We know you have concerns regarding the buying process in BCS.
Below are some of the legal terms you’ll come across, and explanations to clarify why they are required as part of your purchase.
Apostille: A Stamp from the Secretary of State that assures the U.S. Notary used for documenting signatories is in good standing with the Secretary of State from whichever state a buyer or seller lives in. For example, an apostille is required in the use of a Poder (Limited Power of Attorney). The Closing Company handling a purchase or sale will forward the required document via email or fax for the buyer or seller who cannot be present at the closing.
Avalúo Fiscal: This is the declared value (in pesos) of said property. It is prepared by a 3rd party. This person is a licensed, gov’t appraiser to provide an estimated property value for annual tax purposes.
The Bank Appraisal (AVALUO BANCARIO): is used when someone buys a piece of property using a bank loan. It is similar to US appraisals, being determined using comparable sales. It is also used as a justification for establishing the sales price.
The last type of commercial appraisal is the Avaluo Comercial, con Mejoras I.S.R. Enajenacion.
This appraisal is underutilized and can be a great way to lower your capital gains liability. Many people have done remodels to their properties but do not have official tax facturas to document the work and justify a gains tax reduction. This type of appraisal can be used to justify improvements on the property, raising the tax basis of the property, and hence lowering or eliminating your I.S.R. (Capital Gains)tax liabilities. You only get tax benefits from remodeling and improvement costs done on your property. It does not apply to simple repairs when something broke and needed replacement. I.S.R. (capital gains) tax liabilities use 80% of the value of the improvements for purposes of calculating the taxes.
Ayuntamiento: The municipal offices that process annual tax payments.
Catastral: Here in Mexico we have three types of real estate appraisals. Tax (Catastral), Bank (Bancaria) and Commercial (Comercial). When choosing an appraiser, remember that all appraisers must be licensed. The catastral appraisal is based upon tax tables published by the municipality where each city block is assigned a value per square meter for the land. The municipal tax tables value the square meters of construction depending on age of the property, style and condition.
Escrow: There is no recognized escrow institution in Mexico. Instead, from the time the parties agree on a price and provide down payment until the deed of transfer is signed before the Notary, a preliminary agreement is usually signed. This agreement secures the rights of both parties through a foreign Escrow Co. This document will only be signed after confirmation from Public Registry of Property that the property involved in the transaction is free of encumbrances. Once the preliminary agreement is signed, all the necessary paperwork and authorizations are obtained and sent to an appropriate notary for signing and registration.
The deed of transfer of title that is registered in the Notario´s books as well as with the Mexican Public Registry of Property will contain the entire trust agreement.
Fideicomiso: The actual document held in trust by whichever chosen bank. A Fido/Trust can be established for up to 50yrs, and then automatically renewed after that time, or by surviving beneficiaries. This is the equivalent of a U.S.Family Trust, and lists all parties involved in the buy/sell transaction, including future beneficiaries. There is a fee to establish the trust account, and an annual fee for maintaining the file. When your trust is set up your bank/trustee designates a “trust account number” for the trust. This number is not in your deed and is a number that the bank generates to keep track of your trust. You need to get a copy of this trust account number. It is the file number the bank uses to keep track of the status of your trust and annual payments.
Impuesto Predial: Your property has a Property Tax Account number, which is called your “Cuenta Catastral”, or clave catastral #. This number is of utmost importance, so hang onto that info!
You will find this in numerous places within your title/deed. You need to provide this number to the municipal property tax authority to obtain yearly Property Tax Assessment. The municipality will not send you a bill since in Mexico there are not street addresses as you may be used to. You will, however, receive a discount for paying during January, February and March and start with late penalties in April. The calculation of property tax varies municipality to municipality, and from state to state. Your property tax is calculated base on the “Valor Catastral” or Property Tax Value of your property. Usually, this charge is 2% of the land value and 1.2% – 2% of the construction value. In most municipalities these “Catastro” values are very low and therefore your taxes are low. The Property tax assessments are changing in 2023, but your discounts remain the same.
ISABI: This Acquisition Tax amounts to about 2% of your total registered purchase price. Paid at time of closing, it becomes part of your Cost Basis. It is part of the calculation used and fully deductible if you decide to re-sell your property.
IVA: Sellers pay the IVA (16%) sales tax on services, not just goods. This is something foreigners don´t understand, as they are used to paying sales tax on the sale of goods only and not professional services. You pay the sales tax of 16% and they (Brokers) pay income tax on agent earnings. This is like purchasing a car in the USA, you pay sales tax and the dealer still pays income tax on their profit.
KYC: a form required by the government. The buyer(s) and seller(s) must ALL fill in required data and sign.
This means if there are 2 or more buyers and 2 or more sellers listed on the title (Fideicomiso) there will be a form for each of you.
LLC: (Ownership through a corporation). You will need to make sure that you have a certified public accountant making the necessary tax and foreign investment filings. Corporations are businesses and must be treated as such. They require much more attention than holding property through a trust in that even if they do not have any income, they do have filing requirements (unless they are properly put in a “dormant” state). Not making these filings will result in fines. At the end of the day the tax authority will come to the corporation and not the accountant.
Notario: Mexican law requires that all real property transactions be done by a Notary Public.
The Notary is obligated to register in his books the deed of transfer of title, have it signed by the parties involved and have it recorded in the Public Registry of Property that corresponds to the location of the property. Once the deed of transfer of title is signed in the presence of the Notary and registered with the Public Registry of Property, the real property transaction has fulfilled the requirements of Mexican law.
Poder: (pronounced poh-dare), this is the equivalent of a Limited Power of Attorney. A Poder is used to represent either a buyer or seller who is incapable of being present on the day of closing. The buyer or seller may choose who will represent them and speak on their behalf.
Predial: Mexico Property taxes paid through the municipality …how your taxes are determined is explained above. You are actually able to pay your taxes online if you live outside Mexico. Log on to: www.eloscabos.gob.mx, and click on Impuesto Predial. (This site is in spanish, but fairly easy to follow)
Enter your Clave Catastral # as found in your Fideicomiso. This is your Tax ID #. The amount of tax shown on the site will be in pesos. Enter your credit card information, and your tax payment will be debited to your Card.
Restricted Zone: The restricted zone, according to Article 27 of the Mexican Constitution, is all land located within 100 kilometers of any national border and within 50 kilometers of any ocean. Article 27 states that no foreigner will be allowed to acquire direct title to land within the restricted zone. However, Mexico’s Foreign Investment Law allows foreigners to acquire indirect title to land in the restricted zone by one of two methods; through a Mexican corporation or through a bank trust (fideicomiso).
Reverse Capital Gains: Under normal circumstances, capital gains will affect the seller based upon the original purchase price versus the new selling price of the real estate. If there have been major alterations to the property by the seller, as a buyer, you may be surprised by a Reverse Capital Gains tax on your purchase.
The required-by-law appraisal of the property may be significantly higher than the price agreed upon by seller and buyer.
If, for instance, the seller is in need of an immediate sale, or you or your agent are above average negotiators, or, more likely, if it’s a ‘buyers’ market forcing the selling price down. As the buyer, the normally required acquisition tax (usually 2% of the price paid) may actually increase slightly. However, if the difference between the avaluo (official valuation of the property) is more than 10% higher than the agreed upon purchase price, the Buyer will be charged reverse capital gains at 25% of the difference between the purchase price and the legal valuation assessment price. There are pros and cons embedded in this non-typical scenario. Yes, as the buyer, you will pay a municipal tax on that difference. You also have a property valued significantly higher than what you paid for the property, giving you immediate equity.