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Buying & Owning Real Estate in Mexico
History of Buying Property in Mexico
In 1917 despite all of the sparring between the Mexican government and the Mexican rebels, Carranza got a convention together in Queretaro to formulate political and social goals. The result was the constitution of 1917. Property Ownership in CozumelThe constitution, among other things, gave communal or ejido land to every Mexican village. This land was given by the government to the villages for use only and could never be sold away to the highest bidder. All land was to be either communal land for use only or owned by Mexican Nationals only.This law was greatly placed in effect for the past problems with the Spanish, French and Americans, controlling both land and waterways in Mexico.

In 1973, a constitutional amendment known as the Foreign Investment Law allowed foreigners to purchase property anywhere in Mexico, except in the restricted zone. The restricted zone, stated in article 27, is 50 km (32 miles) from the coast during high tide and 100 km (64 miles) from any border. The largest problem with this amendment is that most of the foreigners wanted to purchase specifically in the coastal and border areas. In January of 1994 NAFTA had been finalized and President Bill Clinton gave a multibillion-dollar loan to Mexico. In succession with NAFTA, Mexico passed another amendment to the constitution that foreigners could now own property in the restricted zone with a bank trust or fideicomiso. The trust system circumvents the constitution allowing foreigners to legally own in the restricted zone.

Purchasing Property
Purchasing property within 32 miles of the coast or within 64 miles of the border requires the property be purchased with a bank trust deed or fideicomiso. The bank (know as the trustee) holds the trust deed for the person or persons purchasing the property (known as the beneficiaries). This property is not part of the bank's assets and cannot be subject to any lien or attachment for any bank obligations. The beneficiaries have all ownership rights to the property and may sell, lease, mortgage or pass on to their heirs as desired under law.

A bank trust is not a lease. The Mexican government established the trust agreement as a way of protecting foreigners interested in owning property in Mexico. The reasoning was that by making ownership pass through the trust process, there would be an automatic review of the transaction to ensure it was legal and unencumbered. The bank is required to check ownership, insurance and indebtedness of the property, providing further protection to the foreign owner. In the past numerous foreigners have purchased property, illegally and with liens unknowingly. At that time there was no way to protect the foreigners because there was no check and balance system.

A trust may be granted and extended in 50-year periods. If you purchase property currently held in a trust deed, a new 50-year period can be established or the existing trust deed may be assigned to the purchaser. Trusts are renewable at any time by simple application with the bank. It was never the intent that these properties pass back to the government at the end of the trust period. This is a common misconception and fear of most buyers. In fact at the end of the 50-year period the owner has an additional 10 years to renew the trust with the bank.

So, What Do I need?
One of the most commonly asked questions by everyone. To purchase property the buyer needs a photo id, preferably a passport and the tourist visa received upon entering the country. If a buyer wants to live in Mexico for more than six months at a time they might want to apply for a different immigration status of FM3 or FM2. See the section on Immigration for more details.

Trustee Fees
There is a fee of a few hundred dollars to open a trust account as well as an annual fee as long as the trust exists. It's wise to check with several financial institutions on actual fees to set up the trust as they can vary from bank to bank. These trust fees pay for establishing the paperwork and handling some (but not all) government reporting on behalf of the buyer each year.

To open a trust account a buyer will need the accepted offer for purchase, a photo ID and 10% of the purchase price of the new home. At that time buyers will also receive wire transfer instructions from the bank setting up the trust so that any remaining money owed to the bank can be received directly. Do not give anyone any money that is not being handled by a bank escrow representative. Buyers should sign a bank trust contract with a banking official at the time the initial set up deposit is made.

