Real Estate Properties (Legal information)

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PURCHASING AND SELLING IN MÉXICO

PROCESS

Most real estate transactions are "opened" after a written purchase offer is accepted by the seller and when a purchase-sale agreement (promissory contract) is signed by both parties. In most cases, a deposit is required by the broker in order to transmit the offer to the seller. If the transaction is being conducted directly with the seller, it is highly recommended that a real estate broker or a lawyer be consulted before signing any papers or handing over any money.

In some areas it is common practice to deliver to the seller, as an advance payment, the equivalent to a 20-50% (including the initial deposit) of the total price upon signing the purchase-sale agreement which should contain a penalty clause applicable in case there is a breach of contract by any of the parties.

Normally, when signing the escritura or official deed, which needs to be certified by a Notario Público or notary public, the balance is paid and the property is delivered. This should not take more than 45 days. In certain resort areas the custon of using "escrow's" is being implemented.

NOTARIO PUBLIC OR NOTARY PUBLIC

The Notario Publico is a government appointed lawyer who processes and certifies all real estate transactions, including the drawing and review of all real estate closing documents, thus insuring their proper transfer.

Furthermore, all powers of attorney, the formation of corporations, wills, official witnessing, etc, are handled and duly registered through the office of the Notario Publico, who is also responsible to the government for the collection of all taxes involved.

In connection to real estate transactions, the Notario Publico, upon request, receives the following official documents, which, by law, are required for any transfer:

• A nonlien certificate from the Public Property Registry based on a complete title search.
• A statement from the Treasury or Municipality regarding property assessments, water bills, and other pertinent taxes that might be due.
• An appraisal of the property for tax purposes.

CLOSING COSTS

It is common practice that the buyer pays the transfer or acquisition tax as well as all other closing costs including the Notario fees and expenses, and the seller, pays his capital gains tax and the broker's commission.

Since January 1, 1996, the federal law regarding the real estate transfer tax, which was 2% for all the republic of Mexico, was modified in order to allow each of the Mexican States to determine its own tax. The range may be from 1 - 4 %, of the tax appraisal value, generally less than the sales value.

The rest of the closing costs, which exclude the transfer cost mentioned above, may vary from 3-5% of the appraised tax value or more, depending on the particular State. These percentages are applied to the highest value of the following:

• The amount for which the property is sold.
• The value of the official tax appraisal.
• The value designate bye the property assessment authorities.

COST OF THE FIDEICOMISO

Based on a present tariff, the bank charges the person desiring the Fideicomiso an initial fee (approx.. $ 500.00 US ) for the drawing up of the agreement and establishment of the trust, plus a percentage according to the value of the property. In addition the bank charges an annual fee (depending on the value of the property) to cover its services as a trustee.

REAL ESTATE BROKER´S COMMISSION

Most real estate companies in Mexico charge a 5-7% commission based on the actual sale price of the property. However, different area broker rates reflecting higher broker expenses may be found, such as in the resort areas.

CAPITAL GAINS TAX

In Mexico, the concept of capital gains tax does not apply in the sense in which it is determined in the United States. Here, the gain from the sale of the property is considered as normal income at a tax rate of up to 35%. In order to determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:

• The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes.
• Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above.
• Commissions paid to real estate brokers by the seller.
• The closing costs, including all expenses, taxes and fees paid bye the seller.
• The Notario will retain the calculated gain after deductions forwarding it to the Mexican tax authorities.
  
  The seller will then deduct this amount against his her annual tax return, which becomes an adjustable tax credit in the U.S.
  
  On the other hand, there is no capital gain tax in Mexico if there is conslusive proof the seller has had the property as his primary residence for the previous 2 years.

LEASING

Historically, in Mexico, the law favored the tenant, making it harder for the landlord to increase the rents and/or evict the tenant upon the termination of the contract. Consequently, contracts were designed to protect the landlord as much as possible, but in 1993, the law regarding leases in Mexico City (Federal District) was modified in order to expedite the lawsuits against the tenants, with the resulting benefits for all.

