History of Mexican Land Laws
Let me start by giving you a brief history of Mexican real estate laws.
1917: The constitution of 1917 proclaimed that all land in Mexico would either be ejido (communal) or owned by Mexican nationals only. Ejido land was given to every village in Mexico and could not be sold. This law was put into effect for the past problems with the Spanish, French, and Americans, controlling both land and waterways in Mexico.
Perhaps another reason for the restricted zone was that the Mexicans were somewhat concerned about having lost so much territory to the U.S. in the 19th century- about 1/3 of their country: Texas in 1845, and in 1848 through the treaty of Guadalupe Hidalgo the territory that became California, Nevada, Utah, most of Arizona, and parts of New Mexico, Colorado, and Wyoming. The treaty was signed shortly after Americans forces captured Mexico City. The U.S. paid $15,000,000 for all of his land. And in 1854 through the Gadsden Purchase the U.S. acquired the rest of what is now Arizona and New Mexico. It's not surprising that Mexico was a little nervous about allowing foreigners, especially Americans, to acquire any more land.
1973: A constitutional amendment known as the Foreign Investment Law allowed foreigners to purchase real estate anywhere in Mexico, except the restricted zone. The restricted zone consists of areas within 100 km (64 miles) from international borders or within 50 km (32 miles) from the coastline. The problem with this amendment was that most of the foreigners wanted to purchase specifically in the coastal and border areas
1993: Mexico amends the constitution to allow foreigners to purchase real estate within the restricted zone by means of fideicomiso (bank trust).
The first paragraph of Article 27-1 states, "Only Mexicans by birth and Mexican Companies have the right to acquire ownership of lands, waters and their easements, or to obtain concessions for the exploitation of mines or waters". Moreover, the same paragraph states, "The Mexican government may grant the same property rights to foreigners provided they agree before the Ministry of Foreign Affairs to consider themselves as Mexican nationals with regard to said land and waters and not to invoke the protection of their governments in matters relating thereto, under penalty, in case of default to comply with this agreement, of forfeiture of the property they had acquired to the benefit of the nation". This is known as the Calvo Clause, which is constitutionally mandated, and is contained in all bank trust agreements.
1994: The NAFTA trade agreement between the United States, Canada, and Mexico is passed. In this same time period President Bill Clinton gave a multi-billion dollar loan to'" Mexico. Mexico implemented a constitutional amendment, which allows corporations to be 100% foreign-owned. (A corporation may own property in a restricted zone without a fideicomiso.)
This is a great benefit for foreign business owners. However, this is not the answer for everyone. Commercial property carries higher water, electric and phone rates. You also are required to do additional government reporting and tax payments. You cannot own a single-family residence in a corporation. The government has cracked down on purchasing property in a corporation unless it is actually for business use. The trust deed is just as safe and seems to produce fewer problems with the government.
Trusts
Now that you understand your right to purchase property in Mexico through a fideicomiso, most commonly referred to as a bank trust. Let me explain how the bank trust works.
The fideicomiso is set up through a Mexican bank for a period of up to 50 years and can be renewed for 50 years. To acquire the land the purchaser must obtain a permit from the Ministry of Foreign Affairs. The buyer can lease, sell or transfer the property to another family member, and if he dies, his property can be passed to an heir. At the end of the 100 years the property can be sold.
In the trust there are three elements: The trust Settlor (Fideicomitente) which may be a physical or legal Mexican person, who is the owner of the property which is to be placed in trust; the Trustee (Fiduciario) which, by law may be only a credit institution and which holds the raw real estate; and the Beneficiaries (Fideicomisarios) the legal or physical foreign persons who are the beneficiaries of the trust who obtain the use and benefit of the property.
The bank (known as the trustee) holds the trust deed (known as the escritura) for the person or persons purchasing the property (known as the beneficiaries). This property is not part of the bank's assets and cannot be subject to any lien or attachment for any bank obligations. The beneficiary has all ownership rights to the property and may sell, lease, mortgage or pass on to their heirs as desired under law. A bank trust is not a lease.
