Buying Property in Mexico: Should you get a Fideicomiso or form a Mexican Corporation?

201801.13
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If you’re not a Mexican citizen, but you want to buy real estate in Mexico, you need to make sure you can legally do so.  One of the first questions to consider when buying property in Mexico is this:  How can you legally purchase real estate property, particularly in the “restricted zone”?

In Mexico, under article 27, section 1 of the Political Constitution of the United States of Mexico (the real name of our country), foreigners are not allowed to acquire property on the coastline or 50 kilometers inland and 100 kilometers from our borders. The reason is quite simple: Our constitution was passed in 1917 and very few things have been changed ever since. In those years, the risk of invasion seemed imminent (we had faced quite a few by then and one of them cost us half of our territory), so the prohibition against non-Mexicans acquiring land in strategic locations seemed only logical.

Many years have passed, and even though the prohibition seem pretty ridiculous now, it still exists because many people and institutions profit from it, mainly banks. Many attempts (or announcement of attempts) to modify the constitution and change this article have been made, but nothing solid, and we can say with a good level of certainty that this is something that may never change.

It’s because of this that the expats who come to the Yucatan Peninsula (particularly Mérida and the beach) with the intention of buying property in Mexico have only two options: obtaining Fideicomiso from a Mexican bank OR through their own Mexican corporation.

The two of them are quite different and satisfy very specific needs.

A FIDEICOMISO is the most common option chosen by the foreigners who attempt to buy property in the area. A Fedeicomiso is unique because it doesn’t have an exact equivalent in United States or Canada, so an exact translation is impossible. The closest we can get would be a “real estate trust.”

A Fideicomiso de Zona Restringida (Real Estate Trust of a Restricted Zone) is a legal document with which a Mexican bank will, for lack of a better word, lend you their name so you can use and manage the property. Technically the property will be under the bank’s name (as shown in the catastral cedulas of houses that are under Fideicomisos) but in the course of the 32-40 pages that the Fideicomiso deed contains, it explains how, by paying a yearly fee of around $700 USD (depending of the banking institution) the bank will be responsible for the ownership of the land, but that’s about it. The use, administration, maintenance, civil responsibility, rental income, mortgage loans, and income from its sale, belongs exclusively to the trustee. The trust institution makes very clear that they have no responsibility to the property and trustees can do pretty much whatever they want with it.

There are many benefits to a Fideicomiso. One of them is that it works like a will. In the deed, you designate beneficiaries who inherit the trust upon your death by presenting a death certificate and a simple letter. Another benefit is that nobody can put a lien of your lot, simply because it is not in your name, so your legal/economic issues won’t affect the property. But that the biggest advantage is that, if the property qualifies and the trustee gets resident status, at the time of sale, the seller (trustee) can exempt 100% of the ISR tax (capital gains) up to a selling price of $3,800,000 MXN.

The downside of forming a Fideicomiso would be the price. The initial bank fees (that include the permit, one yearly fee in advanced and expenses) are between $2,000 and $2,500 USD, which you pay on top of all the closing costs (acquisition property tax, rights, certificates, notary and attorney fees, etc.). Also, a bank takes around three weeks to issue the permit, but this is from the moment the permit is paid and all the proper documents and forms have been submitted. To get those documents and fill out those forms takes usually a good two or more weeks, so the closing time frame of a Fideicomiso is usually two to three months.

CORPORATIONS are simpler. A Mexican corporation can be formed in two weeks with at least two partners. (They can both be foreigners; no Mexican citizen is needed, so don’t fall for that story.) It costs a maximum of $1,500 USD and from there you can use it to acquire property through a normal transaction as a Mexican national would (basically because the corporation is a considered Mexican person and can do everything that a Mexican can do). So in a month and a half you can have the corporation formed and the property under its name. You can also buy a car and pretty much anything you want with it. But price and speed are its only benefits.

The corporation ties you to an accountant for life. Even if it reports zero income, an accountant will charge you a fee. To act on behalf of the corporation as a partner you need to get your resident status, otherwise you will have to act through powers of attorney given in the corporation to Mexicans (which means that somebody else will have, for lack of a better word, control of your money, land, car, and everything you buy or do through a corporation). Everything, and we mean everything you buy through a corporation, has to be done through a check and or wire transfer made from the corporation bank account, so cash is not an option. And finally, the biggest downside: there is no way to avoid capital gains when selling the property. If you manage the property properly and get fiscal receipts for everything you do in the house, you can deduct that against the profit at the time you sell to lower the tax bill, but you can´t avoid it completely.

That makes this the best option for people interested in starting a business. If you intend to open a business or even buy property for a non-residential reason, a corporation is the best route. It will save you some money on income tax, and most of all, it will allow you to create a legal source of income in the country.

In our opinion, a Fideicomiso is the way to go if you plan on buying property in Mexico and use it for residential/personal reasons that will not generate an income. If you intend to open a business or if you’re buying the property to function as a business, then you will want to form a corporation.

For any questions about these two options for buying property in Mexico, and a more detailed explanation of the way they work, don’t hesitate and contact the EASY LEGAL TEAM. We will answer you promptly and help you make the best-informed decision for your specific situation.