MEXICAN BANK TRUSTS
Foreigners or Mexican Nationals can own property through a bank trust or “Fideicomiso”. These trusts can operate similarly to what is known as a “Beneficial Trust” or “Family Trust” in the United States. The trust is used through a Mexican bank in order to purchase real property anywhere in Mexico, especially in the Restricted Zone. A buyer contracts a Mexican bank of their choice to act as a trustee on their behalf.
As a foreigner in order to open a bank trust you must first apply for and obtain a permit from the Ministry of Foreign Affairs. A trust can be established for a maximum term of 50 years and can be renewed for another 50 year period. During the term of your trust you have the right to transfer the title at any time.
The legal owner of the property is the bank but you as the Primary Beneficiary of the trust have the right of exclusive use and also have all the benefits of an owner, including the ability of leasing or selling the property to a third party or to a pre-determined heir. Through the trust the foreign owner has all the rights and privileges of a Mexican National real property owner. Bank Trusts generally cost approximately $550 USD per year but fees can be raised during the term of your trust contract.
Where this can get confusing for US and Canadian Buyers is the misconception that your property will depreciate as the years left of your trust decrease. This is not true. Trusts can be renwed, canceled if you don’t like you trust bank’s service, or when you sell, the new Buyer may change trust banks, start a new trust, or assume your trust thus assuming the years left on your current trust contract.
For practical reasons, even in the unrestricted zones, many foreigners and Mexican Nationals, prefer to own their property through a Trust.
THE NOTARY PUBLIC
It is the Notary Public or Notario Publico’s legal responsibility to “give faith to the operation” which means to act as an intermediary between Buyer and Seller to make sure the process is done correctly and taxes are collected where necessary. He is a government appointed lawyer who processes and certifies all real estate transactions, including the generation and review of closing documents to ensure a property’s correct transfer. In addition they create all power of attorneys, corporation bylaws, wills, official witnessing, etc. These are all are handled and registered through the office of the Notary Public.
FINANCING
Real Estate purchases are still mostly all cash transactions, however more and more US and Canadian loan product is emerging at very competitive rates for a foreign market mortgage. Companies like GMAC, GE Mortgage, and other large companies have seen the need and huge demand for this emerging area. Loans are full qualifier loans. We can help you find the right lender for your situation and help you get a pre-qualification with a lender to help you find the right property at the right price.
CLOSING COSTS
Normally Buyers pay their own closing costs including the property transfer tax, the notary fees, and the trust set up fees. Sellers are responsible for their capital gains tax responsibility and the real estate broker's commission. A general rule of thumb would be that a Buyer’s closing costs will be approximately 5% to 6% of their property’s purchase price. It is best to counsel with a Notary for the exact calculation.
TITLE INSURANCE
A title insurance policy is an agreement with a insurance company which agrees to indemnify the insured against a loss sustained as a result of defects in the title, other than those outlined as exceptions. The title policy can insure the owner, a lender, a mortgage holder, or a holder of any interest in the property. The title insurance company agrees to defend, at its expense, any lawsuit affecting title which is based upon issues outlined in the policy.
Currently there are two title companies with offices in Puerto Vallarta, First American Title, and Stewart Title Company. Both companies also offer escrow services for the management of funds in a transaction as well. Please note that escrow accounts with these companies are generally not interest bearing.
PROPERTY TAXES
Property taxes in Puerto Vallarta are extremely low. Property Taxes or “Prediales” are at the mil rate of .08% of the assessed value or a property. They are due every quarter and there is a 15% discount if the entire year is paid prior to February of each year. Values are assessed at the time of every sale as an appraisal is needed for every closing which is done by a competent and licensed appraiser.
CAPITAL GAINS TAX
In Mexico, the concept of capital gains tax applies more and more similarly to what is practiced in the United States. Gain from the sale of your property is taxed at a current rate of 27%. As of January 2007 there are two situations in which exemptions of capital gains tax is granted. In both situations the exemption is only granted if it is determined that your property is a principal residence, you have a valid FM3 or FM2 immigration visa, and that you have a bank statement, telephone bill, or electricity bill with your name and property’s address on it for a minimum of 6 months to 5 years. An index is used to determine what you tax liability would be which is called a UDI index. Basically it gives each property owner an exemption of roughly $520,000 USD if you have owned the property for less that 5 years. If you have owned your property for more than 5 years there is no maximum on your exempted amount. The $520,000 USD exempted amount applies to a sales price and not the gain amount. For an exact calculation given the fluctuations in the law it is best to get an exact calculation from a Notary Public.
EJIDO PROPERTY
A large part of Mexican real estate is classified as “Ejido” and is not private property that can be bought and sold with title. Since 1992, after some constitutional reforms, “Ejido” land can now be regularized or converted into private property and sold with a title to third parties. In general terms an “Ejido” is a collective group of people that live and work on a determined parcel of property as a community. The concept is pre-Hispanic but most of the theory behind it is democratic communism. Until “Ejido” land is converted into private land it cannot be purchased by foreign investors with ownership as we understand it. Since foreigners cannot become “Ejidatarios” or part of the community group, foreigners cannot take title to “Ejido” property. Care must be taken that the property you are interested in is not “Ejido” property that has not been regularized or turned into private property.
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