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In 1917, the Constitution in Mexico was drafted and passed into law. In the Constitution, there was a provision that created what is called the Restricted Zone. The Zone is 100 km (62 miles) from the borders and 50 km (or 31 miles) from the coasts. In this Restricted Zone, only Mexicans could own the land. This was done for their own protection, and at the
time, it made sense.
However, in the 70′s they realized that there was a lot more money outside of Mexico than inside. Therefore, in 1970, a bill was passed into law, which created a legal loophole. This bill stated that a trust, called a ‘Fidecomiso,’ could be set up, with the foreigner as the sole and exclusive beneficiary. Since a Mexican bank holds the title and must administer this trust, it satisfies the requirements to purchase land in the Restricted Zone. The beneficiary (foreigner) could control the land (rent it, improve it, sell it, etc.). Because of the 1970 bill, major foreign investment flowed into Mexico and we saw not only Cancun, but also Cozumel, Acapulco, Puerto Vallarta, Ixtapa, etc., take off.
There were, however, limitations to the Trust system. For each property you owned, you needed a separate trust. The cost to set up each trust or Fidecomiso (the Spanish word for Trust) is about 1% to 1.5% of the value of the land. In addition, there is an annual “administration” fee to the bank of $600-700.
In 1994 the newest bill was passed, pertaining to the Restricted Zone. In this bill, the government said that a Mexican Corporation, wholly owned by foreigners, could legally own property. As shareholders and owners of the corporation, you possess full rights to the deed and property.
The additional benefit to the corporation system is that there are no annual fees to the bank and your corporation can own more than one property (you do not need to form one corporation for each property). When you go to sell your property you can either sell the corporation or just sell a property held by the corporation. In addition, after you buy land via the corporation system, you are permitted to file a dormancy election, which means your company is “asleep” until you activate it. This has the benefit of reducing the accountant filings that are required for active corporations.
The accountant costs will also, accordingly, be less.
Is it better to purchase property through a corporation or a trust (fidecomiso)?
If you plan on purchasing one single property for residential purposes, the trust is a better way to go. It’s simpler to administer and doesn’t require any accountant corporate filings. There’s an annual administration fee that must be paid to the bank to maintain the trust. With a trust, technically the bank owns the property and you are the lessee of the property. The trust has a term of 50 years and is guaranteed to be renewable at the end of that term. In addition, you can only have one property held per trust (unless all properties are purchased and put into the trust at the same time).
If you plan on buying and selling multiple properties and/or starting a business on your property, then the corporation is the better option. You can sell individual properties held by the corporation, sell shares in the corporation, or sell the entire corporation. There are no annual fees with a corporation, but there are accountant fees that will cost you as much or more, unless you place the corporation in ‘dormancy.’
Do I actually own the land in a corporation?
You own it in the name of your corporation and you own 100% of the corporation. You do NOT need a Mexican as a shareholder.
I’ve been told that the ability to use a Mexican Corporation to purchase land is limited to commercial endeavor, not residential use. Please explain this to me.
The term ‘residential use’ means that you have an existing structure on it and you are residing in it. Vacant or ‘raw’ land is NOT considered by the Mexican government to be ‘residential,’ even though the land may be zoned to be residential.
I have only myself, and no friends. How do I form a corporation if I need two people?
You can have your attorney hold 1% of the company and he/she agrees not to participate in the votes or profit of the corporation.
Can the government take my land after I close?
No. Mexico is a land of laws and there are real estate and property laws.
When you (meaning your corporation) are the registered owner of the land, then it is yours and not the government’s. No foreigner would ever buy property in Mexico if there was this kind of risk. Resort areas like Cancun would not enjoy the annual 8 billion dollars in foreign investment each year if people thought the government cold take their property from them.
Can squatters steal my land?
You may have heard that squatters can steal your land. In Mexico, in order to be granted title to land you do not own but are living on or ‘squatting on,’ you must prove to the government that you have been residing on the property for 5 years in a notorious manner, which means you must make it known to everyone that you reside there. (Paying a tax bill, receiving mail, having utility services placed in your name at the address of the property or something). You cannot simply hide out on the land for 5 years and then petition the government for the title.
If you allow squatters the use of your property, then the squatter can, after 5 years, petition the government for your deed. However, the government must make every attempt to notify you of this, either by mail, by phone or by placing an ad in the most circulated local newspaper at the time. If they do contact you, they will ask you if you are willing to consent to having your deed transferred to the squatter.
If they do not hear from you then the government will permit the squatter to remain oh your land for up to another 5 years. At which time (now we are at 10 years of notorious use of your property), the squatter can petition again for the deed to your land and again, the government must make every attempt to contact you. If they fail again, or rather if you fail again (to respond), then the government will authorize the transfer of your land and deed to the squatter.
One way to discourage people from squatting is to build a fence around your property. This may not completely stop the problem, but it demonstrates very strongly that it is private property and sends a strong signal that it is off limits.
What are Ejido Lands?
Ejido lands are nothing more than a land ‘use’ grant from the government to a cooperative of families for the purpose of using and living off of the land. The government still owns the land but has granted the use of it to the families of the Ejido.
