The ability to pocket undeclared income in Mexico is going away. Based on new tax law changes by the Mexican government, expat rental income in Mexico will be taxed beginning this year. The problem with foreigners who rent their homes or condominiums and fail to pay Mexican taxes has existed for a long time, but the recent changes specify that not declaring income and paying taxes is a violation of Mexican tax law with severe penalties if discovered.
The new law went into effect on June 1 and obligates foreigners to pay taxes on income generated in Mexico, no matter where the income is received.
The law breaks tax rates and procedures for payments into two categories:
Resident in Mexico
If the owner is a resident of Mexico, he/she 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/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 and Airbnb, will have the income tax (ISR) and the added value tax (IVA) withheld from the owner’s proceeds and delivered directly to the Mexican tax authorities.
Residents of Mexico with more than 300,000 pesos (approximately US$13,000) 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 the taxpayer elects to take a 35 percent blind deduction or provide invoices for full deductions. Taxes declared and paid in Mexico are used as a credit for 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 sign up with the Mexican tax authority, SAT. 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.
Finally, you should know that there is no double taxation. Mexico has tax treaties with 32 nations, including the U.S. and Canada. Taxes paid in Mexico can be taken as credits in the taxpayer’s native country.
This article is based upon information shared by Linda Neil, co-owner of The Settlement Company, Cabo San Lucas, legal opinions, current practices and my personal experiences. I recommend that each potential buyer or seller of real estate conduct his/her own due diligence and review.