By: Blake Harrington, REmexico Real Estate
With the advent of the North American Free Trade Agreement (NAFTA), the Mexican government recognized that it was crucial to make foreign investment in Mexico safer and easier for non-Mexican citizens. Because the Mexican Constitution prohibits foreigners from purchasing or owning real estate within 60 miles of the U.S. international border, or within 30 miles of the Mexican coast, an innovative and secure method of holding title was created. This method allows foreign ownership through a Mexican property trust called a Fideicomiso. This is a trust agreement, much like an estate trust in the U.S., which gives the Purchaser all of the rights of ownership.
In order to obtain the rights of ownership through a Fideicomiso, the Department of Foreign Affairs in Mexico City issues a permit to the Mexican bank of the Purchaser’s choice, allowing the bank to act as Purchaser of the property. Essentially, the bank acts as the “Trustee” for the trust and the Purchaser is the “Beneficiary” of the trust. The trust is not an asset of the bank; the banks simply act as the Trustee to hold the trust.
Much like living wills or estate trusts in the U.S., with a Fideicomiso the Mexican bank, or Trustee, takes instruction only from the Beneficiary of the trust (the Purchaser). The Beneficiary has the right to use, occupy, lease and possess the property, including the right to build on it or otherwise improve it. The Beneficiary may also sell the property by instructing the Trustee to trans fer the rights to another qualified Purchaser, or bequeath the property to an Inheritor. The initial term of the trust is 50 years, however the trust can be renewed for additional periods of 50 years indenitely, providing for long-term control of the asset through the Fideicomiso.
The Purchaser holds the same rights as a property owner in the U.S. or Canada, including the right to enjoy, sell, rent, improve the property, etc.
This is not to be confused with a land lease. The property purchased is placed in a trust with the Purchaser named as the Beneficiary of the trust — the Purchaser is not a lessee. If the property purchased is already held in a trust, the Purchaser has the option of assuming that trust, or having the property vested in a new trust.
Establishing a Trust
A Notario Publico in Mexico is much different than a Notary Public in the U.S. In Mexico, Notaries are specialized attorneys who act on behalf of the state and federal government in relation to any transaction; they are comparable to a U.S. Clerk of Courts. On average, you can obtain your trust within 60-90 days. In some cases title has been transferred in as little as two to three weeks.
The Purchaser should only release funds when he or she receives clear title. By utilizing a U.S. or Mexican third party escrow service like First American Title Company, Stewart Title Guaranty, or one of several escrow service providers in Mexico, your money is held in an individually numbered escrow account until your trust is complete and the property rights have been transferred to you, the Purchaser.
When you purchase real estate in Mex- ico, it is recommended you consider Title Insurance for your property pur- chase. We insure our cars, homes and our health — it is just as important to insure one of your largest investments: your property. Title Insurance is avail- able for properties in Mexico purchased by U.S. and Mexican citizens through Stewart Title.
In the trust document the Pur- chaser must name the Beneficiary or foreign owner of the property. The purchaser can be an individual, multiple partners, a foreign corporation, an estate trust, a living will, or another entity. The Trustee of the trust (the Mexican bank) will take direction from whomever you name as the Beneficiary.
You also can name a U.S. corporation as the Beneficiary of the trust. This is perfectly legal. If you sell the shares in the U.S. corporation, you have created a real es- tate transaction in Mexico and all Mexican capital gains taxes apply. I suggest to consult this with a tax professional before purchasing or selling Real Estate in Mexico.
You can own a property in a Mexican corporation and take ti- tle fee simple only if the property is for development or investment purposes and you cannot own property through Mexican corporation to bypass the trust process.
It is against the law for a foreigner to own property in a Mexican corporation for residential purposes. This refers to Article 190 of the Mexican Revenue Code and is also declared in the International Tax Treaty between the U.S. and Mexico. If this is done, and you do not pay the Mexican taxes, you will have created a tax burden over the property for the new owner.
Owning in Mexico may sound complicated, but if you have a Cabo Real Estate professional to guide you through the process, you will be living your dream before you even know it.