Regulations for Rental Income Properties

Table of Contents

For many years the SAT, Mexico’s taxing authority, has been collecting tax on income from Mexican rental properties. The law is clear, no matter where the money is paid, if the income is generated from a property located in Mexico, SAT is entitled to its tax. And the authorities are watching the company websites, the property managers, the vacation rental companies and the digital platforms on the internet. They know there is tax evasion taking place!

 Since many owners have not come forward to honour their tax obligations, a new law goes into effect at the beginning of June 1, 2020 anybody who accepts a booking through a digital platform (think AirBnB, VRBO, Home Away, etc) will have the applicable taxes deducted before the balance sent to the owner.

 So…….. no evasion.  No way to avoid the taxes.  These new regulations are defined in Articles 113 and following of the Income Tax Law (ISR), Section III, and Articles 18 and following of the Added Value Tax (IVA), chapter II.

 The law breaks tax rates and procedures for payments into two categories:

 The Resident in Mexico: if the owner is a resident of Mexico, he may obtain a taxpayer identification number (RFC) and declare income less allowable deductions. Taxes are generally lower than for non-residents but the requirements for residency are fairly high including minimum time in the country each year and verifiable proof of monthly income. In most cases the monthly declarations are provisional and an annual declaration must be filed with the tax authorities.

 The Non-Resident in Mexico: If the owner is someone who came, fell in love and bought a property for appreciation, for retirement or just for fun but is not in a position to live in the country or does not have sufficient stable income, he or she is a NON-RESIDENT, and declares under a different formula. Tax rates are fixed and an annual declaration is not required.

 Both residents and non-residents who promote their properties through AirBnB, VRBO and any other digital platform, will be taxed and funds withheld from income based upon their immigration status.

 What about those who rent through a property manager? or privately? What about those who rent sometimes through a digital platform and sometimes through other sources?

 The law has not changed. Both residents and non-residents must declare their full income and enforcement will most likely be stricter than ever. For the non-resident, a Mexican person or entity must be appointed to collect, declare and pay taxes. No RFC is required. The tax is fixed, on the gross, it is a definite tax and no annual declarations need to be made.

 Evasion of tax is a criminal offence. Articles 150 to 178 of the Fiscal Code provide for imprisonment of up to six years for evasion of taxes. Not only is it a criminal offence but the taxpayer must pay the past due taxes and very substantial interest penalties which amount to 1.3% per month, compounded. Unless taxes and accrued penalties are paid in a timely manner the property can be seized and put up for auction. Additionally, in a reform of Article 118 of the Fiscal Code, no landlord may demand payment of past due rent in the courts without submitting proof of tax compliance. This is not unlike tax evasion consequences in the US and Canada!

 The good news on all of this is that Mexico has tax treaties with 32 nations, including the US and Canada. Thus, taxes paid in Mexico are a credit against income in both countries! Double taxation is never an issue!

copyright 2020. C. Phoenix, S.C. Reproduction prohibited without consent. # # # #

about the author:

LINDA JONES NEIL is the founder of The Settlement Company®, which specializes in real estate transfers, escrows, and consultations. Settlement® provides a full accounting and taxpaying service for residents and non-residents.. For further information on taxes on rental properties please contact: The Settlement Company®,

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