Buying Real Estate in Coastal Areas of Mexico
 

  
 

By: Luis Enrique de Rivera

 Executive Director of Fiduciary Services, Banca Cremi, S.A.

The ocean's wonderful sights and smells and the peace of living or vacationing along Mexico's 6,000 miles of coastline is a powerful attraction for foreigners.

But before purchasing vacation property or a retirement home on or near the beach, there are a few important legal and technical matters to keep in mind.

Foreigners are welcome to invest in property along the coast, but there are restrictions. The most important restriction is contained in Article 27 of the Mexican Constitution and states that foreigners cannot own property within 100 kilometers of the border and 50 kilometers of the coastline.

The government, however, provides a way to get around this restriction. The Ministry of Foreign Affairs allows Mexican banking institutions to establish Trusts for property destined for residential or tourism use.

How does the trust work?

Three parties are involved in the Trust: the Trustor, or owner of the original property; the Trustee, which is the bank; and the Beneficiary, or person that will receive the benefits of the Trust.

The Trust -- which in Mexico is called a Fideicomiso -- does not give direct ownership to the foreign beneficiary. Instead, it establishes the legal basis by which the bank holds legal title to the property in order to act on the foreigner's behalf.

What does the bank do?

It is an important link between the foreigner and the government. The bank accepts full technical, legal and administrative responsibilities - and protects the beneficiary's interests.

Banks will charge a prearranged fee, plus a percentage of the property's value, to cover the costs of preliminary studies and the drafting of the Trust agreement. An annual fee is also charged by the bank.

Trust contracts are limited to a period of 50 years. At the end of that term, they may be renewed, providing the beneficiary and terms of the original agreement remain unchanged. Or, the property can be sold to a person legally authorized to own land or to a foreigner via a Trust.

What can the foreign beneficiary expect from the trust agreement?

Essentially, three things:

1.      The Beneficiary can occupy the property for the life of the Trust.

   2.      Title to the property can be transferred to the foreign beneficiary in the event that he acquires legal capacity to hold such property, or to any legally qualified person he may designate.

   3.      The property may be rented with prior approval from the Ministry of Foreign Affairs.

What can you do to the property?

Beneficiaries are allowed to modify their property. Construction, in accordance with local zoning regulations is permitted at the owner's expense.

 Where do you start?

Once property in a coastal area has been selected, then the bank steps in.

Most Real Estate agents have arrangements with a bank. If not, you can contact a major bank in that community for Trust information. English-speaking personnel, as well as publications, are usually available to answer questions about Trusts.

    
 
 		  

Other Information

CLOSING COSTS

How to avoid unpleasant surprises... Mexican law says that taxes must be paid on the higher of the following: purchase price OR appraised value. Since many appraisals are lower than the actual selling price, your taxes will be considerably lower if the appraisal value is declared.
BANK ADMINISTRATION FEES: If title to the property is in a bank trust there will be annual fees for the administration of the trust. The initial fee to set up your trust will cost you approximately $1000. to $1500. USD - That will also include title and attorneys fees.

If the permit has a remaining term of less than 35 or 40 years and/or the annual bank administration fees are more than $500 USD it probably makes sense to obtain the permit for a new 50-year trust with a bank offering more attractive fees.

If you don't take it upon yourself to follow through on this yearly, you could be in for a big surprise from the trustee bank when you go to sell your home in the future.

PROPERTY TAXES: Unlike exorbitant property taxes in the U.S. and Canada, Mexican property taxes are negligible. For example, on a home valued at $150,000 U.S. dollars, your taxes run about $40/year.

CAPITAL GAINS TAXES: A foreigner who sells property in Mexico is liable under special rules, much like the United States, for the payment of the I.S.I.R. (Impuesto Sobre la Renta) which is the Mexican equivalent of capital gains tax, about 25% of the net value, taking into consideration the length of time held, the improvements made, commissions paid, and other allowable expenses. The formula is complicated, and a notary will do the computations.