Buying Property in Mexico
The Mexican constitution, written in 1917, gave communal or ejido land to every Mexican village for use only—not to sell. All land was to be owned by Mexican Nationals only. In 1973, a constitutional amendment (the Foreign Investment Law) allowed foreigners to purchase property anywhere in Mexico, except in the restricted zone—32 miles from high tide and 64 miles from any border. Most foreigners, however, only wanted to buy property on the coasts or near the borders, so in 1994, Mexico passed another amendment to the constitution. Now foreigners can own property in the restricted zone with a bank trust or fideicomiso.
What does this mean? Foreigners can’t own property in the restricted zone outright. Instead, a real estate trust (fideicomiso) is set up to hold title for foreigners. The fideicomiso is executed between a Mexican bank and the seller of property in the restricted zone. The bank acts on behalf of the foreign buyer, buying and taking title to the property. The trustee bank then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary.
There is a common misconception among foreigners investing in Mexico that once the trust expires, the beneficiary loses all rights and benefits of the sale of the property held in trust. This is not the case. On the contrary, the beneficiary has a contractual right under the trust agreement with the Mexican bank to all benefits that may result from the use or sale of that property. There is also the myth that the real estate trust amounts to a lease. Not so. The foreign buyer retains all rights of ownership—the bank just holds title.
While the bank holds title, it has no rights of ownership, and can’t use or sell the property. The foreign buyer, on the other hand, is entitled to use and exploit the property, or even sell it for fair market value to any eligible buyer. The law defines "use" and "exploitation" as the right to use or possess the property, including its fruits, products, or any revenue that results from its operation and exploitation by third parties or from the bank/trustee.
So how then does one go about buying property in Mexico? Just call a real estate agent? Of course not—it’s much more complicated than that. Before you do anything, you may want to retain a Mexican attorney to advise you on the finer points of Mexican real estate law. To be sure that an attorney is licensed in Mexico, a foreign buyer should ask to see the attorney's license, or have the attorney's license number included in a retainer agreement before employing any services.
First, all foreigners are required to apply for and obtain a permit from the Ministry of Foreign Affairs prior to entering any real estate contract. Again, the Mexican trustee bank is in charge of this process. Most permits are granted within a matter of days.
After you’ve got permit in hand, you find a piece of property you want to buy. You’ve made an offer, and it’s been accepted. Now you must open your trust account. This will cost you around $354 US for paperwork and government reporting on your behalf. After the account is set up, you’ll pay an annual fee to keep it open. To open your trust account you will need your accepted offer for purchase, a photo ID and 10 percent of the purchase price of your new home (your earnest money or down payment). Very important note here: do not give anyone any money that is not being handled by a bank escrow representative—not to the seller, and not to a real estate agent. You’ll hand over the cash when you sign a bank contract with a bank official. Then you’ll receive instructions on how to wire the remaining money into the bank when you return home.
Your down payment, held in escrow, is used to start your closing process by ordering all of your legal documents, appraisal, survey and title search. Money left over remains in your escrow account until closing, which usually takes 30-45 days. Closing costs are paid by the buyer and are usually about 6 percent of the purchase price, 2 percent of which is sales tax. The buyer does not have to be present at the time of sale, but your bank trustee will need to be given the power of attorney to execute the closing process for you.
When you do decide to sell your property, know that the seller pays capital gains taxes at the time of closing, which are 35 percent of the difference between the purchase price and the selling price, with adjustments made for inflation.
While most foreign real estate buyers only utilize their Mexican property part-time, know that you needn’t pay capital gains taxes if you can prove that you’ve lived on the property for the previous two years. You would need your FM2 or FM3 with the address of your home in Mexico and two years of water and electricity bills.
If you want to learn more about investing in the international real estate market, contact me for more details.