Rental Income Tax Is Required in Mexico
If you rent out a property in Mexico, the nation’s tax law insists that you pay income tax on all monies received. This is true regardless of your nationality and physical location, how long the rental is being used, or where the rent payments are being paid and received. We’ve found that when our clients comply with the tax law, they have greater peace of mind and freedom from dire consequences.
Rental Income Tax Basics
El Servicio de Administración Tributaria (SAT), also known as the Ministry of Finance and Public Credit, manages the public finances for Mexico. SAT implements a 25% rate on the gross income earned from rental properties. This is before the property owner claims any deductions (more on that below).
It’s also important to note that the tax rate applies to property owners across the board, regardless if they spend the full year, part of the year, or none of the year in their rental property.
The 25% rate also applies to rentals of all sizes. A room, suite, condo, private home, villa, or piece of land — they all count according to the Mexican government. What’s more, the length of time the property is rented doesn’t matter. Tenants could rent it for a few days or a few years, and you’ll still owe the tax.
IVA Tax on Furnished Rental Property
If your rental property is furnished, you’ll need to pay the 16% value added tax. This is a sales tax, and it’s officially known as Impuesto al Valor Agregado (IVA). IVA is due on the gross amount of the rent charged for the rental term. Property owners typically fold IVA into the asking rental price, which is paid by the tenant.
How to Pay the Tax
The law requires you to pay the tax within 15 days of receiving the rental payment. You can do this online or at a bank. If you’re out of the country, you can hire a Mexico-based accountant to make the payment in your stead.
Enforcement of Tax Laws
In the past, property owners have been known to evade rental income tax. This was especially true for foreigners who could buy a property, rent it out and receive funds out of the country. However, this is no longer the case.
Government officials are working hard to ensure that all owed taxes are paid. They search property rental websites and social media platforms to track unreported rentals, and they make arrangements with vendors, such as Airbnb, to help them in their efforts. They then come up with a perceived rental income to determine taxation based on the property’s location, occupancy rate and volume of tourism in the area. Sometimes the estimation is higher than the actual rental price!
A Notice to Pay
If you owe income taxes on your rental, you’ll likely receive a notice from the government asking you to register the property as a rental and claim any income received on the property. Depending on your situation, you may be asked to pay the unpaid taxes and assessed penalties.
If you choose to ignore the notice, you could face severe penalties. These include a maximum penalty on all taxes owed, jail time and/or deportation. The trust could also be canceled as tax evasion violates the terms of most bank trusts (Fideicomisos). The Mexican government may even exercise its right to take possession of the property and sell it for any outstanding monies owed.
The Good News
Mexican tax law allows you to take deductions and avoid double taxation on your rental income!
Deductions – Offset taxes by improving and/or repairing your property. (Just be sure to save your receipts!) Below are some eligible deductions.
- management fees
- property taxes
- strata fees
Double Taxation – Thanks to the North American Free Trade Agreement (NAFTA), any rental taxes paid to Mexico can be deducted from your tax return in your home country of Canada or the United States. Keep in mind, though, that these countries share information about investments and income tax, so be thorough and consistent when reporting rental income in both countries.
Is It Still Worth It to Invest in Rental Property?
Absolutely! There’s no question that investing in rental property is a great idea. It offers a steady income — especially in high-demand areas — and gives you a barrier against inflation. It’s also a smart strategy as property investments outperform traditional investments such as stocks, bonds and mutual funds. This may be especially appealing when you consider today’s uncertain stock market!
Get Started Today
If you’re ready to invest in a rental property or rent it out, we recommend that you hire a certified Mexican accountant or lawyer. Look for someone with a solid reputation for helping foreign property owners navigate the Mexican tax system and inform you of your obligations. Perhaps this person can also advise you on ways to lower what you owe and maximize deductions!
And remember that we’re always here to help with key resources and professional recommendations for a worry-free, rental property investment experience!