For all of you who want a better understanding of how things work in Mexico real estate, here is a summary of the characteristics of a fideicomiso trust, which is required if you buy property on or near the coast.
Legal ownership of real estate in Mexico for foreigners comes from the Foreign Investment Law, which was approved by President Luis Echeverria in 1971, and became law in 1973.
This law exists because notaries and other businessmen in Mexico recognized the huge asset Mexico’s coastline represents. These leaders realized there was an opportunity to attract foreign investment. Having funds for economic development in the 1970s was of paramount importance to Mexico, and U.S. dollars were highly desired. How to make this asset available to foreigners and not violate the Mexican constitution was the dilemma. The key became the fideicomiso or trust.
The 1917 Mexican Constitution banned foreign ownership of any land within a specific Restricted Zone, delineated as the areas within 64 miles of international borders and within 32 miles of any coastline.
The Foreign Investment Law of 1973 allowed a different treatment of real estate within and outside the Restricted Zone (RZ). Foreigners can own land outside the RZ without the need of a trust. Merida and Guadalajara are locations where a number of expats own properties with a simple escritura or deed. Land inside, such as Puerto Vallarta or Riviera Maya would be within a fideicomiso trust.
The investment trust program was very successful, and in 1989, the Mexican government signed into law the ability for foreigners to have successive extensions of the trust thorough a simple application process when the original trust period expired.
In 1994, the new Foreign Investment Law allowed a beneficiary to have a trust for 50 years, with the application for extension or renewal still intact.
The trust is privately held in a Mexican bank authorized to act as a trustee. The trusts are not assets on the books of the bank, nor are banks allowed to take any action without written instruction from the beneficiary of the trust. The bank holds title to the real estate in trust, and the foreigner is designated as the holder of the beneficial rights of the trust, which includes the right to sell, improve and will to heirs, or exercise any legal right under law.
As beneficiary, the foreigner has the equitable interest in the property through whatever market variations may occur. In other words, any equity or the loss of equity accrues to the holder of the trust, not the bank.
When the actual sale takes place at the office of a notary, the foreign owner may assign his beneficial interest in the trust to the new buyer (for a Mexican owner, he/she endorses the title in favor of the buyer). The new owner may wish to establish a new bank trust where he/she is named the primary beneficiary. In this case, he/she will issue instructions to the notary for this purpose.
Closing costs for the buyer are normally acquisition tax, city appraisal, foreign permits, bank trust set-up and first year administration fee, notary costs and title insurance or survey, if requested.
Closing costs for the seller include payment of capital gains tax, trust cancellation – if applicable – and real estate fees. Capital gains tax is computed using the declared value of the purchase price in the seller’s deed and the tax value, which form a basis to index appreciation or depreciation, and deduct allowable receipts to arrive at an amount of tax. Each individual case will be different and proper analysis by a qualified professional is necessary. An appraisal by a registered appraiser can be used by the seller. There is a charge, and the notary closing the transaction has to approve the ISR amount to pay. The notary pays the government and the seller needs to receive a proper receipt to use for proof of payment for a credit against any tax owed in his/her home country.
This article is based upon legal opinions, current practices and my personal experiences. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.
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