Difference between a trust and a Mexican corporation to buy property as a foreigner in Mexico.

 

Are you a foreigner and want to invest in Mexico? Find out how with this article.

 

If you want to purchase real estate in Mexico and you are not a Mexican citizen, it is important to ensure that you can legally do so. 

One of the key considerations when purchasing properties in Mexico is how to legally acquire real estate in the 'restricted zone'.

Under Article 27, Section 1 of the Political Constitution of the United States of Mexico, foreigners are not permitted to acquire property on the coastline or within 50 kilometers inland and 100 kilometers from the borders.

This restriction was put in place in 1917 when the risk of invasion was high, and it has not been changed much since then. Despite the restriction seeming outdated and unnecessary now, it still exists because many people and institutions profit from it, especially banks. Efforts have been made to modify the constitution and change this article, but with little success.

As a result, expats who wish to buy property in Mexico, especially in the Yucatan Peninsula, have two options: obtain a Trust from a Mexican bank or set up their own Mexican corporation.These options serve different purposes and have unique requirements.

 

Trust

When foreigners wish to purchase property in Mexico, they often opt for a Trust as their best option.

Although an exact translation is not possible, the Fideicomiso can be described as a "real estate trust" as it is a legal document that permits a Mexican bank to lend their name to manage the property. Technically, the bank owns the property, but the trustee is responsible for its use, administration, maintenance, rental income, mortgage loans, and sale income, and the bank is only responsible for ownership. For an annual fee of approximately $700 USD, the trustee can designate beneficiaries to inherit the trust, and no one can put a lien on the property. 

The main benefit is that if the trustee qualifies for resident status and the property meets the criteria, the trustee can exempt up to 100% of the ISR tax (capital gains) up to a selling price of $3,800,000 MXN.

The primary disadvantage of establishing a Trust is its cost. The bank fees, which encompass the permit, an advanced yearly fee, and expenses, range between $2,000 and $2,500 USD. 

Additionally, these expenses are added to all the closing costs (such as acquisition property tax, rights, certificates, notary and attorney fees, etc.). 

Moreover, it takes around three weeks for the bank to issue the permit, but obtaining the necessary documents and filling out forms usually takes at least two weeks. Therefore, the typical closing time for a Trust is approximately two to three months.

 

Mexican Corporation

In contrast, forming a Mexican corporation. is easier and quicker. Two partners, both of whom may be foreigners, can create a Mexican corporation in two weeks. The cost is no more than $1,500 USD, and the corporation is treated as a Mexican national in terms of property acquisition. Thus, in only one and a half months, the corporation can be formed and the property under its name. You can also purchase a car and nearly anything else with it. 

However, affordability and speed are the only benefits of a corporation.

The disadvantage of a corporation is that it ties you to an accountant for the rest of your life. 

Even if the corporation reports zero income, an accountant will charge a fee. Furthermore, you must obtain resident status to act as a partner on behalf of the corporation. Otherwise, you must use powers of attorney granted to Mexicans, meaning that someone else has control over your money, property, car, and anything else you purchase or do through a corporation. Every purchase made through a corporation must be done via check or wire transfer from the corporation's bank account, making cash impossible to use. 

Finally, the most significant disadvantage is that you cannot avoid capital gains tax when selling the property. However, if you manage the property appropriately and obtain fiscal receipts for all activities performed in the house, you may deduct those expenses from the profits when selling to reduce the tax liability, but it cannot be eliminated entirely.

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If you are looking to start a business or purchase property for non-residential purposes, forming a corporation is the ideal choice. It will not only save you money on income tax but also enable you to establish a legitimate source of income in the country. 

However, if your intention is to buy property in Mexico for personal or residential use that won't generate income, a Trust would be the way to go. Our recommendation is to form a corporation for business purposes and opt for a Trust for personal or residential purposes.