Puerto Vallarta Real Estate Tax on Rental Income in Mexico. The ability to pocket undeclared income in Mexico is going away. Tax changes in 2020 have been announced by the government. The press and social media groups are circulating this important information to the expat community. The problem of foreigners who are renting their homes or condominiums and failing to pay Mexican taxes has existed for a long time. NO LONGER. Not declaring income and paying taxes is a violation of Mexican tax law with severe penalties if discovered.
FOREIGNERS ARE OBLIGATED TO PAY TAXES ON INCOME GENERATED IN MEXICO no matter where the income is received.
Effective JUNE 1, 2020, new procedures and regulations come into effect.
The law breaks tax rates and procedures for payments into two categories:
Resident in Mexico. If the owner is a resident of Mexico, he may obtain a taxpayer identification number (RFC) and declare income less allowable deductions. Taxes are generally lower than for non-residents but the requirements for residency are fairly high including minimum time in the country each year and verifiable proof of monthly income. In most cases the monthly declarations are provisional, and an annual declaration must be filed with the tax authorities.
Non-Resident in Mexico. If the owner is someone who came, fell in love and bought a property for appreciation, for retirement or just for fun but is not in a position to live in the country most of the year, or does not have sufficient stable income, he or she is a NON-RESIDENT, and declares under a different formula. Tax rates are fixed, and an annual declaration is not required.
As of June 1, 2020, the Mexico tax law requires that any property promoted and reserved through a digital platform, such as VRBO, AirBnB, etc. will have the income tax (ISR) and the added value tax (IVA) withheld from owner proceeds and delivered directly to the Mexican tax authorities.
RESIDENTS OF MEXICO with more than 300,000 pesos (approximately $13,000 USD) in annual income from their property must then file a declaration each month and a final annual declaration each year. The final tax rate will depend if taxpayer elects to take a 35% blind deduction or provide invoices for full deductions. Taxes declared and paid in Mexico are used as a credit in U.S. and Canadian taxes.
NON-RESIDENTS who rent exclusively through the tech platforms will have their taxes withheld and the withholding is considered as final. Airbnb and VRBO are requiring owners renting to provide their Mexican tax number. So, it has become necessary for these renting owners to enlist in the tax authority, SAT. The owners are asking for referral of names of good local accountants where their rental property is located. These tech platforms are responsible for providing an official receipt for taxes withheld and paid to the Mexican authorities. So, the owners need to register in order to be able to keep the tech platform account.
NON-RESIDENTS who rent occasionally through tech platforms and also through private rental agencies have the option of filing when income is received. These non-residents must appoint a Mexican company to declare and pay tax on their behalf and to provide official receipts for same. The return is considered as final.
NO DOUBLE TAXATION. Mexico has tax treaties with 32 nations. Taxes paid in Mexico can be taken as credits in taxpayer’s native country. 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!
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!
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
Author and article courtesy of Harriet Murray, Founder of Cochran Real Estate in 1997. Born in Louisiana, Harriet Murray had an early love of art and studied art education in college. Upon graduation, she went on to become an art teacher in New Orleans public schools. She later moved to TX and taught art there; as well as science, speech arts, and other subjects like most young teachers do. She is the current President of the Puerto Vallarta chapter of AMPI (after serving as Vice President under different Presidents for 15 years); and is AMPI certified in both the US and Canada, as well as a member of the NAR. She is a proud Certified International Property (CIP) specialist – an achievement only attainable after intense training in real estate in markets all over the world. This article is based upon legal opinions, current practices, reporting from FBS MLS of AMPI members, and personal real estate experience in Puerto Vallarta since 1997. I recommend that each potential buyer or seller of real estate conduct his own due diligence and review. Contact Harriet at email: email@example.com.