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Many ex-pats have chosen to purchase a second home or condo in Mexico to have as an investment and for retirement and many like to utilize it for rental income. Well, as everyone knows, there is no avoiding the tax man. This article is a short primer on your tax responsibilities and how to minimize your taxes owed and thus maximize your return on investment. Obviously, you should consult a professional tax accountant to get all of the details, this is a mere introduction to some of the basic concepts and is not meant as professional tax advice. Click here to redirect to a tax professional.
Residency in Mexico.
Many folks who purchase in Mexico choose to apply for residency. It's an easy process and the only requirements are that you meet the minimum financial solvency amounts. Click here to read about the requirements. The two basic categories for residency are temporary residents and permanent residents. Temporary resident visa converts to a permanent one after 4 years. So either way, you will eventually become a permanent resident.
The big difference is that a permanent resident visa grants you an automatic work permit, while you must apply for a work permit under a temporary visa. The first question I usually get asked at this point is “Why would I need a work permit?”. If you are retired or working remotely for a foreign company, you do not need a work permit or a tax ID (known as an RFC). The Mexican government considers earning money in Mexico as working, even if you are earning it from rental income from a property you own. As mentioned above, if you are simply physically present in Mexico, but your work is for a foreign company and you are paid in that foreign country, you are not considered to be earning money in Mexico. If you own property in Mexico and you earn income from it, you will fall into one of these categories:
No residency visa, no work permit, no RFC
No residency visa, have RFC (this is done through a power of attorney)
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 added to the price of a booking or rental and then passed on to the government so it does not impact the home owner. The income tax is another matter. The major digital platforms will withhold different amounts of tax depending on if you have a Mexican tax ID number known as an RFC. If you have an RFC they will withhold 2% if not then they withhold 20%, clearly you want to be in the 2% withholding group. So let’s take another look at the various groups and how much tax the digital platforms withhold:
No residency visa – 20%
No residency visa, have RFC - 2%
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%
One other critical factor that having an RFC provides you with is that you can now deduct any expenses related to your rental income. Utilities, management services, advertising, cleaning etc. This is how you minimize your taxes and maximize your profits.
It’s not that different than in the USA or Canada, with the exception that you need this RFC tax ID. It is important to keep in mind that persons who are renting their condo’s in Mexico and earning money from that endeavor must file taxes. Even if the digital platform is withholding 20% that does not exempt you from filing the tax and it may not be the full amount that you owe. The same applies for the folks who’s withholding is 2%.
It is also important to note that taxes need to be filed monthly in Mexico as well as at year end. Yes, it is true that there are many examples of ex-pats who own and rent in Mexico, are not residents and have never filed or paid taxes and never knew they had to. They might continue doing so and never be found out, however, the Mexican government now has a record (from the digital platforms) of which properties are for rent and they can, and have, come knocking to collect back taxes.
Getting your RFC
Getting your residency is the most common way to getting your RFC, however an accountant can easily set up a power of attorney and get you an RFC without you having to get your residency.
The good news is that there is no requirement for you to live in Mexico full time in order to maintain your residency. You will need to renew your temporary each year, or you can pay for the last three renewals all at once after the first year. If you like, you will only have to physically be in Mexico when you get your first visa, when you renew after your first year, and when your temp converts to a permanent. Once you have your permanent residency visa, you need not live or even visit Mexico.
A new fractional ownership development has just entered the market in Puerto Vallarta. One Beach Street offers fully deeded fractional ownership of beachfront condos, an RFC is provided for you with the purchase of your fraction(s). They also offer check-in and Check-out as well as two housekeeping visits per week with your purchase - this can drastically minimize your rental expenses. You can read about it by clicking here.
In summary
It makes sense to get your residency even if you don’t live here. It also makes sense to get your RFC and it is incumbent on owners who wish to rent that they file taxes, by registering your RFC with the rental platform and utilizing deductions, you will minimize your taxes and maximize 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.