Real Estate Transactions in Mexico in a Nutshell

An Expert's View about Real Estate in Mexico

Posted on: 5 Jan 2012

The Mexican Constitution expressly forbids the direct acquisition of real estate by foreign individuals or foreign entities in the so-called “restricted zone”. The restricted zone comprises an area of 100 kilometers along the borders and 50 kilometers along the seashores. In this restricted zone, only Mexican individuals and Mexican companies (notwithstanding any foreign investment in them) may directly acquire land and buildings.

* Real Estate Transactions in Mexico in a Nutshe l l by Moises Gonzalez-Santillan December 2011 The Mexican Constitution expressly forbids the d ir e c t acquisition of real estate by foreign individuals or foreign entities in the so-called “restricted zone”. The restricted zone comprises an area of 100 kilometers along the borders and 50 kilometers along the seashores. In this restricted zone, only Mexican individuals and Mexican companies (notwithstanding any foreign investment in them) may directly acquire land and buildings. Mexican companies with foreign investment in their capital stock may acquire d ir e c t title to real estate in the restricted zone provided it is not used for residential purposes. All such purchases in the restricted zone must be filed accordingly with the Ministry of Foreign Affairs. Notwithstanding the above, foreign individuals or entities may acquire the use and enjoyment (or indirect title) of real property in the restricted zone by means of a trust. In a trust of this nature a Mexican banking institution (acting as trustee) acquires fiduciary title to one or more pieces of land and building or buildings and transfers to the beneficiary (foreign individual or corporate entity) the right to hold, use and enjoy the premises up to a renewable fifty-year term. Prior to the expiration of such term, the trustee may be instructed to either sell the corpus of the trust (real property) or renew the trust. In the fifty year interim, the beneficiary has the right to request the trustee to lease, encumber or dispose (sell) of the premises the same as the beneficiary may deem convenient (which includes the right to use the property as collateral for financing). Acquistion of real estate by foreigners outside of the restricted zone may be frely acquired by foreigners provided that prior approval is obtained from the Ministry of Foreign Affairs. Any real estate transfer in Mexico must be arranged in a public deed prepared by a Notary Public and filed accordingly with the Public Registry of Property having jurisdiction over the real property. 1 The closing costs and taxes encountered in a typical real estate transfer transaction in Mexico will include: (a) Income Tax: income tax accrues on the capital gain of seller and thus, is borne by seller. If seller is a natural person, the Notary Public has a statutory obligation to calculate, withhold from the proceeds and tender payment of seler’s income tax on behalf of seler. Hence, prior to the closing of the transaction, the Notary calculates this amount and upon closing seler hands over a check to the Notary for such amount. If seller is a corporation then the Notary Public has no obligation whatsoever to calculate and withhold such tax. (b) Value Added Tax: VAT acrues at a rate of 16% on the value of buildings and constructions atached to land. Land itself is not subject to VAT. Residential real estate is not subject to payment of Value Aded Tax either. If the real property has constructions atached thereto, the public ded wil contain a breakdown of the portion of the purchase price which is allocated to buildings and the portion allocated to land. Value Added Tax is paid by buyer provided however, that buyer is entitled to credit for VAT collected for goods sold and services rendered by buyer. (c) Property Transfer Tax: this is a State tax and as such, the tax rates may vary accordingly from State to State. Generally speaking, property transfer tax accrues at a rate of 2% of the higher of (a) the value of the real property as appraised by the relevant Municipal Land Department or similar office, or (b) the amount of the transaction. As opposed to VAT, property transfer tax will accrue on the entire amount of the transaction; in other words, there is no distinction whatsoever betwen land and constructions. Property transfer tax is borne by buyer. * The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. The information contained herein is protected as property of G&M Consulting, SC ©. No recipient hereof should act or refrain from acting on the basis of any content included in the article without first seeking professional advice on the particular facts and circumstances at issue. This article contains general information and may not be updated nor reflect current legal developments. G&M © expressly disclaims all liability in respect to actions taken or omitted based on any or all of the contents of this article. 1 This is usually the scenario for privately owned property in Mexico. The scenario changes dramatically in property subject to a special regime such as “ejido” or “communal” property. Real Estate Transactions in Mexico in a Nutshe l l December 2011 (d) Survey: if the current owner has not already done so, the property shou ld be surveyed in order to determine that the surface, metes and bounds are acurate as stated in seler’s tile ded. The fes for performing such survey depend upon the actual surface to be surveyed. (e) Filing fees: while filing fees vary significantly from State to State, generaly speaking they are in the neighborhood of 1% of the transaction price. In the State of Nuevo Leon filing fees are capped up to the 2 approximate amount of $13,000.00 Pesos. Filing fees are to borne also by buyer. (f) Notary’s fees: Notary’s fees will range between 0.5 to 1.5% of the transaction price. It should be noted however, that this is an entirely negotiable figure and is usualy borne by buyer since the transaction is usually carried on before a Notary selected by buyer. (g) Certificates: ther are a couple of certifcates to be obtained for any real estae transfer transaction. The certificate of no liens from the Public Registry of Property and the certificate of apraised value from the Municipal Land ofice are to be obtained by seler at seler’s cost and expense. The cost for obtaining these should not exceed US$100 Dollars. (h) Property Taxes: Property taxes are colected by the Municipality having jurisdiction over the property and the rates vary significantly from State to State and from Municipality to Municipality. Property taxes are paid on a by-monthly basis and usually some savings may be accomplished if these are paid in full at the outset of each calendar year. Before any closing takes place, the buyer may get an idea of the amount of property taxes acruing on the selected piece of land by obtaining a copy from the relevant seler, of the bil evidencing payment of the taxes for the immediately preceding bi-month period. The seller has the obligation to submit proper evidence showing that property taxes have been paid in full until the date of the closing. (i) Trustee’s Fees: If the real estate transaction is closed under the umbrella of a trust, you should also envision bearing the fees of the trustee for (a) accepting the appointment, and (b) administering the trust (the latter fees will accrue on a yearly basis). The fees also vary from bank to bank. Also, depending on the prima facie conditions of the property, a diligent buyer may want to consider performing one or more of the following: (j) Phase I Environmental site assessment: this study should be caried out by a reputable and authorized environmental engineering firm. The purpose of this evaluation is to determine that the site is free and clear of any adverse environmental condition. The fes for an asesment of this nature range betwen US$2,000 and US$3,000 Dollars. (k) Soil Mechanics study: the purpose of this evaluation is to establish that there are no adverse geological, topographical or similar issues with the soil of the property and should also indicate if the property is located within a flood hazard prone area. The study should be performed by a reputable engineering firm and fees are typically in the neighborhood of US$3,000 Dollars. (l) Title insurance: while this is not mandatory, we strongly encourage our clients to obtain title insurance from a Mexican insurance carrier. Insurance policies issued by foreign insurance carriers are null and void in Mexico. Some US carriers may have a Mexican subsidiary duly licensed to do insurance business in Mexico. The above items reflect the bulk of the costs and taxes asociated on a typical real estate transfer transaction and are exclusive of legal fees of buyer and seler. Additional items and expenses may have to be incurred in depending on the conditions of the property which is to be assessed on a case by case basis. 2 Readers should be aware that this is not the practice in all States. There are instances where States will not have any cap to filing fees at all and these will accrue on the entire amount of the transaction.
Posted: 05 January 2012
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G&M Consulting, S.C.

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