, Foreign Inv. $ * Bank Annual Fee Bank Signature Fee CERTIFICATES AND APPRAISAL Official Appraisal $ * Certificate of No Liens $35.00 * Certificate of Property Taxes $10.00 * TITLE SEARCH AND INSURANCE (optional) Title Investigation fee Title Insurance Policy Premium CLOSING CHARGES Fee to The Settlement Co. $1, I.V.A. 10% $ Notary Public fee $1, Power of Attorney (optional) Financing documents TAXES AND REGISTRATION Adquisition tax (2% of purchase price) $5, Public Registry of Property $ Property Code Department $10.00 OTHER EXPENSES Attorney, Clossing Officer, Auxiliar Services $0.00 Telephone/Fax/Courier/Bank Services $ * CREDITS FUNDS REQUIRED TO BEGIN (*) (Wire immediately) $2, FUNDS REQUIRED PRIOR TO REGISTRATION. $8, _ TOTALS $11, $11, (All figures quoted in U.S. dollars PRICES SUBJECT TO CHANGE WITHOUT NOTICE) THE ABOVE FIGURES ARE ESTIMATES ONLY. ACTUAL AMOUNTS, TOGETHER WITH RECEIPTS FOR SAME,WILL BE PROVIDED WITH THE FINAL CLOSING STATEMENT. The above estimate includes completion of the above under normal circumstances and up to one hour of client attorney consultations, in person, via telephone or fax. Special services, negotiations or additional investigations are provided as required. These services are charged at the rate of $ dlls. for a closing officer and $ dlls per hour for an assistant. Research activities as required are billed at $25.00 to $75.00 dlls per hour depending upon complexity of the matter. All fees plus IVA-10% This estimate expires in one month. 13

14 Statement of No Liens The seller should provide the buyer with a certificado de libertad de gravamen, a statement affirming that there are no liens, unpaid taxes, or other encumbrances on the property. The information set forth in the gravamen includes a legal description of the property, boundaries, surface area, and the owner of record. In addition to the gravamen, the buyer can request a certificado de no aduedo, a certificate of no debt, from the local tax office and a copy of the existing escritura publica, public deed. It is also prudent to also verify that all homeowners association fees, if applicable, have been paid. If the previous owner employed household staff, such as a housekeeper or gardener, the buyer should make an effort to determine that they have been properly dismissed and compensated in accordance with Mexico s labor laws. It is best to obtain an affidavit from the seller. Appraisals An avalúo, official appraisal, of the property is done in order to establish a value for tax purposes. The official appraisal amount may or may not be the same as the purchase price. Both amounts, official appraisal and full purchase price, should be included in the escritura. The cost of the official appraisal can range from $150 to several thousand dollars based on the value of the property. The Notario will order the appraisal that will be carried out by a perito valuador, an official appraiser. If a mortgage loan is involved, the lender will require a second appraisal; this cost is in addition to the official appraisal. Secretary of Foreign Relations Permit and Registration Foreigners who wish to purchase property within Mexico s restricted zones must obtain a bank trust permit from the Secretary of Foreign Relations. The new deed must be registered with the National Foreign Investment Registry. For purchase of real estate in nonrestricted zones, a foreign buyer must obtain a permit and register the new deed, but a bank trust is not needed. If the property is a vacant lot, the permit request should include a general development plan detailing the amount of money to be invested and the construction time frame. The fee for the permit from the Secretary of Foreign Relations is about $1,500. Foreign purchasers are required to sign a Calvo clause statement; this document states that the signers agree to give up recourse to the laws of their home countries in case of a dispute regarding their ownership. 14

15 The Secretary of Foreign Relations must grant any petition for a trust permit that complies with the stipulated requirements within five working days following the date of its presentation to the central office in Mexico City or thirty days if the application is submitted to one of the Secretary s state offices. If the maximum period passes with no action, the trust permit or registration is considered authorized. However, the trustee banks actually obtain the permits and therefore it can be challenging for a buyer to determine the date submitted. Social Security Clearance for New Construction If acquiring a single family home that is less than five years old a document known as terminacion de obra, conclusion of work, should be provided by the seller as well as a clearance from the Social Security Institute (IMSS) that all worker insurance was paid during the construction. The Fideicomiso The Constitution of Mexico states that no foreigner is permitted to own property within 100 kilometers (62 miles) of the national border or 50 kilometers (31 miles) of the coast; all of the Baja Peninsula, with the exception of a tiny portion of the interior, falls within the restricted zone. The fideicomiso, a bank trust, is the federal government s accommodation allowing foreigners to own property within these restricted zones. It is the only legal and secure method for foreigners to own residential property within these areas. The fideicomiso is a trust set up with one of the federally chartered banks in Mexico. The bank becomes the owner of record for the property and the foreign buyer is the sole and controlling beneficiary. Under the terms of the trust, the foreign beneficiary enjoys all rights of ownership including pledging the property as collateral, renting it out, bequeathing it to heirs, or tearing down an existing structure to construct a new residential or touristic dwelling. The parties involved in the trust arrangement are: Fideicomitente: the seller 15

