The housing sector has shown a significant reactivation during the first years of this decade, which has made of this industry a modern activity that is increasingly expanding.
Nowadays, three thousand companies are registered in this field, which contribute 2.4 percent of the GDP and 61.3 of the construction industry. Whereas, 10 years ago, the participation of the housing sector hardly reached 0.6 and 16.2 percent of these indicators, respectively.
The dynamics of the housing sector can be mainly understood by virtue of to the financial stability of the country, and the boost of the governmental authorities, which have improved the coordination amongst the national housing agencies; these factors have allowed, jointly with the construction industry, the generation of direct employment for 1.4 million of Mexicans, 10 percent of the population that pays social security dues.
Without doubt, 2008 will be a complex and difficult year, due to the recession in the United States and the instability of the international markets, but the conditions exist to reach the goals planned and to achieve, within the next years, one million of mortgage financings per year and a total of 6 million in the current administration.
Acting in joint manner, both public and private agencies are doing well; the figures and results up to this date allow to foresee that, in 2008, one million 324 thousand credits will be extended, from which 800 thousand will be used to purchase housing, whereas the investment during this term will register 281 billion pesos.
The soundness and stability of housing in Mexico has arisen the interest of both the officers of the industry and foreign investors.
Delegations from Spain, Colombia Guatemala, Turkey, Egypt, Colombia and Chile, amongst others, have traveled to Mexico in order to familiarize with the National Housing Program of President Felipe Calderón and the actions undertaken, as well as the successful experience in Mexico in this regard.
Likewise, teams of officers of the National Housing Commission have traveled to England, the United States and different Latin American countries.
Notwithstanding the instability of the international markets and the mortgage crisis in the United States, the housing sector in Mexico has continued with great energy. This industry keeps a good construction pace, particularly the one aimed to low-income people, considering the attention that President Calderon has given to economic housing through his subsidy program Ésta es tu casa (This is Your Home).
Therefore, taking into consideration the stable macroeconomic conditions in Mexico, the stable trend in the interest rates, the diversification in the housing offer and mortgage products designed by different financial intermediaries, we are able to consider that this is still a good time to purchase housing in our country.
Technically, the United States economy is not yet in an economic recession, which is defined by two consecutive quarters of economic contraction, or negative economic growth. However, many economic indicators such as jobless claims, manufacturing activity, housing starts & core inflation, which have traditionally signaled the onset of a recession, are already indicating that, at the very least, a significant slowdown is inevitable. Despite technical definitions of the current health of the United States economy, one of the obvious causes and weaknesses of the current situation is the sector of residential real estate.
The severity of this readjustment cycle lies in the long period of historically low interest rates, which created prolonged artificial appreciation, due to the cheap cost of debt financing, speculation and sub-prime lending. Now that the housing bubble has burst, there is a large segment of American homeowners who have less financial leverage than they had anticipated in recent years. With values of homes decreasing steadily, and US consumers facing a liquidity crisis, their financial reaches have been reined in significantly.
Although the US consumer is resilient, as are the financial markets in the United States, the culmination of numerous economic trends has created a sore spot in the economy that is unlikely to be concealed with a temporary bandage.
The evidence of a recession in the US economy appears imminent, and it is well-known that the effects of any US downturn affect the stability of markets in México. These negative effects are experienced in the amount of cross border trade conducted, employment levels in manufacturing, tourism and foreign investment directed at México. These impacts vary across different sectors of the Mexican economy, and are felt more acutely in certain industries depending on the origins of the economic problems. In the current US economic cycle, the slowdown is a direct result of financial imprudence on the part of lending institutions, lack of liquidity among consumers and depreciating real estate values. These weaknesses translate directly to vulnerability in the Mexican tourist real estate markets.
Despite the overall negative impact of the current US downturn, when properly analyzed, there are many unaffected demographics and other distinct opportunities that are emerging, which will dominate growth in the current cycle. Understanding the niches where potential remains will be crucial to ensuring profitable ventures in this market.
