Rental Income


 

 

See the link below for up to date tax information

http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-mexicoguide-2014.pdf

 

 

Mexico has high taxes on rental income, typically at 25%

INDIVIDUAL TAXATION


INCOME TAX

Nonresident individuals earning income from leasing Mexican property are liable to income tax. Married couples are taxed separately.

25% Withholding Tax

Nonresident individuals are liable to tax on their Mexican-sourced income. Gross rental income from the leasing of real estate, property and time-sharing services by a nonresident individual is subject to a 25% withholding tax. No deductions are allowed. The Servicio de Administracion Tributaria (SAT) is responsible for assessment and collection. The Mexican party can make payment to the SAT through internet, or through a bank, within 15 days after the payment is due.

Electing Business Income Option

Nonresident individuals earning income from leasing property can consider their rental income as business income and choose to file an income tax return. Through this option, the taxpayer will be taxed on his net income at progressive rates.

INCOME TAX RATES 2007

INCOME TAX RATES 2007 MARGINAL TAX RATE
Up to 5,953 (US$525) 3%
5,953 – 50,525 (US$4,459) 10% on band over US$525
50,525 – 88,793 (US$7,837) 17% on band over US$4,459
88,793 – 103,218 (US$9,640 88,793 – 103,218 (US$9,640
Over 103,218 (US$9,640+) 28% on all income over US$9,640
Source: Global Property Guide

Taxable income is computed by deducting income-generating expenses, depreciation (capital allowance), and real estate taxes from the gross rent. The taxpayer can choose between two methods for deduction:

  • Deduct actually incurred income-generating expenses, depreciation (capital allowance) and real estate taxes;
  • Deduct 35% of the gross income as standard deduction (covering income-generating expenses and depreciation) and real estate taxes

CAPITAL GAINS TAX

The tax administration may appraise the value of the transferred property and if the appraisal exceeds more than 10% of the amount declared by both parties, the excess amount is subject to 20% tax payable by the non-resident acquirer.

25% Withholding Tax

Generally, capital gains realized by non-residents from transferring real property in Mexico are subject to 25% withholding tax on the gross amount or selling price of the property.

Non-Residents with Appointed Local Representatives

Non-residents who have appointed representatives residing in Mexico may be taxed on their net capital gains at 28%. The taxable gain is computed by deducting the following from the selling price:

  • The property acquisition cost as adjusted (for immovable properties, the adjusted cost may not be less than 10% of the transfer value)
  • Investment costs and improvement costs
  • Taxes, valuation, and notary fees paid by the transferor of the property
  • Commission and brokerage fees paid by the transferor of the property
 

PROPERTY TAXES

 

Property Tax (impuesto predial)

Property tax is levied on the cadastral value (assessed value) of the real estate. The tax rate ranges from 0.275% to 1.350%, depending on the property location as each state has a different tax rate. It is payable to the state government annually.

Assets Tax (Impuesto al activo)

Assets tax is generally a tax on business assets levied at 1.8%. The taxable value is the asset’s net worth (total average annual value of assets less total average annual value of liabilities). Among those who are liable for this tax are resident companies, resident individuals conducting business activities, and nonresident individuals leasing Mexican properties.

Income tax actually paid during the tax year (corporate income tax, individual income tax, or business income tax) may be credited against the assets tax. A refund of the income tax paid is given if the assets tax is equal to or greater than the income tax.

CORPORATE TAXATION

 

INCOME TAX

The tax year (ejercicio fiscal) in Mexico coincides with the calendar year. Under the tax reform for 2005, transitional provisions provide for a gradual reduction of the corporate tax rate, whereby the corporate tax rate for 2007 is 28%.

Computation of taxable income

Taxable income is computed as follows:

Gross Income (ingresos acumulables)

- Authorized Costs and Business Expenses (deducciones autorizadas)


= Net Profits (utilidad fiscal)

- Employee Profit Sharing paid as from 2006 (PTU)

- Carried Forward Losses (perdidas fiscales)


= Taxable Profits (resultado fiscal)

The general rule is that legal entities may deduct expenses which are strictly necessary for the purpose of their business activities and are supported by invoices or tax vouchers and documentary evidence is prepared in accordance with Mexican tax laws.

Rental Income

Effective Tax Rate on Rental Income

Monthly Income US$1,500 US$6,000 US$12,000
Tax Rate 3.7% 16.0% 17.8%
Click here to see a worked example
Source: Disclaimer

For tax purposes, actually incurred income-generating expenses (such as maintenance and repairs, management fees, property taxes, etc.) and depreciation are deductible against gross income.

Capital Gains

Capital gains derived by legal entities are included in the gross income and are subject to the standard corporate rate. Capital losses may normally be set off against taxable profits under general rules.