Property Tax
Taxes are typically very low in Mexico as a whole. The property tax - known as "predial" is .1% of the assessed value of the property. Taxes are paid annually with the assessed value determined at the time of sale. If a purchased property has an assessed value equivalent of of US$100,000 (valuations are always in Mexican Pesos) the annual tax rate would be US$100. The reason property taxes are so low is that they have never been considered a source of revenue for Mexican government entities. However, this is beginning to change throughout the country as government entities like cities and States search for new funding sources to be able to provide better education and city services for residents. Be sure to review taxing policies in the particular area of interest before purchasing a property.

The Closing Process
The property sale closing process takes between 30 to 45 days. While awaiting the final closing, the bank sets up an escrow account, a Notario prepares the legal deed and closing papers and checks if there are any liens or problems with the title of the property.

Closing costs are paid by the buyer and are usually about 6%-8% of the total purchase price. 2% sales tax to the Mexican government, 4% to other closing costs such as title search, attorneys fees, filing of all legal documents and closing deal.

Always ask all parties involved (notaries, attorneys, bank, agents) for a written, itemized, good faith estimate of the closing costs for any property purchase. Buyers have a right to know what closing costs will be as the time approaches. The seller is responsible for his or her capital gains tax and any real estate fees owed on the property at the time of sale. The buyer does not have to be present at the time of closing the sale. However, a limited power of attorney prepared by a Mexican Notario in advance will need to be given to the party designated to execute the closing process for a buyer in their absence.

Remember you are buying in a foreign country. Things work a little slower and a lot different here. Do not get frustrated; enjoy the education and the dream of your home in Mexico.

The Notario
The Notario is a government appointed official that helps to close and educate buyers through the closing process. The notary represents a high level of legal standing and their services are required for the transfer of real estate property. The Notario is the attorney of record and the unbiased, official representative of the government. A Notario has a fiduciary responsibility to both parties and sanctions the contract from a tax and legal point of view. A Notario must first be an attorney and then must take special instruction in real estate law to become a Notario. Once he has finished his instruction the attorney must then be appointed by the government. This "Notario designation" can also be taken away by the government should he not follow the rules and regulations. Ask others in your area for the names of Notarios that are known and trusted.

The above is a THEORECTICAL explanation of what a Mexican Notario is and should do during a property transaction. But the sad fact is, as many throughout Mexico and in Cozumel have learned, Notarios can be some of the most corrupt and unscrupulous "white collar" thieves in Mexico. Select a Notario with extreme caution especially in Cozumel and never fall victim to believing a Notario represents you or your interests.

Property Ownership as a Corporation
This is a question that is very frequently asked. In 1994 change in the Mexican Foreign Investment Law allowed a Mexican corporation to be 100% foreign owned. An individual is, by establishing a corporation to purchase property, allowed to own title, without a bank trust in a restricted zone. This is a great benefit for foreign business owners. However, this is not the answer for everyone. Commercial property carries higher water, electric and phone rates. And additional government reporting and tax payments are required of corporations that do not apply to individuals. It is stipulated that a single-family residence cannot be owned by a corporation but of course there are several ways to circumvent this if appropriate. The government has cracked down on corporations purchasing property unless it is actually for business use such as for office space. The trust deed is just as safe and less problems with the government.

Maintaining Your Property
Many property owners leave their property unoccupied for some time during the year. Condo owners pay monthly fees and on site managers will maintain the property area in the absence of owners. Individual homeowners should consider hiring a property management agent to handle the upkeep and bills of the property during their absence.

There are many property management services in Cozumel so interview several and understand clearly what fees are involved. NEVER utilize anyone to manage a property who isn't an actual property manager in the business of professional management. Often times, a nice waiter in a restaurant or a boat captain or other "island friend" will offer to care for a property in order to earn a little extra income. These situations rarely end well and typically spell the end to friendships made. So do the professional thing and hire a professional property management company to care for a new island home.

Just like in the US, there are various types of insurance available in Mexico such as health, life, auto and property insurance. While the only legally required insurance in Mexico is auto insurance, the premium rates are relatively low on all types of insurance and should be purchased for maximum peace of mind. Some regions of Mexico do not have many agents to select from but review the local phone directory or ask others in your area for a reference to a reputable insurance company.