Over the past two decades the Mexican economy has experienced sweeping changes due to a number of factors, the largest catalyst being NAFTA. Since the signing of NAFTA in 1992, many sectors of manufacturing have experienced a boom and benefited greatly. However, in recent years, the US demand for Mexican products has gradually weakened due to the influx of Chinese products. In December 2007, INEGI published a statistic from the Labor Ministry, reporting that factory employment had decreased by 2.7% from the previous year.
With the current decrease in consumer spending in the US, demand for products made in México, such as automobiles, textiles and garments, GDP from manufacturing is expected to decrease again in 2008. This impacts the average Mexican by increasing unemployment in the important manufacturing sectors. However, this availability of labor creates an opportunity for other industries, such as real estate development, which have experienced shortages in a few instances during recent years.
Another transformation to the Mexican economy has been the increased internationalization of the financial sector. Due to its consistent economic growth and progress in financial securitization, as compared to many Latin American countries, México has been an attractive place for foreign direct investment. This has allowed foreign capital to assist the expansion of many sectors including real estate development. In 2006, Moody’s, Standard and Poor’s, and Fitch Ratings all designated México’s sovereign debt as investment-grade, lowering the risk associated with lending capital.
With a scarcity of capital in the US financial markets, México could be entering a period where investment from Spain and other European countries increases its share of total foreign investment. However, despite the financial woes in the US, interest rates are once again approaching historic lows, allowing financial institutions to expand their portfolios. With the lack of lucrative investment opportunities in US real estate, some financial institutions will look abroad to increase their exposure to mortgage backed assets in foreign markets. Private equity firms have acknowledged that, investment in México is increasingly becoming more attractive for the reasons stated, and that they are actively seeking more investment opportunities in emerging markets than previously.
Foreign injections of capital aside, the Mexican financial sector has rebounded strongly from the times of the “Tequila Crisis,” and Mexican financial institutions have become a significant source of available capital. A parallel effect of the US recession could be seen in the activity of stakeholders as opposed to opportunists. Referring specifically to real estate development, the new builders who are undertaking projects strictly during strong growth cycles have begun to disappear. The stakeholders, however, such as the experienced Mexican developers who want to advance México’s prosperity and have a long-term vision, will remain in the market, and emerge more dominant when the market regains its full strength.
Although some sectors of the economy are bound to feel the acute effects of the US economic problems, overall México is in a better position than in past recessions, to avoid the turbulence to the north. After the Dot-Com Bubble in 2000 and the ensuing US recession, the real estate industry in México felt the effect somewhat. However, neither demand for Mexican real estate nor its subsequent appreciation had been fully realized. This latent demand and potential for upward price movement was experienced in the years from 2002-2006, in which Mexican real estate made its mark among international buyers.
President Calderon, with his savvy team of economists, has been proactive in counteracting the potential impacts of a US recession. The infrastructure plan that was successfully passed through Congress, will serve as an economic engine for growth and employment, at a time when some sectors are contracting.
For years, conservative and liberal voices have debated over allowing Pemex to receive private investment to improve much needed infrastructure and increase exploration. With dwindling output, Pemex posted record losses in 2007 operating at a $1.5 billion deficit. Although economists have forecast a bleak scenario for 2008, Pemex posted a profit in the 1st quarter of 2008, shocking many who expected steep losses. This reversal is due to the increases in worldwide fuel prices, breathing much needed life into this backbone of the Mexican economy. If tax receipts from Pemex oil revenues increase during 2008, the government will be able to maintain a budget surplus. However, it is likely that the contentious debate will continue and that many voices, including Calderon’s administration, will push for liberalization of private investment in the state-controlled oil industry.
Another pillar of the Mexican economy which will remain important is the tourism industry. September 11, 2001 was a turning point for Mexican tourism, causing a greater number of Americans to travel to closer, more familiar places such as México. México’s attractiveness to US tourists only continues to increase as the Peso remains affordable, and European currencies overwhelm the dollar. In addition, Fonatur is reportedly increasing its budget three-fold, which will assist in maintaining high levels of tourism while fuel costs are on the rise. Overall, tourism appears as though it will maintain its momentum and remain strong for all of its related sectors.
