As a non-Mexican citizen buying real estate in Baja, there are several ways to hold title. The two highest forms of title come in the form of using a fideicomiso (a Mexican bank trust), or creating a Mexican corporation which will hold the title to your property. Many people choose to use a Mexican corporation as a tax strategy, but for most, the simpler way is to own the property in your own name using a fideicomiso. Here are some of the reasons.
The first and main reason is capital gains. If you own a property in your own name and can prove that it was your principal residence for at least two years, Mexico allows you an exemption from paying capital gains when you sell the property. Proving residence is done by simply maintaining utility bills and taxes for the property in your name as it appears on the title. Mexican capital gains are called “Impuesto Sobre la Renta,” but do not be confused; this tax has nothing to do with rent.
On the other hand, by owning property through a Mexican corporation you lose the opportunity of the capital gains exemption. In order to reduce the burden of capital gains, you would have to provide valid receipts for approved expenses relating to the maintenance and/or management of your property. While these receipts are fairly easy to come by in the U.S. and Canada, they are much harder to obtain in Mexico. Most Mexican receipts are simply hand-written “notas” and are not acceptable. The only acceptable receipts are official “facturas” showing that you paid the 11% service tax, or IVA. Since most laborers do not charge IVA, nor have the ability to prove that you paid IVA, these monies cannot be counted against your capital gains. Valid receipts can only be obtained from mainline construction stores and official contractors who tend to charge more for their products and services, and of course, will charge you the extra 11% IVA, greatly increasing your costs.
The second reason it is preferable to purchase property in your own name rather than through a corporation is the simplicity of the process. It is much easier to set up a fideicomiso, or Mexican bank trust, than to start a Mexican corporation and obtain all of the necessary documentation to be given permission to work in Mexico and administer your corporation. It is always easier, faster, and less complicated to simply get a bank trust in your own name.
Another factor involved in setting up a Mexican corporation is the cost and effort involved. While there are people who can help you streamline the process of setting up a Mexican corporation, you would still have some large costs to deal with. Setting up a corporation costs between $2,500-3,500. In addition, you will have the costs of all of your personal documentation, annual accountants’ fees of $500-900, and an annual filing fee of $300. Aside from these costs, managing your corporation is a job in itself and will require much time, money, and effort on your part.
Instead, you can purchase a fideicomiso for about $1,600 and maintain it for about $600 annually. Setting up this bank trust is fairly easy, much more cost effective than using a corporation, and requires virtually no work on your part other than making your annual payments and renewing the trust once every 50 years.
Generally speaking, a bank trust is the best way to go unless you have a specific tax strategy for owning through a corporation. Here is one such example. If you have a self-directed IRA, you can use that IRA to fund a U.S. based LLC which would be created by you, and through that LLC, fund a Mexican corporation that would also be created by you, and use that corporation to purchase your Baja real estate. This is a tax and investment strategy that requires much work and monitoring, but it can have its advantages if you know what you are doing.
In summary, using a fideicomiso is the way to go for just about everyone. Using a Mexican corporation to own Baja real estate is complicated and requires much more effort, documentation, and money than simply using a fideicomiso. And with a fideicomiso, you can sell your property capital gains free after holding it for 2 years as your principal residence. It’s a win-win situation!