Ejido lands are for Mexicans. It is granted use by the government to create affordable living for Mexicans, similar to government run housing in the US. As a foreigner in Mexico, you have NO RIGHTS to use or purchase Ejido land.
You should not purchase any property designated as Ejido land. Ejido members do not own anything. They simply have rights to the ‘use’ of the land. The land is owned by the government.
What happened in Baja California?
The situation in Baja California is that the property in question was owned by the government and was at the time in the Ejido system. The Ejido members decided that they would lease the land to foreigners. In addition, for a couple of decades the lessees went on with their lives and built their homes on land they had leased from people whom NEVER EVEN OWNED IT TO BEGIN WITH.
The Ejido members petitioned and dragged it out with false hope that they could obtain titles and told the people who leased the land from them not to worry. This went on for 13 YEARS. The Mexican Government did not ‘take’ any land from the Americans. The Americans never owned it to begin with. The moral of this story is: stay away from Ejido lands.
How do I know the title I am getting is really the land I saw?
By comparing the survey of the land to the legal description on the closing document, your attorney will know that the legal descriptions compare and match up. By comparing the survey to the corner markers on the ground, we can determine that the property and the survey are the same.
Additionally, your attorney will match the legal description on the survey and on the deed to the legal description in the Notario’s books and the legal description in the Land Registration Office and the tax 10 number. It’s really no different from the US.
Closing costs: what is included?
Closing costs include EVERYTHING needed to give you legal ownership of the property. This includes the formation of the Mexican corporation (or trust), registration with the Ministry of Foreign Investment, taxes, Notario fees and legal fees for your attorney.
Who owns the land that I am buying?
The beachfront is owned by private parties. Most property is owned by Mexicans who have inherited it and have owned it for many years. We are now starting to see the resale of properties by North Americans who bought it for speculation several years ago and now want to sell it.
How do I finance the land? Is there financing available?
Financing for vacant land in the Costa Maya is virtually non-existent. I’m not aware of any lending institutions at this time that will finance vacant land here. In some cases, owners may agree to hold a mortgage on the property while you make payments over time.
THE BUYING PROCESS
How is property priced?
Generally, beachfront property is priced by the amount of linear feet of beachfront. In some cases, owners will price their property for sale based on square meters. This generally has the effect of increasing the price of the property. Be careful when purchasing property priced by the square meter.
If I find a property I want to purchase, what is the first step?
The first step as a buyer is to sign a contract of sale (Contrato de Promesa de Compraventa) which specifies all the terms, conditions and price that you are agreeing to. The seller also needs to sign this same contract. This agreement binds both buyer and seller to the specified terms. You should be able to obtain this form from your agent or broker. Insist on it.
What happens after I sign the contract of sale?
You will need the help of an attorney (he/she doesn’t have to be a Notario) to begin the closing process. Typically an attorney will send you an estimate of their services and fees associated with closing on a property. You should get estimates from at least 2 attorneys just to compare prices. An attorney will review the property being sold and certify that there are no liens or encumbrances. It’s not common, however, for attorneys to perform a title search of the property unless you specifically ask for it.
What is a title search and title insurance?
A title search is a process conducted by attorneys to ensure that the property you’re buying has clear title. The chain of title can sometimes be traced back almost 100 years. Over the course of this period, many people may have owned the property. If the property was conveyed without all the required signatures of past owners, you may get stuck with a property that a former owner has a legitimate claim to. I strongly recommend purchasing title insurance when you buy property. It’s well worth the price to know that if there are ever title problems you will be compensated based on the amount of title insurance. Legal fees to perform a title search will cost between $1,000 and $1,500. A title insurance policy will cost $1,000 per $200,000 of coverage.
Will there be a capital gain tax when I sell my property?
Yes. You cannot avoid this. The capital gain tax in Mexico is based on the difference between two stated values. The first value is the one stated in your deed (escritura); this can easily be found and is stated as the “avaluo.” This value has nothing to do with the price you paid when you purchased your property. This “avaluo” is set at the time of purchase and is based on the existing value stated on the cedula catastral (official assessment). The second value is determined at the time of sale. If you’ve held the property for several years, the value has obviously increased, and so has the assessed value, shown on the cedula catastral. Depending on when the latest assessment was performed, the assessor may increase this value at the time of sale. So then, your capital gain will be the difference between the first and second value. The tax rate for this capital gain is 33%.
To use a simple example, let’s say the avaluo stated in your deed is $50,000 (currency stated always in pesos). At the time of sale, the assessed value is now $70,000 pesos. Your capital gain tax would be ($70,000 minus $50,000) x .33 equal to $6,600 pesos.
Tax notices, where are they sent?
Tax notices are not sent out in Mexico. Your attorney or accountant can ask for them each year and advise you of the amount to remit. You can also go to Chetumal, the state capital, or one of the local offices in Majahual to pay your annual property taxes.
How much are annual property taxes?
Annual real estate taxes on the Costa Maya are quite reasonable, and are based on the stated value on the cedula catastral. Typically property taxes will range from 0.15 % to 0.25 % of the stated value. Taxes for most properties in the Costa Maya are between $150 and $250 dollars (U.S.).
When are property taxes due?
They are due annually and can be paid any time during the year. However, if paid in December of the previous year, a discount of up to 25% is granted.