México’s ability to attract tourists to its cultural and natural appeal has been one of its strengths in promoting investment in tourist properties. These are attractions that endure recessions and real estate downturns, and factor into the overall cycle of real estate buyers. Therefore, tourism, especially in a slow market, is a valuable asset in reaching and capturing real estate buyers.
As mentioned, second-home buyers in México transition through various phases within a real estate life cycle. As many as 22 million Americans visit Mexico annually. For many buyers, purchasing a timeshare or fractional interest is their initial way of transitioning from being tourists into purchasing a property outright. In times of financial uncertainty, such as the current economic slowdown, some low-end buyers are less willing to take the risks involved in a traditional purchase of a condo or villa, and will turn to timeshare or fractional ownership. In addition, Americans have been funding some of their Mexican investments with the equity in their US properties. With home values depreciating across the US, homeowners are less likely to borrow from their equity to finance cross-border transactions.
With the downtrend in home values in the US, it will be increasingly difficult to attract this low-end demographic to purchase until the market improves. Through the duration of the US economic downturn, timeshares and fractional ownership will be strategic products that allow for continued capture of US buyers. When the US buyer regains its liquidity and the dollar regains its strength, this demographic of US buyers will be in a perfect position to purchase condominiums, homes or homesites.
In contrast to the tightening of the low-end market, the high-end buyer remains financially liquid and maintains the ability to purchase luxury condominiums, villas and exclusive oceanfront properties. Additionally, if mid-range products experience a decrease in prices, this wealthier demographic might take advantage of the opportunity to buy an additional properties for investment purposes.
It is important to distinguish among buyers in “drive-to” markets, such as Puerto Penasco, Rosarito, and San Felipe, and the buyers from the rest of the Mexican tourist markets, or the “fly-to” markets. These drive-to markets cater to a demographic of buyers from Southern California & Arizona, with different characteristics from the majority of buyers in the other markets.
This demographic desires beach front real estate because they live in locations where there are no beaches, or where the oceanfront properties are beyond their purchasing ability. During the last growth cycle, condominiums were the dominant product being sold to this segment. Due to the limited influence of only a few nearby US cities, these drive-to markets tend to function and feel like more of an extension of the US than the fly-to markets.
The proximity of these markets and the strong dependence on buyers from only a few US cities, makes word-of-mouth a powerful promotional tool. In the past growth cycle, Puerto Penasco and Rosarito all experienced rapid increases in the number of new developments. Since the market peaked in 2006, absorption in these locations has declined significantly, and it appears as though they are somewhat oversupplied with condominiums. Although many proposed condominium projects have been canceled or put on hold, one additional large condominium project in any of these markets could cause a greater situation of disequilibrium.
This rapid increase in the number of developments was due to speculation on the part of investors and unsafe real estate practices of builders. These speculative investors or flippers mimicked the condominium trend in Miami, Phoenix and Las Vegas, and allowed developers to continue with projects based on short term demand. As is common, a number of developers accepted reservations of pre-construction units in exchange for minimal cash deposits. However, in many instances the deposits were not secured in third party accounts and in some cases are not being refunded to the buyers were projects have been canceled. This will create a publicity nightmare in the US for Mexican real estate. If this situation is not handled properly and efforts are not made to ensure safe real estate practices are utilized, it could have a lasting impact on these drive-to markets and to a lesser extent, on Mexican real estate as a whole. Negative publicity from Rosarito and Rocky Point has already started to generate some attention in the national news.
The fly-to markets, in contrast, are not comprised of buyers from any specific demographic that can be generalized. These markets are comprised of buyers from all over North America, as well as Europe and other foreign countries. Although there is a large influence from buyers in the Western United States and Canada, buyers from the East Coast are beginning to enter the market in significant numbers. Additionally, the price range and type of product available are much wider in the fly-to markets allowing them to meet the demands of various demographics that have different motivations for purchasing real estate.
