Once you start renting your Cabo home, you are in business in México. At least that’s how SAT (US equivalent of the IRS) sees it. Some companies collect money in the US and take the stance that no taxes are due in México. México does not agree. As Oswaldo Murillo, accountant and president of the national accounting firm Kreston México explains, “The source of the income is in México, therefore it is taxable in México.” You are responsible for paying the appropriate tax on your rental income. This is actually quite simple if you have the right support system in place. The basic elements are to register with SAT (formerly and familiarly known as Hacienda) to get a taxpayer ID number. Once rents are received, you or your property manager will issue a FACTURA (official tax receipt) to the renter or rental agency. Businesses here in México file taxes monthly, so you will need an accountant to prepare the documents and make the filing; a yearly summary filing is also required. Sounds daunting? Your rental or property manager should be able to arrange this for you, including making the tax payments via the Internet. It should be entirely seamless with no effort on your part. According to attorney Pedro Perichart, of P&H Closing Services in Cabo San Lucas, you should check with your US or Canadian tax advisor, as NAFTA and other treaties have restricted double taxation. In other words, the taxes you pay in México will become a credit on your own personal taxes in your home country. “The income received by foreigners from a rental/lease of a house or condo located in México will be taxable at a rate of 25%,” says Perichart, adding that you can elect to take a flat of 35% with no deductions. Stating the obvious, trying to get around, or worse yet avoid, these Mexican real estate tax laws is not wise. As under tax laws in other countries, tax authorities in México have the right to impose substantial penalties and additional taxes. Believe me: It’s simpler to pay what you really do owe. You are still going to make a profit!
Once you are a legal taxpayer, you’ll be able to take deductions including maintenance, upkeep, improvements, salaries, accounting fees and commissions to the rental agent. Accountant Murillo points out that in order to take deductions, you must have a legally appointed Legal Representative here in México. Otherwise, you must take the percentage of gross option.
On the US or Canadian side you may be able to take deductions for your trips to “inspect” your rental property in México. Read that “free vacation.” Check with your tax advisor for more details.
Form A Corporation?
From time to time the rumor circulates that the “smart” way to circumvent the authorities is to form a Mexican corporation and take title to the rental property in that. Yes, that is an option. However, bear in mind that this means that you cannot live in your home without signing a rental agreement, and paying rent each time you stay in your Cabo home. Moreover, when you sell your home the capital gains tax will be substantially higher than if you had held it as a residential property. And if you ultimately aspire to retiring into this property, you will have to sell it to yourself and pay not only closing costs, but also corporate income taxes when you shift from rental to retirement. It probably will not work out in your favor. Consult an experienced Mexican real estate attorney before putting your property into any alternative ownership option. Jorge Rodriguez, President of International Land Title, says “Corporations really don’t offer any advantages unless you are buying multiple properties. For a single property there really is no purpose.”
Welcome to the Neighborhood
Lastly, think about your neighbors when you are buying to rent. If you are in a residential community, you’ll want to be sensitive to them. You don’t know what is happening in your home when you are not there, but your neighbors do. Most rental agents are excellent at screening clients, some are not. In fact, a few even specialize in “problem” renters, the types the hotels won’t accept. If your renters violate the local Home Owners Association rules for noise or behavior, fines may result. Those fines may run into the thousands of dollars. Before you commit to a rental agent, be sure he or she is aware of your Home Owners rules and will abide by them. If you think this is an inconsequential point, bear in mind that these fines may be as much as $3000 US per occurrence. This can significantly eat into your profit. The best way to avoid these fines is to have your rental company thoroughly vet the renters and advise them of any restrictions in the community.
So does all this infer you shouldn’t buy a home for the purpose of renting it? Of course not! As you can see from a quick trip to the Internet, the rental of properties in Los Cabos is a thriving and profitable business, even after taxes and expenses. Just be sure to buy the right property, and to set up the right accounting systems. Then you can sit back and relax. Preferably in a hammock overlooking the ocean. This really is the perfect blend of business and pleasure.
Author’s Note: Before investing in a rental property in México, Los Cabos Magazine and the author suggest you consult with tax advisors on both sides of the border.
