The impact of money laundering on Mexico real estate transactions is the result of numerous laws that were passed after the September 11, 2001 attack in the United States to combat terrorism financing.
A global financial task force was used to put pressure on governments around the world to increase surveillance and monitoring of financial transactions and share this information between countries. Starting in 2002, governments around the world upgraded money laundering laws and surveillance and monitoring systems of financial transactions.
Many countries introduced or strengthened border controls on the amount of cash that can be carried and introduced central transaction reporting systems where all financial institutions have to report all financial transactions electronically.
Real estate construction, purchase and rental, as well as fractional or time share, are havens for dirty money according to international anti-money-laundering laws. Mexico instituted its own laws in 2012 and made them effective September 1, 2013.
One big change was KYC forms are required from buyers and sellers by escrow companies and by notaries for further reporting to the Mexican government.
Impact on Buyers
Notaries are required to send an xml and a pdf of the xml file to buyers of property over US$38,500. Buyers must keep the xml file to use when the property is sold in order to verify the price of the property. SAT – the Mexican IRS – can identify your transaction with the xml file to prove what you paid is declared to be accurate. The pdf is a copy of what the code says so you can know if the true price has been declared. You must keep both of these records in a safe place, and you should also keep backups on other devices. If you do not have the xml file or it is corrupted, you will not be able to claim the entire price you paid as your basis upon which future tax will be computed when you sell.
Impact on Sellers
Notaries must send by email an electronic factura that shows the amount of ISR, or capital gains, tax paid at closing. This factura can be used by Americans as a tax expense when filing U.S. tax returns. The notary should also send a receipt if he/she (or a third party hired by the notary) charged for a strategy to lower the ISR. This receipt should be turned in by the American to his/her U.S. accountant to show as an expense. Currently, Mexicans cannot use the receipt for strategy since it is not a factura or formal receipt.
Notaries and real estate agents, both sides representing the buyer and the seller, are required to report to SAT a closed transaction of a property over US$38,500 by the 17th of the month following the occurrence. Reports include what is noted in the escritura: seller and buyer identification, details of the closing price and formal reference to the identification of the new escritura and its filing information in the public registry.
As an owner or buyer, you should be familiar with this and understand the terms factura, escritura and fideicomiso trust.
Additionally, as a consumer, you should know you cannot own a residential property in Mexico without a trust. However, you may have a Mexican LLC without a fideicomiso trust if you develop and or own commercial property. If you want to have an American or Mexican LLC in a trust to own a residential property, for the reason that you want to avoid or lessen liability, you are far better off making sure you have a good insurance policy in place for the building (through the HOA) and you have a good individual homeowner´s policy for your unit, to cover accidents or injuries of persons on the property you have invited.
All of the procedures and steps that are required to be compliant with anti-laundering laws now make it longer to close a transaction, especially if a financial institution is used that has been charged with mistakes or breaking anti-money-laundering laws.
Hopefully, 2021 will bring better streamlining of systems and more awareness from the Mexican government and trustee banks that purchasers and sellers of real estate in Mexico need a more efficient system to help shorten delays.
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.