The most important distinction to be made among the fly-to markets is that the three largest tourist markets, Los Cabos, Puerto Vallarta and Cancun, have the most diversity with regard to international buyers, and most exposure to high-end buyers. This is extremely relevant in the current cycle. Due to the strength of the Euro, Pound and Canadian Dollar, these markets can offset the weakness of the US consumer by shifting the marketing focus to other segments. More importantly, these three markets have the most expensive coastal real estate in México, which serves as an additional buffer to the concerns of the US consumer’s liquidity. Furthermore, affluent national are taking advantage of the distressed sales in these marketplaces.
Markets with significant numbers of international flights have an additional buffer to slowdowns. The East Coast of the US is still heavily focused on the Riviera Maya and direct most of their tourist dollars to those locations where there are direct flights. As airlift from the East Coast to other locations in México increases, tourism will generate new buyers for growing markets.
In many markets, developers will be competing on price more than any other factor. The effect of this, especially in markets with considerable inventory of product, will be a downward trend, or at the very least, stabilization of prices. However, in order for this to occur, developers will have to accept smaller profit margins on completed projects that are on the market, and proposed projects that are already in the pipeline. For this reason, as mentioned previously, many “opportunist” builders will engage in fewer projects during the downturn due to less lucrative returns. Also, in a slower market risk premiums will make the cost of capital increase, thereby lowering projected margins for shortsighted builders. Well-established developers with proven track records and name recognition will gain an advantage during a difficult market.
In addition to competitive pricing, projects that offer a wide range of amenities will be a key driver of competition. Once prices have been adjusted to meet the current market, buyers will look to amenities in making their purchase decisions. Highly amenitized projects create value for the buyer, and allow some of the developer’s costs to be hidden in HOA fees. Therefore, competitive pricing and attention to detail in development planning will allow projects to be successful while still achieving acceptable margins.
Overall, the negative impacts experienced by the coastal real estate markets in México, due to the US recession, will depend on the characteristics of the specific market; of greatest importance are the geographic and financial demographics of the buyers as well as the price points and amenities offered by developers. Developers that adapt to the current market dynamics and accept the nature of the downturn will be able to succeed with projects throughout the duration of the US downturn.
Since its introduction in the early part of 2005, the cross-border Mexico mortgage market -- mortgage financing for foreigners purchasing vacation and retirement homes in Mexico -- has been compared by many realtors and developers to riding a roller coaster. But now, a greater number of those individuals are looking at the cross-border mortgage market to help strengthen the slower real estate market.
The recent U.S. downturn, comprised of the U.S. housing bust, housing and corporate credit crunch, high gasoline prices, weakened U.S. dollar, and inflationary pressures, has taken a toll on the cross-border Mexico real estate market. Such effects started to appear as early as last fall and continued to grow throughout the early parts of the summer, with little signs of letting up before the upcoming busy season beginning November 2008. While prices for real estate properties in the resort areas of Mexico have not receded significantly, prices have not appreciated at the high historic levels once seen. Most notably, the overall velocity of sales over this time period has decreased considerably from years prior throughout most of the resort areas of Mexico, including Los Cabos, Puerto Vallarta and Cancun/Riviera Maya region.
Local developers, realtors and buyers who have typically shunned cross-border Mexico mortgage financing in the past are now beginning to embrace it. Several reasons have forced many to take a second look. From the realtor and developer side, financing options are one of the few tactics which can help bolster sales in a slower market without sacrificing profitability. This could not have been more apparent in the U.S. real estate boom over the last decade and, as in the U.S., should translate into more sales in Mexico. The main reason for this is a simple finance principle; leverage provides buyers with greater purchasing power and greater returns. With sales volume still depressed as the busy season approaches, realtors and developers are looking to push financing options as their main tactic to increase sales. After all, pushing financing is far better for their bottom line than other popular tactics such as offering incentive or lowering prices.