16 Fiduciario: the trustee, i.e. the bank Fideicomisario: the beneficiary, i.e. the buyer The life of the trust agreement is fifty years and can be renewed for an additional fifty years. An application for renewal of the trust must be made to the Secretary of Foreign Relations within a period of 180 days (minimum) to 365 days (maximum) before the expiration date. This procedure assumes that there have been no changes in the beneficiaries or terms and conditions of the trust. If the trust is terminated, ownership of the property is transferred to the party named by trust beneficiary, subject to legal capacity of that party to own the property; if the trust expires and the fiduciary has not received instructions regarding a transfer, the property may be sold and the proceeds, less expenses, of the sale go to the trust beneficiary. Banks charge an initial set- up fee of approximately $500 $750 and an annual maintenance fee of about.05 1 percent of the value which is subject to reappraisal every year or two. With the increasing numbers of bank trusts established by foreign real estate owners, annual trust fees have decreased substantially in recent years; it makes sense to shop around for the best rates and services. Paying annual bank fees Trustee banks do not customarily send a statement for payment of the trust s annual administrative fee. It is expected that the property owner knows of this annual obligation and will make arrangements to pay it on time, in person or through a payment service, in order to avoid penalties. Although setting up the bank trust may seem like adding extra red tape and cost to the transaction, it actually does have some advantages. The trust can be modified in a fairly simple procedure to allow for new beneficiaries. The interests in the trust can be passed to heirs without going through a probate proceeding in Mexico. If so instructed by the beneficiary, the trustee may rent or lease the property for up to ten years with the beneficiary receiving the rental income. 16

17 In order to avoid potential legal problems for themselves and their clients, banks customarily review prior title documents before accepting the property in trust. This is not a guarantee of a clear title, but it is one more professional examination of the property s status. If the property is sold to another foreign buyer, the process is one of transferring interests in the trust. The interest in the property can transferred by means of a Contrato de Cesión de Derechos Fideicomisarios. If the property is already in a trust, the buyer may either request an assignment of the rights or a new trust for a fifty- year term. In either case, a permit from the Secretary of Foreign Relations is required and the new deed must be registered in the National Foreign Investment Registry. The costs for transferring the rights of a trust are about $1,500 for a new permit, in addition to about $500 for registration in the National Foreign Investment Registry (RNIE). An assignment of rights has no permit charge but does require RNIE registration which costs about $500 Therefore, when deciding whether to accept an assignment of rights or apply for a new trust, the factors to weigh are the remaining term of the existing trust and the annual bank fees. If the trust has an unexpired term of less than thirty- five or forty years and/or annual fees of more than $500, it would probably be advantageous to obtain a new fifty- year trust with a bank offering more attractive fees. Neither signing of the offer nor a promise contract constitutes closing of the transaction. When real estate changes ownership between citizens of Mexico, it is done by means of the fee simple deed. Be warned! Nothing has closed until all parties to the transaction in front of the Notario sign the deed of conveyance. Waiver of Secrecy of Confidential Information For buyers from the U.S. the process of signing the fideicomiso may also include signing of a waiver allowing the financial institution to comply with requests for information from certain U.S. governmental agencies such as the Department of Homeland Security and Internal Revenue Service. The Renuncia al Secreto de Información Confidencial, Waiver of Secrecy of Confidential Information, will likely contain wording, in Spanish, such as: 17