The Mexican government established the trust agreement as a way of protecting foreigners interested in owning property in Mexico. The reasoning was that by making ownership pass through the trust process, there would be an automatic review of the transaction to ensure it was legal and unencumbered. The bank is required to check ownership, insurance and indebtedness of the property, providing further protection to the foreign owner.
Trusts are renewable at any time by filling out a simple application with the bank. It was never the intent that these properties pass back to the government at the end of the trust period. This is a common misconception and fear of most buyers.
It may help in understanding the Bank Trust to compare it with the Deed of Trust, a type of financing instrument used in the U.S. People who buy homes, paying the full amount upfront, receive their titles right away. However, this rarely happens. Under a deed of trust the buyer of a house has only "equitable title," or an equity interest, with the right to use but only a restricted right to sell, until the loan is paid off, after which the owner receives the actual fee simple title. Until then it is held by a trustee, usually a bank or title company. In Mexico the Bank Trust is also held by a trustee, but the buyer never receives the actual title. Realistically many homeowners in the U.S. never receive title to their properties either, because they sell or refinance their homes before the30-year term of their loan is complete:
The following chart will help show the comparisons between U.S. and Mexico:
U.S.
Purchase Contract
Contract & Earnest money held
by Escrow
Escrow Instructions
Deed of Trust or Fee Simple
Title
Mexico
Transfer of Trust Rights
Down Payment made to seller
Documents held by Notario
Bank Trust (for all foreigners in the restricted zone) or Fee Simple Title (for Mexicans).
"Punta Banda"
Some 400 American families were evicted from homes in the state of Baja Norte, south of San Diego, because there titles were in dispute. The press gave negative publicity to Mexico, but the truth is the buyers simply did not due diligence when acquiring this land.
Watch out for land collectives known as ejidos. It's the same as buying on an Indian reservation. There's no deed. That is what happened to the Americans in Baja Norte. The evictions of American residents at Punta Banda should clearly signal the fact that in any country, including the United States, title discrepancies exist, lawsuits get filed, and in some rare cases, buyers lose their property. "Catastrophic failure of title" doesn't happen often, but in the case of Punta Banda, it clearly has occurred. In order for us as Americans to be an educated and prudent buying public, it is extremely important that we understand the issues concerning the Punta Banda case and owning residential real estate in Mexico from a general perspective. American's should not fear buying property in Mexico. Owning a house a condo, or buying a residential lot on the beach can be a secure, legally entitled, publicly recorded, and hopefully profitable investment. Their are hundreds of thousands of Americans who have obtained property in Mexico by following the rules and have had no problems, My intention for bringing up this most unfortunate situation with "Punta Banda" is to draw your attention to the importance of following the law while purchasing property in Mexico, or anywhere else for that matter. By reading the following material you should have a good understanding of the appropriate steps needed to have a successful real estate property transaction in Mexico.
Purchasing Procedure
One of the first things you should request when purchasing property in Mexico is a copy of the lien certificate (certificado de libertad de gravamen) on the property. It should indicate the owner of record, surface area and classification of property type, the legal description, and whether there are any liens or encumbrances filed on record against the property. The buyer can also request a certificate of no tax liability (certificado de no aduedo) from the local taxing authority.
Legal Steps To Purchase Real Estate In Mexico:
1. Offer and acceptance and/or promissory agreement
In accordance with Mexican Law, a letter of intent fulfills the requirements for it to be considered to be a valid contract, with the condition that there has been mutual consent on the part of both the seller to transfer a specific property and the buyer to acquire it.
2. Title Search and Conditions of the Property
This will ensure that none of the information of the Public Registry of Property and Commerce regarding the property is overlooked.