From the buyer’s perspective, the attractiveness of mortgage financing goes even deeper. The recent U.S. downturn and uncertainty from the upcoming U.S. presidential election have drastically eroded U.S. consumer confidence, making U.S. buyers more cautious. A more cautious buyer often chooses to lever up larger purchases in order to hold cash and maximize liquidity in the unlikely event it is needed. Further, the U.S. home equity line, which historically has been tapped by the cross-border Mexico real estate buyer, has become more difficult and expensive to obtain. Both scenarios have translated into U.S. buyers looking more favorably at cross-border Mexico mortgage financing. Other potential buyers who have put large deposits on a Mexico property or have been seeking a Mexico property for some time are becoming more stretched financially due to underperforming investments and lower household income, all effects of the U.S. downturn. Often these buyers need additional help to secure their retirement, vacation, or investment property in Mexico and are likely to now turn towards a Mexico mortgage loan.
Demand stemming from the changing U.S. economic climate is not the only reason for buyers and industry players to recently turn to Mexico mortgage loans for their Mexico real estate purchases. Once plagued with negative media attention as the result of numerous Americans and Canadians losing their real estate properties in the late 90’s, misconceptions regarding whether foreigners are legally allowed to own property (they can – see inset), and more recent events such as the fallout out of several cross-border Mexico lenders as well as the inability for some lenders and mortgage brokers to effectively close loans, the cross border Mexico mortgage loan market is finally seeing significant changes that have been ignited by greater demand.
Several positive changes have already been executed and continue to be underway in the cross-border Mexico mortgage industry. A broader array of financing options is now available, thanks to new lenders entering the market, including Deutsche Bank and Lehman Brothers. Additionally, mortgage brokers such as ConfiCasa Mortgage International have implemented smoother loan processes with better communication, transparency and closing timelines. A smoother process has resulted from several years of experience for the earliest entrants like ConfiCasa, who continue to focus on implementing ways to create a financing process that more closely mirrors that of the U.S. and Canada.
With so many more heads turning towards cross-border Mexico mortgage financing, the industry is finally looking to shed its roller-coaster like past and seem more like a smooth and predictable merry-go-round. And that would benefit everyone!
As a lawyer in private practice who represents many U.S. investors, buyers, service providers and other clients involved in the Mexican residential real estate market, I have had the opportunity to observe the development of the Mexican housing sector at close hand during the past several years.
There is an interesting contrast between what has happened in the Mexican residential housing market and the United States residential housing market during those years.
In Mexico, there has been an unprecedented growth in residential housing, especially in the so-called “affordable housing” sector, accompanied by a stable market. In the United States, on the other hand, the same period has seen the meltdown of the housing market due in large part to the much talked about sub-prime crisis.
The purpose of this article is to suggest some possible reasons for the very different courses taken by these close and economically interdependent neighbors, contrary to the conventional wisdom that economic problems in the United States inevitably have a strong ripple effect in Mexico.
Most Americans know that in recent years there has been a boom in the purchase of second homes in Mexico by United States and Canadian citizens, usually in beachfront resort areas. Far fewer are aware that the domestic residential housing sector in Mexico, that is, housing for Mexican citizens, also underwent a transformation during the same period. Not so long ago it was difficult if not impossible for a Mexican citizen to obtain a mortgage to purchase a home. Following the severe financial crisis suffered by Mexico in 1995, credit was nearly impossible to come by, and when it was available, interest rates were sky high. Only the rich could afford to own their own homes.
Many observers felt that the lack of a vigorous housing industry in Mexico was an important contributing factor to the migration problem, because of the negative social impact of substandard living conditions and the lack of employment within Mexico itself. Mexico needed the increased employment
opportunities which could be provided by a strong domestic housing construction industry.
At this juncture, the Mexican government decided as a matter of national policy that the expansion of the housing industry needed to become one of the country’s top national priorities. If housing was one of the keys to post- World War II middle class prosperity in the United States, why could it not play the same role in Mexico? If such a goal were to be achieved, there were two key requirements: (1) the working class and the middle class had to be supplied with affordable mortgage financing, and (2) a secondary market had to be created. Most people understood that these things could not happen without government guarantees, at least in the initial years while the industry was getting off the ground. However, policymakers also made the crucial decision to have the private sector participate as an essential player. The private sector was to provide the mortgages and create the secondary market. As a result, one could characterize the Mexican mortgage industry as a public-private partnership.
