With the advent of the North American Free Trade Agreement (NAFTA), the Mexican government recognized that it was crucial to make foreign investment in Mexico simpler for non-Mexicans. Because the Mexican Constitution prohibits non-Mexicans from purchasing or owning real estate within 60 miles of the U.S. international border, or within 30 miles of the Mexican coast, an innovative and secure method of holding title was created. This method allows non-Mexicans ownership through a Mexican property trust called a Fideicomiso.

This is a trust agreement, much like an estate trust in the U.S., which gives the Purchaser all of the rights of ownership. In order to gain the rights of ownership, the Department of Foreign Affairs in Mexico City issues a permit to the Mexican bank of the Purchaser’s choice, allowing the bank to act as Purchaser of the property. Essentially, the bank acts as the “Trustee” for the trust and the Purchaser is the “Beneficiary” of the trust. The trust is not an asset of the bank; the banks simply act as the Trustee to hold the trust.

Much like living wills or estate trusts in the U.S., the Mexican bank, or Trustee, takes instruction only from the Beneficiary of the trust (the Purchaser). The Beneficiary has the right to use, occupy, lease and possess the property, including the right to build on it or otherwise improve it. The Beneficiary may also sell the property by instructing the Trustee to transfer the rights to another qualified Purchaser, or bequeath the property to an Inheritor. The initial term of the trust is 50 years, however the trust can be renewed for additional periods of 50 years indefinitely, providing for long-term control of the asset.

The Purchaser holds the same rights as a property owner in the U.S. or Canada, including the right to enjoy, sell, rent, improve the property, etc. This is not to be confused with a land lease. The property purchased is placed in a trust with the Purchaser named as the Beneficiary of the trust — the Purchaser is not a lessee. If the property purchased is already held in a trust, the Purchaser has the option of assuming that trust, or having the property vested in a new trust.

Whether you purchase real estate in the U.S. or Mexico, We recommend Title Insurance for every property you purchase. We insure our cars, homes and our health — it is just as important to insure one of your largest investments: your property. Title Insurance is available for properties in Mexico purchased by U.S., Canadian and Mexican citizens. Fact: Just because you have a trust does not ensure you have free and clear title. Title insurance is a necessity.

There are two taxes you will pay when you buy a home in Mexico. The first is the Acquisition Tax (ISABI), which is 2% of the total registered purchase price. Typically, notaries caluclate the tax to be 2.1% to allow for peso/dollar exchange rate variances. This tax is paid upon purchase and becomes part of your Cost Basis making it fully deductible if you decide to sell your property in the future.

The second tax is Property Tax (PREDIAL), which is very low in Mexico. The typical property tax on a Del Mar home in 2018 ranges from $500 to $6,000 per year, depending on how large the property is. Property Tax is not based on the purchase price; it is based on the property tax value assigned to the area in which the property is located and the size of the property.

The Notary will calculate the Seller’s capital gains tax based on the purchase price, in Mexican Pesos, at the time of acquisition. This information is indicated on the deed of title. The notary then adds to the Seller’s original purchase price the cost of any construction or remodel (original facturas/receipts required) as well as the closing costs the Seller paid at the time of purchase. After applying annual inflationary credit and construction depreciation factors, the resultant cost basis is determined. The Notary then determines the capital gains tax (ISR) by subtracting the cost basis, as well as the sale’s commission from the sale price, to obtain the ‘gain’, which is taxed at 35%.