As each state in Mexico has different laws regarding leases, it is advisable that a lawyer or a reputable real estate broker be consulted before signing any agreement.

Some years ago, the housing leasing market in areas such as Mexico City, had a very high demand with minimum supply. Therefore, rents, in general, were relatively high.

Presently, the situation has reverted because property owners, unwilling to sell due to the economic situation area choosing to lease as an alternative to selling, as a result, markets reflect a tendency for lower rents.

TERMS

The normal and basic terms of a lease agreement are:

• One year contracts are common, particularly in housing. Commercial and Industrial properties are normally leased for longer terms with predetermined formulas to adjust the rent annually.
• In some cases a co-signer or a bond is necessary in most cases.
• A deposit equivalent to 1-2 months rent is normally required.
• Generally, refurbishing is responsibility of the tenant.
• All utilities as well as condo maintenance fees, telephone, cable vision and other optional services such as special area security, are usually paid by the tenant.

The Mexican Corporation is essentially the same as a U.S. corporation. Your attorney will register the corporation in the capitol of Quintana Roo, Chetumal and you will own 100% of the stock of the corporation. Under this structure, the property should be utilized for commercial reasons.  Generally speaking, commercial use can be for any revenue generating activity, including real estate rental, restaurants, bars, etc. You should consult with your attorney to determine which structure best fits your needs.

Costs
The cost of establishing a trust is somewhat less than establishing a Mexican Corporation. However, the benefit of having a corporation is that the corporation may own as many properties as it wishes. A trust, on the other hand, is set up to hold one piece of property. Therefore, under the trust structure you will have to create new trusts every time you acquire a new piece of property. This can become rather costly.

Generally speaking, the cost for establishing a trust is approximately $US 2,500 plus you will incur approximately 5-7% in closing costs. The cost for establishing a Mexican Corporation and transferring title is approximately $3,500 to $4,000.

Some of the costs you will see if you establish a corporation are as follows:

GASTOS DE LA COMPRAVENTA (Purchase Costs):
Avaluo (Appraisal):$100
Certificado de libertad de gravamen (Certificate of Freedom from Liens):$45
Certificado de no adeudo impuesto predial (Certificate of no pre-existing tax liabilities):$25
Impuesto de adquisicion de inmuebles (Acquisition Tax of Real Estate):$100
Impuesto de inscripcion: Registro Publico (Registration Tax: @ Public Registry):$75
Patente (Patent/Owner’s License):$60
Cedula (Forms):$35
Derecho o aviso de adquisicion de inmuebles por extranjero (Direction or advice for acquiring properties for foreigners):$100
Varios, testimonio, impuesto Notario, etc. (Various: testimony, real estate notary, etc.:$150
TOTAL GASTOS DE LA COMPRAVENTA (Total Purchase Costs) :$690

GASTOS DE LA CORPORACION (Corporation Costs):
Permiso de relaciones exteriores (Permission from foreign relations):$130
Utilizacion del permiso de relaciones (Utilization of Relations):$55
Permiso por ser la corporacion de extranjeros (Permission for Corp. to be foreign):$350
Hacienda (Property):$60
Patente (Patent/Owner’s License):$35
Inscripicon sociedad (Society Inscription):$160
Varios, testimonio, impuesto notario, etc. (Various):$150
TOTAL GASTOS DE LA CORPORACTION:$940

PODERES (Power of Attorney):$100
HONORARIOS CORPORACION Y COMPRAVENTA (Honoraries of the Corporation & Business) :$1,750

GRAND TOTAL: $3,480 US

Notary Public
A Notary Public in Mexico is quite a bit different than a notary public in the United States. In Mexico, the title of Notary Public is difficult to obtain.  The Notary Public is actually a government appointed lawyer who acts to make sure all the documentation, title transfers, etc. have been properly executed. They actually provide you, the buyer, with an added level of comfort that the transaction is being consumated properly.

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