18 I hereby waive all rights to confidentiality of personal and financial information ( Confidential Information ) held by the Financial Institution relating to all trusts under which I am the settlor or the beneficiary, if Confidential Information is requested of the Financial Institution pursuant to obligations under a treaty Mexican Corporations A common misperception is that the fideicomiso can be avoided by forming a Mexican corporation as the owner of the residential property and with the foreign owner as a sole stockholder. This is not legal under any circumstance. Mexican corporations are intended for ownership of commercial enterprises not residential property except, possibly, rental property in some cases. The Mexican Constitution and the Foreign Investment Act are quite clear and unequivocal on this matter. Payment and Financing The buyer is expected to bring to the closing the necessary funds, usually in the form of a bank check, for completing the transaction. Most real estate transactions in Mexico are conducted on a cash basis. In a case of multiple offers in a hot market, cash can win the negotiation. Until recently, mortgage financing was either too costly or just not available. Not long ago, the norms for mortgage financing in Mexico, when obtainable, were forty to fifty percent down payment with interest rates of twelve to eighteen percent and a loan term of ten to fifteen years. Given these conditions, it is easy to understand why cash deals were preferable. The mortgage financing business in Mexico is opening up and financing costs are dropping. Generally, current mortgage financing requires a down payment of about twenty to thirty percent with interest rates around eight to eleven percent and terms of twenty to thirty years. Most companies require a minimum loan of $100,000 and some set a maximum of $5,000,

19 Closing the Transaction Completion of the transaction, the closing, takes place at the office of the Notario who will inform the parties of the date and time. At the closing, the Notario presents the deed of conveyance for signatures authorizing execution of the escritura and collects applicable taxes due from both the seller and buyer. The buyer pays the seller usually by means of a certified check or wire transfer; for payment by wire transfer, buyers need to take into consideration the fact that the credit to the seller s account may not show until the next business day and therefore the seller may be reluctant to sign the deed of conveyance lacking proof of the fund transfer. The buyer brings to closing: The seller brings to closing: Payment for the property Deed Payment for taxes and fees Tax records Identification documents Paid utility and other property- related bills (passport, marriage certificate, visa/tourist permit) Identification documents Marriage certificate, spouse The Notario The Notario is usually selected by the buyer and is probably the most important official a buyer will encounter during a real estate transaction in Mexico. The Notario is a highly qualified public official who drafts the deed and ensures that the transaction is done in conformance with Mexican law. The Notario is prohibited by law from handling purchase funds and, based on regional practices, may order appraisals, certificates, and other documents. It would be a mistake to equate the Notario with the notary public common in the USA and Canada, whose primary function is to authenticate signatures on documents. 19

20 No Notario! No way! If a seller or real estate agent claims that there is no need to involve a Notario in the transaction, it is a sure sign of an illegal deal or someone trying to cut corners. A Notario must be involved in closing the transaction for it to be legal. In Mexico, the Notario must be an attorney of good standing, have at least five years of legal practice experience, complete a rigorous process of application and scrutiny, and pass an exam. The Notario s specific functions are to: Authenticate the seller s right to sell the property Examine the title to establish that there are no prior claims or liens on the property Ensure the legality of the transfer from seller to buyer Finalize the transaction by signing the applicable documents Issue the escritua, the final deed, to the buyer Preparation of tax declarations for the impuestos sobre la renta, capital gains, and acquisition taxes, collection of taxes and payment to Hacienda Enter the record of the transaction in the Public Registry The Notario examines only the current deed The Notario examines only the current deed and lien certificate and does not necessarily perform a historic review or title search past the present transaction. This examination of the documents is not a substitute for title insurance and the Notario is not responsible for defects. 20

21 After the closing, the buyers should verify that the deed has been recorded in the Registro Público de la Propieded, Public Registry. Not all Notarios are as diligent as they should be in completing this final but absolutely essential step in the process. For the deed to be defensible, it must be recorded in the Public Registry. It usually takes about two weeks for completion of this step. Registration of the deed can be verified by referring to the file number recorded on the property tax stamp. A supervising settlement company or attorney should provide the buyer with a completed copy of the deed. Absent Buyers or Sellers, the Apostille Is it necessary for a buyer or seller to be present at the closing in order for the transaction to conclude? Buyers or sellers can grant powers of attorney to third parties who act on their behalf. The grantor should allow the grantee sufficient authority to carry out the intended action but no more than instructed to do. A power of attorney must be signed before a notary public and apostilled by the Secretary of State in the country in which it was executed. The apostille is a form of internationally recognized notarization. It is a brief document that when attached to another document authenticates or legalizes it. In 1981, the Convention Abolishing the Requirement of Legalization for Foreign Public Documents was established. Under this Convention, signed in the Hague, signatory countries agree to mutually recognize each other s public documents so long as they are authenticated by an apostille. Mexico and the USA are both signatories to this convention, but Canada is not. Other signatory countries include: Germany, Argentina, Australia, Austria, Bahamas, Spain, Israel, France, Greece, and Norway. In countries that are not signatories to this Hague Convention, documents to be used in Mexico must be authenticated by obtaining a legalization or ratification from the Mexican Consulate; the Consulate maintains a list of authorized notaries with samples of their signatures and is able to ratify the authenticity of the notary s signature. A closing company can assist with preparing the appropriate power of attorney for the buyer or seller. These powers of attorney are particularly helpful in coordinating the legal presence of buyers and sellers, particularly when one, or both, are foreigners. 21