In the secondary market, mortgages are combined and packaged into pools, which then provide the financial backing for securities sold to investors. Typically, thousands of mortgages are placed into a single trust. Bonds, sometimes called mortgage backed securities, are then issued by the trust to institutional investors such as pension funds. When the bonds are sold, the proceeds are used to replenish the funds used to make the mortgage loans, so that there is money to make more loans. The cash flow consisting of the combined principal and interest payments on all of the mortgages in the pool is dedicated to paying the investors a return on their bonds. To provide necessary reassurance to investors, the government provided guarantees against default. This process is referred to as “securitization”.
To encourage the origination of new mortgage loans, new mortgage companies called Sofoles were authorized and their loans were guaranteed by the government. The Sociedad Hipotecaria Federal, or SHF, provided the guarantees and oversaw the securitization of the newly issued mortgages to provide new funds to lend.
These initiatives have met with noteworthy success, and hold even greater promise for the future. Mexican housing officials estimate that even now, not more than 20% of Mexicans own their own homes, so there is still much room for the industry to grow. Widespread availability of affordable
mortgage financing and the consequent expansion of home ownership is a relatively new development in Mexico. Therefore, as the Mexican residential
market expands and matures, should we anticipate that the same kind of sub-prime problems plaguing the United States are going to emerge in Mexico as well?
This is a question of more than merely academic interest for the United States. Aside from the importance of the Mexican housing industry as an economic building block to diminish the flow of economically-motivated migration to the United States, if Mexican mortgage backed securities are a secure investment, they furnish a potentially attractive alternative for U.S. and other investors. Such an alternative is needed because the issuance of U.S. mortgage backed securities is currently greatly curtailed due to the default and foreclosure crisis in the United States. Lastly, we in the United States can learn important lessons from the Mexican experience in terms of looking at different ways to structure the mortgage industry to lessen the risk of a systemic meltdown.
One significant aspect in which the Mexican housing market is different from that which produced an unsustainable bubble in the United States is that so-called creative financing is not available in Mexico. As in the “good old days” in the United States, the standard mortgage is a 25 or 30 year mortgage with a sizeable down payment and a fixed interest rate. The borrower’s ability to repay is carefully evaluated. There are no adjustable rate mortgages with low initial “teaser” rates and resets to much higher rates after a few years, no zero-down mortgages and no “liar loans”, where the lender takes the borrowers’ word regarding their ability to repay. As we have learned in the U.S., these kinds of loans induced people to buy houses they could not afford and created the conditions for a collapse in home values.
Another factor promoting stability in the Mexican market is the absence of home equity loans and cash-out refinancings. In the United States, the easy availability of these devices has encouraged U.S. homeowners to treat their homes as ATM’s and as a result left no equity cushion to help weather a decline in property values.
Another unique aspect of the Mexican housing industry is the role played by the Mexican social security fund, known as Infonavit. Infonavit uses retirement funds generated by payroll deductions to provide participating low income workers with mortgages to buy homes. Not only that, Infonavit is able to deduct monthly mortgage payments from the workers’ salary. This obviously minimizes the likelihood of default.
Infonavit has played an extremely active role in making first time housing available to low income workers, providing over 40% of the mortgages in Mexico to date. Its projections are to continue providing between 500,000 and 1,000,000 new mortgages each year for the next several years. Infonavit also provides subsidies to help fund the necessary down payment, and it engages in cooperative joint programs with private sector lenders such as the Sofoles and banks to lower the cost to the borrower to the point where the monthly charges are affordable. The fact that the government agency which controls such a large percentage of the affordable housing market in Mexico is committed to conservative, cautious loans lends an anchor of stability that has not been present in the affordable housing sector in the United States. One need only look at the troubles of Fannie Mae and Freddie Mac to see the contrast in approach.
While this article does not seek to list all of the characteristics of the Mexican system which make it unlikely that a subprime crisis similar to that in the United States will develop in Mexico, I hope I have mentioned enough of such factors to allow the reader to share my sense of optimism about the future of the Mexican housing industry.
