Property taxation in Mexico: your complete guide

One of the first taxes you’ll encounter when buying property in Mexico is the property transfer tax, also known as ISAI (Impuesto sobre la Adquisición de Inmuebles). This tax is calculated based on the value of the property at the time of purchase (1). On average, it represents about 2% of the purchase price, but it can range from 1% to 5%, depending on the state where the property is located.

The property value is determined by a certified appraiser approved by Mexican tax authorities. The ISAI tax is usually paid during the property transfer and is managed by the notary handling the transaction.

Once you own a property in Mexico, you will need to pay an annual property tax called El Impuesto Predial, similar to the property tax in the UK (council tax). The amount of this tax depends on the property’s value and location.

The tax is due at the end of March each year.

However, if you want to benefit from a discount, early payment is the way to go :

• 25% discount if paid before December,
• 20% discount if paid in January.

If you offer your property for long-term or short-term rental (seasonal rentals), you must add 16% to the rental price. You will then need to remit this 16% to the Mexican government when filing your taxes.

As a property owner, you are responsible for collecting and submitting this VAT to the Mexican government when declaring your taxes.

Mexico also imposes a tax on rental income, with tax rates varying depending on whether you are a resident or non-resident. It’s important to account for this amount in your budget if you plan to invest in property in Mexico to make an income.

Generally, non-residents are subject to a flat income tax rate of 25% on their rental income. For example, if you are a non-resident of Mexico but reside in a country with a double taxation agreement with Mexico, such as the UK, you will only be taxed in the country where you are a tax resident. These agreements are designed to avoid double taxation of individuals on their income (2).

You are considered a resident if you spend more than 183 days per year in Mexico and need to apply for resident status.

As a resident, you will be taxed on your rental income at a progressive rate ranging from 1.92% to 35% (3), depending on the total amount of your rental income.

There is a significant difference in the tax you will be charged when you sell a property in Mexico, depending on whether you are a resident or non-resident.

• Mexican residents pay 30% on capital gains from the sale of a property.
• Non-residents are taxed at 25% of the gross profit or 35% of the net profit (5).

This difference can be significant, especially for those considering buying property as an investment and selling it for a profit. Residents may be able to offset certain costs, related to property improvements, which can reduce their tax. However, non-residents do not benefit from this advantage.

One major advantage of owning a property in Mexico is that there is no inheritance tax. If you’ve worked hard all your life and achieved your dream of buying your ideal home in Mexico, your beneficiaries will receive the full value.

This means that if you pass away, your heirs will not be required to pay taxes on the property they inherit. The advantage is in stark contrast to countries like the UK, where inheritance tax is 40% on estates exceeding a certain threshold of £325,000 (6). In Mexico, your heirs will receive the full value of the property, making purchasing property in Mexico attractive for those seeking long-term benefits for their families.

If you plan to buy property in Mexico, it is essential to understand local tax laws to avoid any unexpected and unpleasant surprises (like fines). This knowledge will ensure that your real estate investment or residency choice is financially viable and legally secure for the years to come.

Consulting a local tax expert can help you navigate the complexities of Mexican real estate taxation, and our iad Overseas real estate consultants are available to assist you with all your property needs, both in Mexico and internationally.

Whether you’re looking for your dream home or a profitable investment opportunity, we’re here to guide you every step of the way. For more information on the latest updates regarding real estate taxation in Mexico, feel free to contact our experts. We are here to help you make the best decisions regarding your real estate investments in Mexico.

3 key points to remember

1. Property transfer tax – Typically 1-5% of the property value, paid during the purchase.
2. Rental income tax – Non-residents pay 25%, residents are taxed progressively (1.92%-35%). Plus, a 16% VAT on rentals.
3. No inheritance tax – Beneficiaries inherit property without paying taxes.