22 For information on signatory countries and downloadable apostille forms, go to Supervision of the Closing In order to protect their interests and assure that all steps of the process are completed, foreign buyers should engage the services of a settlement company or real estate attorney to supervise the closing. Just as in the U.S. and Canada, Mexican real estate professionals are not attorneys and buyers should not expect them to know or take responsibility for compliance with every detail of the laws of property conveyance. Closing Costs As a rule of thumb, closing costs for a real estate purchase in Mexico are about six to eight percent of the cost of the property. Some costs are paid on a flat fee basis and others vary based on a percentage of the property s declared value. It is customary for the buyer to pay all fees and acquisition costs. Following are the commonly encountered fees and costs and approximate amounts: Closing Costs and Approximate Amounts Paid by the Buyer Title Search... $500 $1500 Escrow Service... $750 Trust fees... $500 to establish, annual maintenance fee of $400 $500 or.05% 1% subject to reappraisal Registry % Notario... 1% 1.5% 22

23 Acquisition tax... 2% of appraised value Foreign Relations Permit... $1,500 National Foreign Investment Registry (RNIE) $500. Supervision of closing by... settlement company or attorney $2,000 $5,000 Title insurance... $5.00 per $1,000 value Agent s Commission... Negotiable. Subject to IVA tax Appraisal... $150 to several thousand dollars based on the value of the property IVA tax... Value added tax applicable to professional services, 11% on Baja peninsula, Cancún, and Rivera Maya, 16% elsewhere ZoFeMaT, Federal Maritime... Terrestrial Zone, annual fee Annual right- to- use concession fee $10 (unimproved), $25 (improved) per square meter, applies to waterfront properties The seller s main cost is capital gains tax. There are some common misperceptions about the tax obligations of foreigners who sell property, such as they are exempt from capital gains tax on the sale of real estate or no capital gains tax is due if the foreign seller has owned the property for at least two years. Following are some basic facts about capital gains tax.briefly, there are two formulas for calculating capital gains tax in Mexico; at the time of closing, both formulas are applied to the gain and the seller pays the lower of the two amounts. The formulas are: 23

24 25% of the gross gain on the sale with no deductions 30% on the net gain after application of deductions and adjustments to cost basis Adjustments to basis are allowed for items such as capital improvements and transaction expenses; an annual one to two percent inflation adjustment is allowed as an addition to basis, which can add up to a significant amount over several years. A homestead exemption allowing exclusion of capital gains is provided to residents who have lived in a home in Mexico as a primary residence.. This exclusion is intended to benefit residents, whether nationals or foreigners, of Mexico, not those who own second homes in the country, and foreign owners claiming this exemption will likely have to prove that Mexico is their tax home. A foreigner who lives in Mexico full- time (more than 183 days annually), has a resident visa, has owned and lived in the home as a primary residence for more than two years, and does not have a primary residence in another country can possibly claim exemption from capital gains tax. Note, that the determination is based on residency not immigration status. In Mexico, the owner s basis in a property is calculated on the declared value not the purchase price; therefore it is important that the declared value on the escritura match the price paid. Both annual real estate and capital gains taxes are assessed based on the declared value. While some may think it is smart to record a low declared value in order to keep the acquisition and yearly property taxes low, in the long run this is a very unwise move. A low declared value will result in a similarly low cost basis for capital gains tax on the profit from the eventual sale. Consider that the acquisition tax is two percent and annual real estate taxes are similarly low, while capital gains tax rates can be up to thirty percent. A buyer who agrees to understate the declared value of a property has in essence accepted a transfer capital gains tax liability from the seller. 24