Financing & The Buying Process
Real estate transactions in Mexico have historically been all cash deals. Recently, the Mexican market has been opened up to financing. There are different types of financing available through the many financing companies available. They can also help you with second home tax breaks in the U.S.

If you are not fluent in Spanish, you should request a side-by-side translation in English so you understand exactly what you are signing. Buying in a foreign country is very difficult so the translation is worth the money in order to make you feel more comfortable.

To start the loan process with a mortgage company, typically a buyer will need to answer a few simple questions such as legal name, address, employer, job title, years of employment, annual income, savings and investments and then some idea of the mortgage parameters in mind. For example, how many years, what level of payments can be sustained, etc. Once the Sales Offer made has been accepted, a contract must be drafted by an attorney or sometimes a Notario will do this if asked. In order for any contract to be legal and binging in Mexico, it must be written in Spanish.

Once the Sales Offer is signed by both parties (the buyer and the seller) and witnessed, a legal contract actually exists.

The Accepted Offer is combined with 10% of the purchase price for a deposit (or earnest money). Typically the funds can be held in an escrow account set up at the bank for the buyer. The funds deposited can be used to start the sale closing process by ordering all of the legal documents such as appraisal, survey and title search. The remaining money should be held in the buyer's escrow account until the day of signing the deed (or escritura).

In order to obtain the deed (Escritura), the buyer, along with the Notario and the bank escrow officer will work to complete the following steps:
  • Ensure the property is free and clear of all liens. This is guaranteed by obtaining a non-lien certificate at time of closing (Certificado de no Adeulo) from the treasury. Additional checks are made to endure there are no outstanding water bills or state taxes.
  • Obtain a permit from the Ministry of Foreign Affairs to establish the trust deed.
  • Obtain the appraisal or the assessed value of the property.
  • Obtain a survey of the property.
  • Prepare all documents for both the buyer and the seller.
When all of these items have been completed, the remaining balance of the purchase price should be transferred into the buyer's escrow account. The buyer will then issue a letter of release to the bank, stating that the money is to be released to the Notario for the signing of the deed. The letter will state how the money and the closing costs are to be dispersed. The buyer's attorney or advisor can help a buyer to write this letter. When the Notario disburses the money, a proud owner of a home in Mexico has just been made!

Capital Gains Taxes
The seller of a property in Mexico pays Capital Gains taxes at the time of closing. Capital Gains taxes are not calculated as they are in the United States. In the US, taxes are paid on the difference between the cost (basis) of the property and the amount for which the property is sold.
With a property sale In Mexico, an expert makes an appraisal (avalúo) of the property. The Notario 's fees as well as the taxes (impuestos) are then based on a percentage of the appraised value. Non-resident foreigners pay much higher capital gains taxes (35%) than do residents of Mexico. Even though foreigners can purchase a home or property on a Tourist Visa (FMT), paying capital gains taxes down the road when selling a property can be avoided by obtaining a Temporary Resident Visa (FM3) or a Permanent Resident Visa (FM2). . Capital gains are not paid if the seller can prove that he or she has lived on the property for the last two years. Proof of residence for this purpose consists of an FM2 or FM3 with the address of this home in Mexico and 2 years of water and electricity bills in the name of the seller. This will eliminate any capital gains one would have to pay on the future sale of the property.

Gains Tax is not calculated the same in Mexico as it is in the US and other countries. Foreigners also pay a higher tax than residents. You may consider becomming a temporary resident to avoid incurring unnecessary taxes when selling your home.

Note: As of publishing this page, we believe all the above information to be true, although laws in Mexico do change, we cannot be responsible for any changes. It is best to check with your own tax and legal advisors before purchasing property in Mexico.

Information provided courtesy of: El Grupo Bienes Raices / The Real Estate Group Bucerias, Nayarit, Mexico

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