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Friday September 22 2017
Purchasing your dream home in Mexico Part II
Author:

Linda Neil
linda@lindaneil.com


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Considerations if financing your property:

Until recently, most homes and condominiums were for sale for all cash or financed by the seller. With the advent of NAFTA however, several mortgage companies have entered the marketplace and offer long-term financing for qualified buyers. If you are considering financing your purchase, and are buying in a location where financing is offered, it makes sense to investigate the terms and plans available, select the company of your choice and make lender approval a condition for the purchase.

If the seller will be financing your purchase, request that title be transferred to you and a pledge guarantee contract executed guaranteeing payment. Traditionally, sellers have preferred to hold title to the rights in their name and transfer title to the rights only upon receipt of payment in full from the buyer. Meanwhile, however, the seller may die, may disappear, may go bankrupt... a risky situation for the buyer.

The prudent buyer will insist upon a transfer of title and registration of a mortgage or pledge in which he gives his rights in the property as security for payment of the remaining purchase price. In the event of default by the buyer, the seller must conduct a proceeding similar to a judicial foreclosure in the United States and Canada. It is troublesome, as is any foreclosure in any country in the world but not notably more problematical.

The registered title and recorded pledge or mortgage provide the buyer a greater comfort level in his investment. The lender also enjoys protection in having his loan recorded and will have an established legal proceeding to follow in the event of default by the buyer.

Closing costs… or ho to avoid unpleasant surprises.

Mexican law says that taxes must be paid on the higher of the following:

purchase price OR appraised value. Since many appraisals are lower than the actual selling price your taxes will be considerably lower if the appraisal value is declared. Payment on this basis has taken place for many years in many parts of the country. It is, however, illegal. Should you choose to pay your costs based upon this basis, please be aware that:

1. it is violation of the law and 2. your tax base will be low for declaration of value in the property when you sell it. Furthermore, if you are financing your property through an institutional lender, full value must be declared.


Following is an example of some of the steps involved in obtaining a registered title. The costs for same will vary with the property and a written estimate should always be obtained prior to initiating the process.

Official Appraisal: The appraisal must be made by an appraiser who is usually an architect and who is recognized as a Perito Valuador, Official Appraiser, by the property tax authorities in the municipality where the property is located. This is required prior to completing any transfer of title. If an institutional lender is involved, a commercial appraisal may also be required.

Foreign Relations Permits: If the property you are purchasing is already in a trust (fideicomiso) you may either: request assignment of the rights to you, or may request a new trust for fifty years. If a new trust, a permit from the Secretary of Foreign Relations is required. Whether a new trust or an assignment of rights, the deed in the new buyer’s name must be registered in the National Foreign Investment Registry.

When considering a new trust or an assignment of rights, the factors to be considered are: 1. Remaining term of the existing trust - when will it need to be renewed?; and 2.-What are the annual bank fees under the existing trust?

If the permit has an unexpired term of less than fifteen or twenty years and/or the annual bank administration fees are more than $500.00 U.S. dlls., it probably makes sense to obtain the permit for a new fifty year trust with a bank offering more attractive fees.

Notary Fees: The Mexican Notary Public is an attorney who has practiced his profession for at least five years and has been appointed by the governor of the state in which he is practicing. His duties and obligations include; drafting of the deed, calculation of seller’s capital gains taxes and buyer’s acquisition taxes and to "give faith" to the validity of signatures. The persons signing before him must prove they are who they say they are.

Because the responsibility and potential liability for the actions of the Mexican Notary Public are considerably higher than those of Notaries Public in the U.S. and Canada, the notary’s fees will also be substantially higher than those charged on the other side of the border.

These fees are based upon a rate schedule reviewed and approved annually by the College of Notaries Public and are tied to the amount declared in the property transfer.

IVA - The Impuesto Sobre Valor Agregado (I.V.A.) is a value added tax which is charged on all services. It is 11% of the value of services provided on the Baja Peninsula and 16% for services provided on mainland Mexico. Many trustee banks are headquartered on mainland Mexico, thus the I.V.A. charged on their services will be 16%. IVA taxes must be paid on services provided by the Notary, the appraiser and any other professionals whose services you use

Bank Aministration Fees: If title to your property is in a bank trust there will be annual fees for the administration of same. Over the past few years there has been a substantial decrease in annual fees and it makes sense to shop around for the most favorable rate for the property being purchased if a new trust is contemplated. If an assignment, new rates may possibly also be negotiated. Traditionally, trustee banks have not sent annual statements.

It is important to request a statement from your trustee bank at least ninety days prior to the anniversary of the trust and pay on time to avoid penalties, or to contract with a company providing this payment service.

Title Search and Insurance: A title search is always a worthwhile investment. An investigation will generally indicate the registered owner, the chain of title, and will indicate liens, if any, against the property at the time of the investigation.

Title insurance, issued when the new deed is registered, guarantees the marketability of the property and is a requirement by many institutional lenders. There are currently several US title insurers offering policies on Mexican properties. In the event there is a problem with title, the insurer is obligated to defend the owner’s rights in the property and/or indemnify the owner against financial loss.

Investment in a title policy puts the financial risk on the insurer, not the buyer who may not be able to defend the property as well as a major insurance company.

Property Taxes: are a municipal tax and income benefits the municipality. Typical rates for residential dwellings is 6.5 (pesos) per 1,000 and 13 per 1,000 for properties destined as rental units. Vacant lots are rated at 26 per 1,000 with an increase of 2.6 per annum for each year there is no construction declared on the lot. Maximum amount is 52 per 1,000.

Valuations for property tax purposes are generally made every two to three years or at the time of sale of a property. Property taxes must be brought current prior to transfer of the title.

Acquisition Tax: The acquisition tax, or transfer tax, is generally paid by the buyer. It is currently 2% of the declared value of the property in most parts of the country.

Capital Gain Taxes: A foreigner who sells property in Mexico is liable under special rules, much like the United States, for the payment of the I.S.I.R. (Impuesto Sobre la Renta) which is the Mexican equivalent of the Capital Gains tax. Liability is either 20% of the declared value of the transaction or 28% of the net value, taking into consideration the seller’s tax basis, the length of time held, the improvements made, commissions paid and other allowable expenses.

The formula is complicated and the tax should be figured both ways and confirmed by the Notary Public who will be having the documents recorded and making the tax payments. This is a seller tax and title cannot transfer to the buyer under this tax has been paid.

Closing Agent Fees: Attorneys and Notaries Public often oversee parts of the previously described required steps to a transfer. The buyer, however, usually has to do certain of his own legwork and can certainly do so if he has a good command of the Spanish language.

Unless the buyer has a lot of time to spend on the activity, it may make sense to hire a Closing Agent, a company whose sole purpose is to supervise and coordinate the permits, tax payments and other myriad of details so necessary to obtain full legal right to the property being purchased.

Fees for these services will vary with the value of the property and the complexity of the situation. It is important to always request a written estimate of all the expenses prior to beginning the transfer!

 

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