Navigating the Tax Maze: US-Mexico Property Ownership
Owning property in Mexico as a U.S. citizen creates tax obligations in both countries. The interaction between U.S. and Mexican tax law is complex, and mistakes can be expensive. This guide covers the key issues every American buyer in Los Cabos should discuss with their cross-border tax advisor before closing.
FBAR: Foreign Bank Account Reporting
If your fideicomiso bank trust or Mexican bank accounts exceed $10,000 in aggregate value at any point during the year, you must file FinCEN Form 114 (FBAR) with the U.S. Treasury.
- Who must file: Any U.S. person with a financial interest in or signature authority over foreign financial accounts exceeding $10,000
- Does the fideicomiso trigger FBAR? This is a gray area. The IRS has not issued definitive guidance. Most tax advisors recommend filing to avoid penalties, as the fideicomiso involves a Mexican bank holding assets on your behalf.
- Filing deadline: April 15 (automatic extension to October 15)
- Penalties for non-filing: Up to $12,909 per violation for non-willful violations; up to $129,210 or 50% of account balance for willful violations
FATCA: Form 8938
The Foreign Account Tax Compliance Act requires reporting of specified foreign financial assets on Form 8938 with your tax return:
- Threshold (single, living in US): Total foreign assets exceed $50,000 on the last day of the year or $75,000 at any time during the year
- Threshold (married filing jointly, living in US): $100,000 / $150,000
- What to report: Mexican bank accounts, the fideicomiso interest, any Mexican investment accounts
- Note: FATCA and FBAR have overlapping but not identical requirements. You may need to file both.
Rental Income: Taxed Twice?
If you earn rental income from your Los Cabos property, you face potential taxation in both Mexico and the U.S.:
Mexican Tax on Rental Income
- ISR (income tax): Mexico taxes rental income at progressive rates up to 35%
- Simplified option: For properties managed through a management company, a flat 25% withholding on gross rental revenue may be applied
- IVA: Short-term vacation rentals may be subject to 16% IVA
- ISH: The state lodging tax of 3-5%
U.S. Tax on Rental Income
- You must report worldwide income on your U.S. return, including Mexican rental income
- Foreign Tax Credit (Form 1116): You can credit Mexican taxes paid against your U.S. tax liability, avoiding true double taxation in most cases
- Deductions: Same deductions available as for U.S. rental property — depreciation, mortgage interest, management fees, maintenance, insurance, travel to the property (with limitations)
- Depreciation: Mexican real property is depreciated over 30 years for U.S. tax purposes (vs. 27.5 years for U.S. residential rental property)
Capital Gains on Sale
Mexican Capital Gains Tax
- Rate: up to 35% of the gain, or 25% of gross sale price (whichever is lower, at the seller's election)
- Primary residence exemption: If you are a Mexican tax resident and the property is your primary home, gains may be exempt up to certain thresholds
- Notario withholding: The notario typically withholds the estimated tax at closing
U.S. Capital Gains
- You must report the gain on your U.S. return
- Foreign Tax Credit applies to offset Mexican tax paid
- Section 121 exclusion: The $250K/$500K primary residence exclusion may apply if you meet the ownership and use tests, even for a Mexican property
- Currency gains: If you purchased in pesos and the peso appreciated, the currency gain itself may be taxable
The US-Mexico Tax Treaty
The bilateral tax treaty provides mechanisms to prevent double taxation:
- Article 6: Real property income is taxable in the country where the property is located (Mexico)
- Article 13: Capital gains from real property are taxable where the property is located
- Article 23: The U.S. provides a foreign tax credit for Mexican taxes paid
In practice, most American buyers pay Mexican tax on rental income and capital gains, then credit those payments against their U.S. liability, resulting in an effective tax rate close to the higher of the two countries' rates.
Estate and Inheritance
Mexico does not have a federal estate tax. However, U.S. citizens must include worldwide assets — including Mexican property — in their U.S. estate for federal estate tax purposes. Proper estate planning using the fideicomiso's beneficiary designation features can simplify the transfer process.
Finding a Cross-Border Tax Advisor
- Look for CPAs or tax attorneys with specific Mexico experience, not just general international tax knowledge
- Several firms in San Diego, Houston, and Phoenix specialize in US-Mexico cross-border tax
- Expect to pay $2,000-$5,000/year for cross-border tax preparation above your normal U.S. return costs
- The investment in proper tax planning typically saves multiples of the advisory cost