3. Requirements for closing and formal execution of a standard real estate Transaction in Mexico
A. Certificate of No-Encumbrances. This certificate will enable the Notary to assess that the property does not have any lien or encumbrance, or any claim pending over it, and thus can be transferred with a clean title. It is obtained directly at the Offices of the Public Registry of Property and Commerce and basically it must contain at least the following information: I) the number of years of documented history made on the property; II) the surface area of the property in accordance with the records; III) the metes and bounds of the property; IV) the name of the owner; V)classification of the property (urban or rural); VI) a legal description of the property (such as if it is owned in a trust or by several owners); VII) the name and signature of the registar and VIII) the official seal of the Public Registry of Property and Commerce.
B. Certificate of No- Tax Liability: This certificate will enable the Notary Public to assess that the property tax has been paid prior to the transfer of the property.
C. Property Appraisal and Site Survey: In accordance with the Real Estate Law ("Ley de Catastro"), it is mandatory to carry out a site survey on the property and do an official appraisal. The appraisal must be done estimating the commercial value of the property, ,; considering its surroundings, a market survey and zoning regulations.~~
4. Notary Public and Public Registry of Property and Commerce
The function of the Notary Public is to act as an extension of a Judge or the Government. His duty is to ensure that a real estate transaction is formally executed in compliance with all legal requirements. Upon the execution of the transaction, the deed of title must be recorded at the Public Registry of Property and Commerce of the domicile in which the real estate, subject matter of the transaction, is located.
A Mexican "notario" is an attorney who, after passing rigorous examinations, is commissioned by the government as a public notary. A notario holds high office for life, unless he or she is removed for cause. The notario fulfills a public function delegated by the government. Although licensed as an attorney, the notario is not in a position to provide either of the parties with legal advice. The notario's responsibilities include collecting and reviewing the sales contract, property tax and water payment receipts; ordering a bank appraisal: freezing the property's file at the local public registry (no documents may be recorded in a property's file during three consecutive thirty-day periods); reviewing the property's file to verify the legal ownership and search for liens, encumbrances or anything that could affect the title (as the majority of public registries are not automated, this procedure can take from 60 to 90 days); requesting the public registry to issue a "Certificado de Libertad de Graveneres" (Certificate of Freedom from Liens and Encumbrances); and performing the closing at this office where the notario handles the transfer of the deed, tax withholding on the underlying real estate transaction, and the recording of the documents at the public registry.
The Most Common Choices For Purchasing Real Estate In Mexico:
1. General Purchase Sale Agreement
A purchase sale agreement occurs when one of the contracting parties obligates itself to transfer the ownership of property and the other agrees to pay a certain price in consideration of the property rights. The contract is perfected and binding between the parties as soon as the property and its price are agreed upon, even when the property has not yet materially been delivered and the price paid. All such contracts must meet specific requirements in accordance with Mexican law in order to exist and be valid.
There are two types of elements to the contract:
A. Essential Elements:
The essential elements of any purchase sale agreement: consent which is granted by the seller's agreement to transfer the real estate to the buyer, and in turn, the buyer's consent to pay a certain price; and object which is the purpose of the title transfer of the real estate on the one hand, and the payment of a certain price as consideration of the transfer.
B. Validity Elements:
The validity elements are: legal capacity that refers to the legal rights of the parties to enter into the contract; and legal form, which are the formalities with which a transfer complies in order to be perfected. For example, real estate transactions must be in writing, and in order for such to be binding before third parties, they must be recorded at the Public Registry of Property and Commerce.
Basically, the fundamental obligations of the seller in a purchase sale agreement, are: a) to deliver the property being sold to the buyer; b) to guarantee the quality of the property; and c) to guarantee the title (with cure in case of eviction).
On the other hand, the buyer's principal obligation is to comply with the payment of the price in the terms place, and form agreed in the agreement.
