U.S. taxes: Buying and selling real estate in Mexico
If you’re confused about what to pay and how to pay it when it comes to your Mexico real estate property and U.S. taxes, you’re not alone. It’s a common frustration among Mexican property owners, no matter where they’re from.
Real estate in Mexico is booming. As more Americans buy second homes in Mexico, places like Cancun and Playa del Carmen continue to offer affordable real estate for those looking for retirement homes or investment properties.
After the purchase, however, many people are left wondering if they owe the IRS anything. You’ll be happy to know that if you’ve purchased a property in Mexico, rental income properties as well as second home properties do have their tax benefits. Many of these tax benefits are similar to owning a home in the U.S., but with a few exceptions.
Much the same as in the U.S., the tax laws depend on how the property is used. If you’ve purchased a retirement property in Cancun, for example, you can usually deduct the mortgage interest and property taxes.
On the other hand, let’s say you decided to buy a home in the city of Playa del Carmen. If it’s a home you purchased as a Mexican investment property you want to rent out when you’re not using it, you can still deduct the mortgage interest and property taxes. With an investment property, you can also deduct numerous other expenses such as repairs, maintenance fees, travel to maintain the property and your property and liability insurance.
If you’ve purchased your beachfront property in Cancun or Playa del Carmen as a second home, for example, you can deduct 100 percent of the mortgage interest up to a total amount of $1.1 million of combined property. The same rules that apply in the U.S. You can also deduct property taxes on any additional Mexican real estate properties. For more, see Tax Breaks For Second-Home Owners.
Investment rental property
Tax rules can become more complicated if you receive rental income from your Mexico real estate property. Depending on how many days a year the property is rented versus how many days a year it is used personally. While a professional accountant is always a wise choice, here is a guideline to how rental properties and taxes work.
Part time rental
If your property is rented for 14 or less days a year, you do not have to report that income to the IRS, even if you rent it out for $5,000 a night. At this point, the property is still considered a personal residence and allows you to deduct mortgage interest and property taxes under the standard second-home rules. But you cannot deduct rental expenses or losses.
Full time rental
If you rent out your real estate property in Mexico for 15 or more days of the year, but use it fewer than 14 days a year or 10 percent of the days the home was rented, the IRS considers it a rental property. The home is now viewed as a business and you are responsible for reporting all income. You are also able to deduct taxes, interest, advertising, insurance, utilities and property management fees.
Another notable difference between owning a rental property in Mexico and owning a second home in Mexico is that the property is depreciated over a 40-year period rather than the current 27.5 years for domestic residential properties.
Half and half
If you use the property for more than 14 days a year or 10 percent of the total days it was rented, your real estate property is still considered a personal residence and thus, personal residence tax rules apply. It’s important to note that if members of your family use the house – siblings, spouse, children grandchildren, grandparents – that counts as personal stay time unless you collect fees as a rental price.
Selling your Mexican real estate
If you wish to sell your Mexico real estate, the tax laws are similar to selling a house in the U.S., in that it depends on how the property was used. If you lived in the property for two of the last five years, it’s deemed a personal residence and therefore, allows you to deduct up to $250,000 of capital gains or up to $500,000 for married tax payers.
Selling the Property
If you sell your home abroad, the tax treatment is similar to selling a home in the U.S. – it depends on how the property was used. If you lived in the home for at least two of the last five years, it qualifies as your primary residence and you can exclude up to $250,000 of capital gains (or up to $500,000 for married taxpayers) from the sale. This primary-home sale exclusion does not apply if the home was not your primary residence, in which case you will owe the usual capital gains tax.
It’s also worth noting that as a foreign property owner, you may be required to file a number of U.S. tax forms depending on your situation. For example, if you rent out your home abroad and open a bank account to collect rent, you must file an FBAR (Report of Foreign Bank and Financial Accounts) form.
For more information on how to buy and sell Mexico real estate, contact Bjoern directly at email@example.com. He has nearly 20 years of professional U.S. and Mexico real estate experience and is always available to help.