25 Write the exchange rate on the fideicomiso The buyer should remind the agent, attorney, or closing company to note the exchange rate on the day of the transaction and amount paid in both dollars and pesos on the deed to the property. This helps establish the cost basis for taxes due upon a future sale. Tax Issues in Mexico The taxes that foreign real estate owners must be aware of are: Impuesto sobre valor agregado (IVA), value added tax; the tax rate is 11% on the Baja Peninsula, Cancún, and Rivera Maya, and 16% elsewhere Impuesto sobre la renta, capital gains tax on the sale of property Income tax on Mexican earnings Acquisition tax paid on the official appraisal value of a property The predial is the annual real estate tax based on the catastro value Impuesto sobre valor agregado, (IVA) is a value- added tax. It is applicable to fees charged by service providers such as the Notario, appraiser, and other professionals, including the real estate professional s commission. The IVA rate is ten percent on the Baja peninsula, Cancún, and the Rivera Maya and fifteen percent elsewhere. The owner of a furnished rental property must collect and pay IVA to Hacienda, the federal tax authority. The predial is the annual real estate tax based on the catastro, the declared value. Property owners should not expect to receive an annual statement or bill for taxes due; it is assumed that the property owner knows about this annual obligation, due on January 1 of the year, and will go to the local tax office to pay it within the early weeks of the year. 25

26 Impuesto sobre la renta, capital gains tax, is due upon sale of the property. As noted above, it is calculated on the amount of gain on the sale. In Mexico, income tax is paid to Hacienda. Foreigners who are legal residents of Mexico are required to register with Hacienda. Anyone, resident or visitor, who earns income in Mexico, including rental income, is obligated to pay income tax on earnings. Note that the emphasis is on earn not receive; Social Security and pension payments received from outside of Mexico are not subject to income tax there. It should be obvious that taxation in Mexico, as in other countries, can be a complex issue, particularly for those who earn income or receive rent payments in Mexico but have a tax home in another country. It is advisable to seek the guidance of a tax expert, both in Mexico and the taxpayer s home country, to assure compliance with tax regulations and procedures. Tax Issues for U.S. Citizens U.S. real estate buyers who think that Mexico is a tax haven are mistaken. U.S. citizens, including those who live abroad, must report and pay income tax to the IRS on any income earned abroad which includes salary, rent payments, and capital gains on the sale of property. To avoid double taxation of income, a credit is allowed for income tax paid on salary received abroad, however generally there is no deduction or credit permitted for foreign real estate or capital gains taxes. In addition to regular income tax, the Alternative Minimum Tax (AMT), an important factor even for middle- income taxpayers, must be taken into consideration; a foreign tax credit may be allowed in calculating AMT (consult the instructions for IRS form 6251, Alternative Minimum Tax). The Foreign Tax Credit is claimed by means of IRS Form 1116; buyers who expect to receive income from ownership of real estate in Mexico should read IRS Publication 514, Foreign Tax Credit for Individuals. All of the IRS publications and forms noted above can be downloaded and printed at On the upside, Social Security and pension benefit payments received from the USA are neither taxed as income in Mexico nor considered foreign- sourced income by the IRS. 26

27 It sometimes comes as a surprise to owners of property held in a fideicomiso to learn that the U.S. Internal Revenue Service requires filing of an annual informational tax document. This annual report must be flied regardless of whether or not the owner receives any income from the property. The value of foreign real estate is included in the owner s estate for estate tax purposes. For U.S. tax purposes, the heir will receive the property with a stepped up basis; another compelling reason to make sure the declared value on the escritura reflects the actual value of the property. U.S. owners who plan to rent their Mexican properties should be aware that all of the tax rules and issues that apply to income from second homes and vacation properties in the U.S. are also applicable to their rental properties in Mexico. Regulations such as the 14- day rental rule, passive income and losses, and limits on deductibility of mortgage interest all apply. Mortgage interest paid on the home is deductible if within allowable limits. The IRS allows a mortgage interest deduction on a combined mortgage financing of up to $1 million for a primary home and one additional residence; home equity financing is allowed an interest deduction on loans up to $100,000. If you know that a buyer plans to use home equity financing to make an initial purchase and later convert to a mortgage, caution the buyers that this may be a costly decision. In order for mortgage debt to be considered home acquisition financing, eligible for the mortgage interest deduction, it must be acquired within ninety days of the purchase; otherwise it is considered home equity financing and subject to the lower limit of deductibility. If the owner establishes a home in Mexico as a primary residence, owning and living in the property for two years, up to $250,000 ($500,000 for joint returns) of gain on the sale is not subject to capital gains tax. Certain allowances are made for those who must be absent or leave their home for medical reasons. U.S. property eligible for a tax- deferred 1031 exchange, i.e. property used in trade or business or held for investment, cannot be exchanged for a similar property in Mexico, or any other country, because the IRS does not define it as like- kind. Some tax experts advise that a 1031 tax- deferred exchange of one foreign property for another foreign property is allowable. Any real estate professional who has experience with 1031 tax- deferred exchange will attest that these transactions are complex and 27