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Bank Trust
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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 the 30-year term of their loan is complete. |
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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. |
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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:
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.
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.
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 real 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 but the
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 |
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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 $100,000US
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: AV2(appraised value 2)
-AV1(appraised value 1) ?Improvements - Cost of the Sale=Taxable Amount
x 35%=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, 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. |
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A legal real estate contract has 5 necessary parts:
1.
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.
2. 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.
3. 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.
4. 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.
5. 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." | |
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