Investing in Mexican Real Estate

The price of Mexican real estate may be enticing and the country’s scenery may be breathtaking, but too often foreign investors make serious mistakes in the process of acquiring the property – avoidable mistakes that cost them later. Whether you already own real estate in Mexico or you’re simply considering the possibility, here are some facts it will help you to know about investing in this country.

Mexico’s Federal Constitution of 1917 imposed new restrictions and laws on foreign ownership of Mexican lands. However, since the Agrarian Law was instituted in 1992, certain governmental restrictions have been relaxed, and today, with more amendments added since 1994, Americans are allowed to own land both outside of and within what is called the “Restricted Zone,” with certain caveats. The Restricted Zone is essentially property within 60 miles of any national border (essentially to prevent installation of foreign military bases on national soil), and within 30 miles of any Mexican coastline. As a result today, there are more than 50 million acres that will go through the process of either being leased or sold in the next several years.

If a U.S. citizen plans to purchase real property outside the Restricted Zone, the U.S. purchaser can hold this real property outright in his or her own name or through a Mexican entity – for better asset protection. However, if the U.S. purchaser wishes to purchase within the Restricted Zone, then the purchase comes with federal regulations attached. These restrictions are regulated by the Mexican Foreign Investment Law and provide the manner in which the coveted coastal regions can be held.

Here’s how they work:

To purchase and own real estate in the Mexican Restricted Zones, the foreign purchaser must hold the land through a “Fideicomiso,” a Mexican trust modeled similarly to the ones in Monaco. Essentially the transaction occurs in the following manner: the seller contributes the property to the Fideicomiso, a trust for the benefit of the purchaser that must have a Mexican trustee, usually a Mexican bank, chosen by the purchaser. The bank trustee has to obtain a special permit for the sale and if foreign ownership is involved, the bank trustee must pay a registration fee to the Ministry of Foreign Investment. Both of these fees are collected by a Mexican notary public. The bank trustee actually purchases the real property from the seller and the U.S. citizen is then the beneficiary of the trust. However, it is also legal to have a U.S. entity (other than a private citizen) be the beneficiary of the Fideicomiso, which may be a better structure in certain circumstances.

The trustee then takes its instructions from the U.S. beneficiary, who has the right to use the property with the right to develop. The beneficiary may also instruct the trustee to sell the rights or transfer the interest to another party, for example a child of the beneficiary. The initial term of the Fideicomiso is 50 years and can be renewed for an additional 50-year period, with an indefinite number of renewals, as it stands now.

On average, if working through reputable channels, a purchaser can secure his or her trust within 60 days. As noted above, in Mexico, as in many other countries, real estate transactions are required to be executed or ratified by a notary public. A notary public in Mexico is in many respects an administrative office, and within that office an attorney who has passed several examinations on Mexican law must ratify the sale or the property remains the legal property of the seller.

Mexican real estate development is growing at a dramatic pace. In an effort to service its debt, in 1982 Mexico enacted laws to stimulate its economy. Under new regulations foreign investors can now own up to 100% of a Mexican company versus the former law, which limited foreign ownership of a Mexican company to 49%. Many of these foreign-owned companies are engaging in hotel and real estate development projects, including planned luxury communities in the coastal regions of Mexico. However, Mexican companies are currently not allowed to hold property in Mexico for residential purposes.

Asset protection is another important step in the planning process as taxes and other traps can create a problem down the road if not properly planned in advance. We recommend that before making any purchase in a foreign country that you check with your tax advisor or tax attorney to avoid getting taxed twice in terms of income (in both the foreign country and in the U.S.), to avoid potentially costly capital gains tax problems later, and so forth.