Many ex-pats have decided to buy a second home or condo in Mexico as an investment, for retirement, and to generate rental income. As everyone knows, taxes are unavoidable. This article provides a brief overview of your tax obligations and ways to reduce your taxes, thereby maximizing your return on investment. It is crucial to consult a professional tax accountant for comprehensive details, as this serves only as an introduction to some fundamental concepts and is not intended as professional tax advice. Click here to redirect to a tax professional.
Residency in Mexico.
Numerous individuals buying property in Mexico opt to apply for residency. The process is straightforward, with the primary requirement being that you meet the minimum financial solvency amounts. Click here to learn more about the requirements. There are two main residency categories: temporary residents and permanent residents. A temporary resident visa transitions to a permanent one after 4 years. Thus, you will ultimately become a permanent resident either way.
The major distinction is that a permanent resident visa automatically includes a work permit, whereas with a temporary visa, you must apply for one separately. The common question I encounter at this stage is, “Why would I need a work permit?” If you are retired or employed remotely by a foreign company, a work permit or tax ID (known as an RFC) is unnecessary. The Mexican government views earning money in Mexico as employment, even if the income is from renting out a property you own. As previously stated, if you are merely present in Mexico but working for a foreign company and receiving payment abroad, you are not considered to be earning money in Mexico. If you own property in Mexico and derive income from it, you will be categorized as follows:
No residency visa, no work permit, no RFC
Temporary resident, no work permit
Temporary resident, have work permit, no RFC
Temporary resident, have work permit, have RFC
Permanent resident, no RFC
Permanent resident, have RFC
In 2021 the various digital platforms all started cooperating with the Mexican government to collect the taxes that are due. These taxes fall into two basic categories;
IVA or value added/goods and services tax which is 16%
Income tax.
The IVA is included in the booking or rental price and subsequently paid to the government, so it doesn't affect the homeowner. Income tax is a separate issue. Major digital platforms will withhold varying tax amounts based on whether you possess a Mexican tax ID number, known as an RFC. With an RFC, they withhold 2%; without one, they withhold 20%. Clearly, being in the 2% withholding category is preferable. Let's examine the different groups and the tax amounts withheld by digital platforms:
No residency visa – 20%
Temporary resident, no work permit, no RFC -20%
Temporary resident, with work permit, no RFC -20%
Temporary resident, with work permit, with RFC -2%
Permanent resident, no RFC-20%
Permanent resident, with RFC -2%
An additional important benefit of having an RFC is the ability to deduct expenses associated with your rental income, such as utilities, management services, advertising, and cleaning. This approach helps reduce your taxes and increase your profits.
It's quite similar to the process in the USA or Canada, except you need an RFC tax ID. Remember, individuals renting out their condos in Mexico and earning income must file taxes. Even if the digital platform withholds 20%, you are still required to file taxes, and this withholding might not cover your total tax liability. This also applies to those with a 2% withholding. Money earned in Mexico will need to have income tax paid in Mexico, however, Mexico has tax treaties with both Canada and the USA and you will not be taxed on this income twice.
It is crucial to remember that in Mexico, taxes must be filed both monthly and at the end of the year. Indeed, there are numerous cases of expatriates who own and rent properties in Mexico, are not residents, and have neither filed nor paid taxes, often unaware of the requirement. While they might continue this way without being discovered, the Mexican government now possesses records (from digital platforms) of which properties are available for rent and can, and have, approached individuals to collect back taxes.
Getting your RFC
Getting your residency is your pathway to getting your RFC,
The positive aspect is that you are not obligated to reside in Mexico full-time to keep your residency. You must renew your temporary residency annually, or you can opt to pay for the last three renewals simultaneously after the first year. If you prefer, you only need to be physically present in Mexico when obtaining your initial visa, when renewing after the first year, and when your temporary residency transitions to permanent. Once you have your permanent residency visa, there's no need to live in or even visit Mexico.
In summary
Obtaining residency is logical even if you don't reside here. Similarly, acquiring your RFC is wise, and it's essential for owners aiming to rent to file taxes. By registering your RFC with the rental platform and taking advantage of deductions, you can reduce your taxes and increase your profits.
Interested in moving to Puerto Vallarta, Mexico? Let us show you how easy it is to own and invest in real estate in Mexico. Contact us. Selling your home? Click here to find out how much your home is worth.
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