Taxes operate in a relatively similar way in all countries: principally taxes on income, taxes on sales and payroll taxes levied on employers. But the rules in Mexico are very special, in particular, as far as how to compute a taxable base.
Furthermore, real estate transactions are subject to special tax provisions.
This is a summary of some of the important tax issues you should ask about to your tax advisor, to ascertain that you are in compliance, and that you are taking advantage from incentives.
Level of exposure to Mexican taxation.
Depending upon facts and circumstances, you may or may not be exposed to Mexican taxation on Mexican sourced income.
There is a set of specific rules related to having a “tax presence”: 1) doing business from you home country (tax may or not may apply depending upon the nature of the income), or 2) doing business physically in Mexico through a so-called permanent establishment (PE) in the country. A PE is considered, any business where partial or totally business activities are developed or where independent personal services are offered. 3) Owning and developing a property for commercial purposes through a Mexican bank trust as an individual would constitute a Mexican tax presence. Finally, owning a Mexican subsidiary or formalizing a branch.
Significant taxes are levied at a federal level. No state or city income taxes are imposed. The only relevant tax is the real estate transfer tax that is levied by states and that hovers around 2% of the higher of the transaction value, the appraised value or the value registered for property tax purposes. Property taxes vary significantly from location to location but are generally established on a per thousand basis (point for each one thousand pesos, rather than a per cent basis).
Projections of impact of business flat tax in the project. This is an alternative minimum tax at the rate of 16.5% in 2008 (17% 2009 and 17.5% from 2010 on) on a special taxable base computed on a cash basis. It coexists with the 28% income tax which follows the accrual basis in general.
Value- Added Tax (VAT), sales or use tax. Key topics are: 1) to determine whether your product is taxable for VAT purposes, i.e. time shares – taxable, sale of fractional – may or may not taxable, sale of homes , generally not taxable . 2)Whether the payments that you make to your vendors are subject to VAT, you would have to pay such VAT to the vendors and 3) whether VAT paid to vendors is creditable against the VAT that you collect from you customers. A condition to claim a VAT credit is that you sales and/or rental activities are taxable for VAT purposes. Otherwise the VAT becomes part of the cost of goods sold.
Profit repatriation techniques, for you and for your financial and development partners, there may be Mexican withholding taxes on (interest, development fees, etc., generally no withholding taxes on commissions, VAT consequences on payments abroad.
Recognition of income and deductions. For income tax purposes, there are a number of provisions to recognize income and to claim deductions, for example, matching of deposits and advances with estimated future deductions.
In Mexico the form prevails over the substance in many instances, accordingly, it is important to comply with special, documentation and information, requirements to secure deductions for tax purposes.
Tax obligations of sub-contractors and vendors, construction companies, real estate brokers, mortgage brokers, from Mexico and from abroad. Generally the developer and landlord are not liable for the taxes of their sub-contractors and vendors, but they may have withholding tax obligations or even may be eventually held jointly liable for certain third party tax obligations, such as social security taxes.
Tax incentives. There are a number of tax incentives and administrative conveniences for developers in the income tax and business flat tax laws.
Taxes in Mexico. Under domestic law, if you move to Mexico you become a Mexican tax resident and you are subject to pay income tax in Mexico on your worldwide income , however, Mexico has a wide network of treaties to avoid double taxation, including the U.S. and Canada, which provide tax relief provisions.
Selling property in Mexico. If you report your taxes as a tax resident of the country where you live other than Mexico, when you sell property in Mexico you are subject to tax in Mexico although, generally, that tax may be creditable in your home country.
Renting Mexican property. If you receive rental income from a Mexican property directly from the tenant or through a rental pool, you are subject to many taxes in Mexico, principally income tax at the rate of 28% and VAT at either 10% or 15%. Local lodging taxes may also apply.
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This summary is not intended to be all inclusive, but simply tries to illustrate some peculiarities of the Mexican tax system as far as real estate operations is concerned. Speak to your tax and legal advisor and do not forget that there are also tax consequences in your home country that should be reviewed in line with the Mexican tax research and planning.
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