By: Agustin Galindo, Attorney at Law*
Many foreigners buy a condominium or second home in Mexico with intentions of renting it when they are not there. But, just like in the USA or Canada, foreigners must have authorization from the Immigration and Tax Authorities.
If you are a foreigner and you want to rent your property legally in Mexico without any problems you need to do the following:
A. Apply for Temporary Residency in Mexico (a green card)
You can vacation in Mexico for up to 180 days with a Tourist Visa, but if you are going to work or conduct business here, you must apply for Temporary Residency status (a green card). To apply, you have to file an application at the nearest Mexican Consulate in your home city abroad. Once you get the authorization from the Mexican Consulate in your home country, you have 180 days to come to Mexico; and once you are here, you have 30 days to activate your Temporary Residency at the closest Immigration Authority (Mexican Immigration Institute) office.
B. Hire an Accountant and Obtain Legal Authorization to Conduct Lucrative Activities
Once you get your Temporary Residency (green card), the next step is to obtain authorization to work or conduct business activities in Mexico. To do this, you need to hire an accountant and obtain a “R.F.C” number (Federal Contributor Registry), which is your tax identification number. After you obtain the R.F.C., you must return to the local Mexican Immigration Authority and apply for a Temporary Residency for Lucrative Activities. (Note: Permanent Residents must also obtain this authorization to work or conduct lucrative activities.)
The accountant will also help you obtain official tax invoices for your clients, called “facturas,” which must be issued through a Federal Digital Internet Invoice. You will also collect “facturas” for all tax-deductible expenses. The accountant will file monthly tax reports, due by the 17th of each month, and the annual tax declaration on the income generated from your rentals.
C. Pay your Taxes
The taxes that you have to pay for renting your property are the following:
If you rent your property for a long-term period (months), that is, in essence, a housing lease and you are obligated to pay income tax at 35%, less taxable deductions. You have two options:
- To pay the 35% tax basis, less approved deductions, which are:
- The property tax payment and contributions for local improvements (such as paving, etc.,)
- Maintenance fees, excluding improvements, extensions or water, as long as these fees are not paid by the renters
- Interests paid from a loan to acquire the property, build or improve it, with the understanding that an official tax invoice (CFDI or Federal Digital Internet Invoice) is required to deduct these interests
- Salaries, commissions and fees and taxes related to salaries, effectively paid
- Insurance costs
- Investments in constructions, including improvements and extensions
- To apply a 35% blind deduction over the income, instead of the deductions listed above, along with the deduction of the property tax payment. If you use the 35% blind deduction you are not bound to keep the accounting, because you are not applying deductions.
When you also use part of the property rented; you cannot apply the deductions for the part of the property that is used by you.
If you rent short-term for just a few days, please be aware that this can be interpreted as a “guest service” and therefore you will be obligated to pay the following taxes:
- 35% Income tax (ISR)
- 16% Value Added Tax (IVA)
- 3% guest tax (Impuesto de hospedaje)
In all cases, if you get income over $100,000.00 Pesos in cash you need to inform the tax authority.
Please keep in mind that there are several variables based on whether you own a hotel or a B&B as an individual, or if you own your property through a corporation, your tax basis will be different.
This article is addressed to foreigners who want to do things in the correct way. I know that getting the Temporary Residency and the RFC number is not precisely a “piece of cake,” but once this is done, then it is just a matter of keeping accounting and paying taxes on time so that you can rent your property legally in Mexico.
*About the Author:
Agustin Galindo is a Mexican Attorney at Law with a Master of International and Comparative Law from Southern Methodist University. He has a tax degree from ITAM in Mexico City. His website is www.galindoabogados.com