Rentals

By John Fleming

Many Americans and Canadians come to Mexico, purchase a property, and then rent it out to others. Even if the foreigner lives in the property part of the year, any income must be declared, an official receipt provided to the tenant, and taxes paid.

The term “rental” carries two meanings in Mexican law. One is lodging. This is the type of service offered by hotels, in which the accommodations are furnished, the linens are changed, and the room is cleaned. The other is long-term rental, in which the owners provide the accommodations but not the services associated with lodging.

It is not illegal for Americans to rent properties to others on a long-term basis. But failure to give tenants the legal receipts or to file the appropriate declaration with the tax authorities can result in penalties for tax evasion.

Some foreigners rent their vacation homes as lodgings, but do not have a corporation or pay taxes in Mexico. This is illegal, because they are in direct competition with hotels and other businesses that have to pay taxes for renting out lodgings. To provide lodging it is necessary to have a corporation, to be registered, and to pay taxes. Value Added Tax (IVA) is paid on all furnished houses, rooms in guest houses, hotel rooms, and commercial properties. It is 10% of the total rental amount in Puerto Peñasco and on the Baja Peninsula, 15% in other parts of Mexico. A declaration must be filed every three months and the appropriate tax paid by the person receiving the rental income. If potential property owners intend to do this, they should make their purchase in the name of their Mexican corporation.

The city and state governments have not in the past had adequate personnel to enforce the laws governing this practice, but now computerized systems are making it possible to exchange information between the U.S. and Mexico. Americans may not be able to evade these taxes for much longer.