2. Installment Sales Agreements withholding transfer of title:
In this kind of agreement, the seller reserves title of the property until full payment of the sale price is made, but the buyer may use and enjoy the real estate until full payment is made. Usually, this kind of agreement includes installment payments. There are some advantages in using this kind of agreement: First, the agreement can be recorded at the Public Registry of Property and Commerce as being enforceable and binding before third parties. Second, the seller is not able to sell the property while the purchaser is in compliance with the sales agreement, usually meaning that he is current in his payment obligations to the seller. Finally, the obligations of the parties are subject to what in Mexican Law is commonly known as "Condicion Suspensiva" (suspensive condition), which conditions the agreement to full payment of the price to the seller.
3. Irrevocable Real Estate Trust Agreement:
This is better known as a "fideicomiso" and is the most common instrument for the acquisition of real estate property within the restricted zone, usually for residential purposes. The seller, "trustor", will transfer property to a Mexican bank institution, the "trustee", by means of an irrevocable trust agreement. The trustee will hold the property on behalf of a designated beneficiary (usually the buyer). The bank is obligated to administer the rea) estate only for the benefit of the beneficiary, who holds the right of use and enjoyment of the real estate, as an owner. The bank holds title to the property btitthe beneficiary is entitled to use it and even sell the property held in trust to any eligible buyer, providing that he instructs the bank to do so.
Contract Legalities
A legal real estate contract has 5 necessary parts:
- Competent parties- This is usually defined as "being of legal age and sound mind." In Mexico another factor comes into play-language. A person who doesn't understand Spanish, the legal language of the country, no matter how mature or intelligent, is not competent in any practical sense. Therefore, the contract must be translated into English.
- Lawful Objective- This means that contracts can be voided if it is discovered that the intent has been to set up a drug business, a house of prostitution, or some other illegal operation. If one doesn't own a property, it can't be lawful to try to sell it.
- Offer and Acceptance- This means that a contract must be signed by both parties. It must also have a date when it takes effect and must specify the place where it is signed.
- Legal Description- Legal descriptions can take several different forms-metes and bounds, lot and block, government survey-but the key is that the property must be readily identifiable.
- Consideration- Consideration accompanies a contract as an evidence of good faith. It usually means money, although it can take the form of a promissory note, another piece of property, an item of value like a car or boat, or even such an intangible as "love and affection."
Title Insurance
Purchasers of Mexican real property can now receive Owner's Policies of Title Insurance that can be issued on both sides of the border from various companies to both U.S. and Mexican buyers. Most title insurance policies today are U.S. contracts of. indemnity guaranteeing ownership rights as vested in a fideicomiso (bank trust) for residential property acquired by foreign buyers in the prohibited zone, or for properties held in a Mexican corporation for non-residential purposes {i.e. industrial and commercial). Mexico is not unlike the U.S. in that there is a definitive legal framework for ownership of land by foreigners known as the New Foreign Investment Law (Dec. 28, 1993) and as mandated under Article 27 of the Mexican Constitution. In addition, there is formality and compliance in the development of real property. Regulatory statutes and procedures are mandated on a state-by-state basis and require a series of official approvals, permits, and authorizations, coupled with public disclosure and written notification by the governing public agency.
American title Insurance is available for Mexican real estate whether acquired directly or through a trust. The cost of the insurance depends on whether the property you are purchasing is covered by a master title commitment. The best way to protect yourself is to get title insurance. Most Mexican companies don't sell it, but Houston based Stewart title Guaranty, Lawyer's Title, and Fidelity National Financial does. The insurance runs about $4 to $7 for every $1,000 of property value, versus $3 to $4 in most of the U.S. In addition to title insurance, property insurance is also available in Mexico and the rates are relatively low.
Taxes
Property taxes are very low in Mexico as a whole. The property tax, known as a predial is .1 % of the assessed value. Taxes are paid annually, with the assessed value determined at the time of sale. If you purchase a property with an assessed value of $l00,000 US dollars your annual tax rate would be $100.00US dollars. The reason taxes are so low is due to the fact that they have never been a source of revenue for the Mexican government
Real Estate Acquisition Tax (transfer tax): Individuals or companies purchasing real estate, consisting of land, or land and its improvements in Mexico, are subject to the payment of a real estate acquisition tax calculated at the rate of 2% of the value of the property (the rate may vary from state to state from 2% to 3.3%). All purchasers of real property must pay this tax whether the acquisition is carried out through a purchase and sale agreement, donation, trust, assignment, mergers of companies, split-off, or payment in kind.
