What taxes do foreigners pay in Mexico on the purchase of real estate?

Mexico is an extremely attractive country for real estate investments. From its cosmopolitan cities to its many tourist destinations. In every corner of the country there is an investment opportunity. That is why if you are a foreigner and you are thinking of buying real estate in Mexico, you should know what taxes foreigners pay.

México’s real estate assets

The climate, culture, tourist areas and cost of living are key aspects that attract thousands of people to Mexico year after year. It is no surprise that the country’s attractions invite real estate investors. This is mainly due to its great capital gain opportunities.

Mexico’s real estate sector represents around 6% of the national GDP. This has been the case in recent years. Another important characteristic of this market is that it is one of the most stable. Despite economic crises or low economic growth due to COVID-19, this market has remained stable.

The country’s attractiveness in real estate investment is also due to the great offer that exists as well as the security in investments. This year alone, Mexico continues to be one of the most attractive countries for Foreign Direct Investment (FDI). During the first quarter of 2023, FDI was 18,636 million dollars, representing 48% more than the first quarter of 2022.

Tourist areas and also cities attract foreign investors thanks to their accessibility and connectivity. At the same time, different parts of the country have quality of life. On the other hand, tourist areas have gastronomic and cultural experiences as well as infrastructure that further increase the capital gain of real estate.

An example of high capital gains is the Riviera Maya. In the last 4 years, annual growth rates of 7% can be observed in the area, according to Obras. After 5 years, a real estate property in that area can be generating over 50% of annual value.

For this reason, we will explain in detail what taxes foreigners pay when buying real estate.

What taxes do foreigners pay in Mexico when buying property?

Foreigners or expats can purchase property in Mexico. There are certain limitations, but by complying with the requirements, it is possible. Did you know that the real estate market in Mexico can generate rates of return on investment above 6%?

Let’s start with the basics, according to the Political Constitution of the United Mexican States in its article 27, states that a foreigner cannot directly acquire any property that is located within 100 kilometers of the country’s border strip as well as real estate within 50 kilometers of the beach strip. Except with the use of a trust, which we will discuss later.

Requirements for the purchase of properties by foreigners or expats

In order for foreigners or expats to acquire property in any of the areas outside of the country’s border or beach areas, they must:

• Have a temporary or permanent residence permit in Mexico.
• To be registered before the Federal Taxpayers Registry (RFC) to pay taxes.

What taxes are paid by foreigners or expats?

In general terms, there are three types of taxes that foreigners pay when acquiring and owning real estate in Mexico: 

1. Real Estate Acquisition Tax (ISAI):It depends on each entity so its cost varies. It is usually equivalent to 2% of the price of the real estate.
   1. In Quintana Roo it ranges from 1.5% to 2.5% (depending on the municipality).
   2. The notary public retains the ISAI.
   3. Land use and sale price determine the payment or exemption from ISAI.
2. Income Tax (ISR): This is the tax levied on income received in Mexico.
3. Property Tax (Impuesto Predial): This is the tax payment for any owner of real estate, depending on each state.

On the other hand, during the sale of property, as long as it does not exceed 700,000 UDIS (Investment Units), no tax may be generated.

Purchase in prohibited or restricted areas: bank trust

Let us first recall Article 27 of the Mexican Constitution. According to the Magna Carta, no foreigner may acquire property within 100 kilometers of the country’s border strip or within 50 kilometers of the beach strip. However, there is the figure of bank trusts. 

Bank trusts are contracts in which a person transfers the ownership or title of a real estate property or rights to another individual or legal entity with the fulfillment of an obligation by the latter. They are a tool that allows the development of real estate activities that meet the needs of all parties. They are composed of three figures:

• Trustor
• Trustee
• Trustee

With the support of a master broker agency such as Dreambuilt, a trust and following the regulations of the Law of Credit Institutions, foreigners can purchase property in Mexico within these zones. 

For foreigners who want to purchase property in Mexico, it is important to know the taxes and fiscal obligations to which they will be subject. Understanding them will help when purchasing a property. 

As you saw, if you are a foreigner and want to buy a property in Mexico, you must pay three taxes: ISAI, ISR and predial.