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| Real Estate Articles in Puerto Vallarta |
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The following information offers a simple and concise summary about owning real estate in Mexico. It is supplied courtesy of
MLS Vallarta.
Alternatives
It is a common misconception that foreigners cannot own real estate in
Mexico, but the reality is that they can. Outside the Restricted Zone,
defined below, a foreigner or foreign corporation can acquire any type
of real estate, holding the property as a direct owner complying with
Mexican law.
However, there is the Restricted Zone. The Mexican Constitution
regulates ownership of the land and establishes that “… in a zone of
100 kilometers along the border or 50 kilometers along the coast, a
foreigner cannot acquire the direct ownership of the land”. These areas
are known as the “Restricted or Prohibited Zones”.
Nevertheless, the latest Mexican Foreign Investment Law, enacted
December 28, 1993, provides a solution in the form of a Fideicomiso.
Within the Restricted Zone, a foreigner or foreign corporation can
obtain all the rights of ownership with a bank trust, known as a
Fideicomiso.
Any foreigner or Mexican National can establish a Fideicomiso (the
equivalent of an American beneficial trust) through a Mexican bank to
purchase real estate anywhere in Mexico, including the Restricted Zone.
For practical reasons, even in unrestricted zones, many foreigners, and
Mexican Nationals for that matter, prefer to hold their property under
a Fideicomiso.
To do so, the buyer requests a Mexican bank of his choice to act as a
trustee on his behalf. The bank, as a matter of normal course, obtains
the permit from the Ministry of Foreign Affairs to acquire the chosen
property in trust.
The Fideicomiso can be established for a maximum term of 50 years and
can be automatically renewed for another 50-year period. During these
periods you have the right to transfer the title to any other party,
including a member of your family.
The bank becomes the legal owner of the property for the exclusive use
of the buyer/beneficiary, who has all the benefits of a direct owner,
including the possibility of leasing or transferring his rights to the
property to a third party or pre-appointed heir.
The trustee is responsible to the buyer/beneficiary to ensure precise
fulfillment of the trust, according to Mexican law, assuming full
technical, legal and administrative supervision in order to protect the
interests of the buyer/beneficiary. Fideicomisos are not held by the
trustee as an asset of the bank.
Another alternative is to purchase non-residential property through a
Mexican corporation, which under certain conditions can be 100%
foreign-owned, with a provision in its by-laws that the foreigners
accept being subject to Mexican laws and agree not to invoke the laws
of their own country. Also, they agree that the real estate acquired be
registered with the Foreign Affairs Ministry and be used for
non-residential activities. In other words, under these conditions
foreigners can directly acquire properties destined for tourist,
commercial and industrial use.
The Real Estate Industry
Status
The real estate industry in Mexico is similar in many ways to that of
the United States, which is probably the most advanced in the world. It
is developing quickly, taking advantage of today’s technology; however,
it seems to be paralleling the system as it exists in the U.S.A.
The only national professional real estate organization in Mexico is
the “Associación Mexicana de Profesionales Inmobiliarios” (Mexican
Association of Real Estate Professionals) or “A.M.P.I.” with 24
chapters in 38 cities. This organization is somewhat similar to the
National Association of Realtors (NAR) in the United States.
Licensing
At this time, there are no government license laws regulating real
estate brokerage and sales in Mexico. Anybody can, in effect, offer
properties for sale. Therefore, caution should be taken to select an
established and reputable real estate company. A potential buyer may
want to check with the local Chamber of Commerce associations or a
prominent law firm.
Financing
Historically, due to lack of capital markets and high Mexican interest
rates, most transactions were made in cash. In 1993 and 1994, the
Mexican economy picked up to such an extent that annual inflation went
down to one digit and interest rates were more or less accessible.
Banks introduced attractive mortgage programs and, consequently, sales
proliferated throughout Mexico. Due to the devaluation in December
1994, the situation has reverted and the few banks that offer mortgages
do so at such high variable interest rates that very few buyers are in
a position to take advantage of them.
However, this is changing. Recently Scotiabank Inverlat introduced
long-term mortgages at rates between 15-17%. These mortgages, however,
are only available to foreigners with FM-2 immigration status.
Multiple Listing Service
A couple of electronic multiple listing services (MLS) are now operating in Mexico.
Producciones Viva, the company that publishes the Real Estate Guide,
has been offering MLS service to Vallarta since 1989, available in a
print catalog and online at mlsvallarta.com.)
Escrow, Title Insurance and Home Insurance
It is the Public Notary who, in effect, acts as a “Holding Agent” for
the involved parties, so there are few escrow companies in Mexico.
At the present time there is no general use of title insurance in
Mexico, although some American companies are providing coverage in some
resort areas of the country. On the other hand, insurance companies do
provide full home coverage throughout Mexico.
The most commonly used title insurance company in Vallarta is Stewart Title.
Purchase-Sale
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 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 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 of 10-30% (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 Public Notary, the balance is paid and the property
is delivered. This should not take more than 45 days. It is recommended
that an escrow account be used for all real estate transactions.
The Public Notary
A Public Notary 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 ensuring 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 Public Notary, who also is responsible to the
government for the collection of all taxes involved.
In connection with real estate transactions, the Public Notary, upon
request, receives the following official documents, which, by law, are
required for any transfer:
- A non-lien 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 of acquisition
tax and all other closing costs, including the Notary’s fees and
expenses, while 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
to allow each of the Mexican states to determine its own tax. The range
now may be from 1-4% of the tax appraisal value, which is generally
less than the sales value.
The rest of the closing costs, which exclude the transfer cost
mentioned above, vary from 3-5% or more of the appraised tax value,
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 designated by the property assessment authorities.
Cost of the Fideicomiso
Based on the present tariff, the bank charges the person desiring the
Fideicomiso an initial fee (approx. $500.00 USD) for drawing up the
agreement and establishing the trust, plus a percentage based on 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 6-8% commission based on
the actual sale price of the property. However, in resort areas broker
rates are usually higher because of increased broker expenses.
Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the same
way it is determined in the United States. Here, the gain from the sale
of property is treated as normal income at a tax rate of up to 35%. 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 by the seller.
The
Notary will retain the calculated gain after deductions, forwarding it
to the Mexican tax authorities. The seller will then deduct this amount
against his annual tax return, which becomes an adjustable tax credit
in the U.S.A.
On the other hand, there is no capital gains tax in
Mexico if there is conclusive proof the seller has used the property as
his primary residence. |
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