Mexican real estate is subject to a 20% capital gains tax on the gross proceeds from the sales without any deduction. There is another option; net basis taxation up to 35% (depends on the state and the interpretation of the notary). Under this tax plan, gain is calculated by deducting from the gross proceeds (1) the original cost of acquisition, (2) the cost of improvements, (3) notarial expenses and other costs of sale, including appraisal costs, and (4) commissions. The original cost is separated between land cost and cost of buildings, with at least 20% allocated to land. The cost of buildings and any other improvements is then decreased at 3% per year between the date of acquisition and date of sale, but the cost is not decreased below 20% of the original amount. The cost of the land is increased based on changes in the National Consumer Price Index.
Formula for capital gains tax: A V2(appraised value 2) -A Vl(appraised value 1)- Improvements - Cost of the Sale=Taxable Amount x 28%=Tax Due
Your FM2 or FM3 can help you to avoid capital gains taxes when selling your property. If someone proves they were living on their property for two years in Mexico, they can avoid paying any type of capital gains.
Individuals in the restricted zone, who are residents of Mexico (have an FM3), and who rent their rights in trust property (fideicomisos) must make provisional payments on their Impuesto Sobre la Renta (Tax on Rents)for income generated from cash deposits, credits, exchanges coming from rents or sub-rentals. The calculation will be based on one of two methods; one option is to pay 1 % (on average, based on state) of the gross amount received during a three-month period, or you can opt to pay around 35% (on average, based on state) of your net profit.
In order for any authorized expense to be deductible, the taxpayer must obtain an official invoice, which is known as a FACTURA. This receipt must be printed on the press of a government-authorized printer and will contain the RFC number (taxpayer ID number) of the individual or company issuing the receipt.
Authorized items for deductions are the following:
1. Property taxes, as well as any contributions or local taxes for improvements, planning or public works expenditures.
2. Maintenance costs that are not related to improvements or additions; water payment when not paid by the tenant who occupies the property
3. Interest paid for loans obtained for the purchase, construction, or improvements of the property
4. Employees directly employed at the rental property. Salaries, commissions
and /or fees are deductible, as well as taxes and benefits paid on those salaries.
5. Insurance premiums on the properties
6. Investment in construction, including additions and improvements (these expenses are amortized at the rate of 5% per year for construction and 10% for installation expenses or improvements.
Mexican residents must file a declaration with authorities by the 17th of each month. An annual declaration is due no later than April 1st the following year and the difference between provisional payments made and total tax due, based upon global Mexican income, and is due with the annual return.
Mexico has signed a number of treaties to avoid double taxation with other countries and their benefit can be applicable depending on the type of transaction. Taxes that are paid on Mexican income are generally deductions on U.S. and Canadian income. It is wise, however, for the foreign taxpayer to check with his or her personal accountant to determine how to declare these foreign tax payments.
Financing
The lack of mortgage financing has caused developers to realize that a fideicomiso de guarantia (guaranty trust) works best for all parties. This mechanism, similar to the U.S. deed of trust process, alJows for the conveyance of the property in Mexico with a first and second beneficiary established in the bank trust when the seller offers financing. In other words, a legal transfer of real estate that can be recorded in the public registry of property and is fully insurable from a title insurance policy standpoint. In this manner, both the seller and buyer are protected in this conveyance methodology. In the past, sellers would only transfer the property when they were paid off.
Immigration
After you have purchased your home in Mexico and decide you don't want to leave. You must apply for your immigration papers, or FM3. The FM3 grants nonimmigrant status and is applied for through the local immigration office.