Buying a Property in Puerto Vallarta

About Buying Real Estate in Puerto Vallarta

The ocean's wonderful sights and smells and the peace of living or vacationing along Mexico's 6,000 miles of coastline is a powerful attraction for foreigners. But before purchasing vacation property or a retirement home on or near the beach, there are a few important legal and technical matters to keep in mind.

Foreigners are welcome to invest in property along the coast, but there are restrictions. The most important restriction is contained in Article 27 of the constitution which states "that foreigners cannot own property within 100 kilometers (60 miles) of the border and 50 kilometers (30 miles) of the coastline." The government, however, provides two ways to get around this restriction:

A Trust (called Fideicomiso) or
A Corporation

How Does the Trust Work?
Three parties are involved in the trust:

The trustor (the owner of the original property)
The trustee (which is the bank)
The beneficiary (the person who will receive the benefits of the trust.)

The Trust, which in Mexico is called a Fideicomiso, does not give direct ownership to the foreign beneficiary. Instead, it establishes the legal basis by which the bank holds legal title to the property in order to act on the foreigners behalf. This trust deed assures the foreign buyer of all rights and privileges of ownership. The Foreign Investment Law, a Constitutional amendment created in 1973 and amended again in 1994, allows the trust to be established for a term of 50 years and is renewable any time during its existence, forever.

The Bank (trustee) holds the trust deed for the person who purchases the property (beneficiary). The property is not part of the bank's assets and cannot be liened or attached for any other obligations. YOU the purchaser are the beneficiary and have all rights of enjoyment of the property including the ability to remodel, lease, mortgage, pass to their heirs or sell the property at any time.

The Mexican government established the trust system as a protection for foreigners interested in owning property in Mexico. By making ownership pass through the trust process, the bank is required to check ownership, insurance, and liens against the property. There would be an automatic review of the transaction, thus ensuring:

Valid Ownership
No outstanding indebtedness of the Property

Bank Trusts may be granted and extended in 50 year periods. If you purchase property, the existing trust deed may be assigned or a new 50 year trust created. Trusts are renewable at any time by simple application. The costs to establish a fideicomiso trust vary from bank to bank. However, the range is approximately $1,000 to $1,500 U.S. dollars for the trust set up and about $300 to $500 U.S. dollars for each year's maintenance of the trust. These fees are paid directly to the bank that has your trust.

Bank trusts are established by a Mexican Notario (Notary), following the receipt of a permit by the Minister of Foreign Affairs. This procedure is routine due to the large number of foreign property owners. The forms are standardized and the entire process is usually completed by the notary as part of the closing procedures.

What does the Bank Do?
It is an important link between the foreigner and the government. The bank accepts full technical, legal and administrative responsibilities and protects the beneficiary's interests. While the bank is the technical owner of the property, they have a statutory responsibility to follow the beneficiary's (YOUR) instructions concerning the property. Therefore, the control of the property is in your hands - not the bank's.

What can the Foreigner Beneficiary Expect from the Trust Agreement?

The beneficiary can occupy the property for the life of the trust.
Title to the property can be transferred to the foreign beneficiary in the event that he acquires legal capacity to hold such property, or to any legally qualified person he/she may designate.
The trust can also be heired to your family by naming them as substitute beneficiaries in the event of your death. The property can also be sold to a person legally authorized to own land or to a foreigner via a trust.
The property may be rented with prior approval from the ministry of foreign affairs.

Beneficiaries are allowed to modify their property. Construction, in accordance to local zoning regulations, is permitted at the owner's expense.

Closing Procedures
Once your offer of purchase and sale has been accepted, the closing process begins. To validate the Offer of Purchase and Sale, a deposit (normally 10% of the purchase price) is required. The money is held either by your attorney, notario, real estate agent, or placed in an escrow account. These funds are held during the time needed to close. The balance is payable upon the signing of the trust deed at the office of the Notario. Most real estate agents have one or two notarios with whom they usually deal.

In order to obtain the trust deed, the notario will:

Ensure the property is free and clear by checking the Land Registry Office. This is guaranteed by obtaining a non-lien certificate and tax statement from the treasury. Additional checks are made for outstanding utility bills and municipal taxes.
Obtain a permit from the Minister of Foreign Affairs to establish the trust deed.
Prepare all documents for both buyer and seller.

When the above has been completed, the notario will present your representative with a statement of remaining funds due and, once paid, will present the legal transfer papers to be signed by the seller.

The entire closing process takes between 30 and 60 days.

Closing Costs
Closing costs are paid by the Buyer and depend on the value of the property purchased. They include a transfer tax (ISAI) of 2% which goes to the Mexican government, an average of 2% for legal Notary fees, a registration fee of .05% of the assessed value of the property, fees for the tax certificate, title search fees and property appraisal, as well as miscellaneous office expenses.

The Seller pays all capital gains taxes and real estate fees. Capital gains taxes are 35% of the difference between assessed values at the time of purchase and sale, with adjustments made for inflation and capital improvements.

Capital Gains Taxes
As noted above, the seller pays all capital gains taxes. As a buyer you are eligible for a one time exemption from capital gains tax if you establish residency for 2 years after your purchase prior to selling.

To establish residency, you must have an FM3 (Resident Tourist Visa), and all the utility and phone bills in your name for 2 years. FM3 Visas are issued from Mexican Immigration. You can request the forms from Immigration which tells you everything you need to apply for the visa. They usually take 30 to 45 days to obtain, once submitted.

The Mexican Notary
In Mexico, certain attorneys are designated by the government as a Notary, and their services are required for the legal transfer of real estate. They are an unbiased, official representative of the government and have a fiduciary responsibility to both parties and sanctions the contract from a tax and legal point of view.

Property Taxes
Property taxes are very low here. The property tax, known as "predial" is a rate of .08% of the assessed value, paid every bimester. The assessed value is determined at the time of the sale. Historically, property taxes have always been low because they have never been perceived as a source of revenue for the government.

Tropicasa Realty has arrangements with several banks and notaries who will assist in setting up the trust. English-speaking personnel, as well as publications, are usually available to answer questions about trusts.

How does the Corporation Work?
Ownership of property through a mexican corporation is an interesting and potentially lucrative alternative. First of all, as long as there are two or more parties to the corporation, a Mexican corporation can be wholly owned by foreigners -- a Mexican citizen no longer need be part of a Mexican corporation to be valid. Secondly, a mexican corporation can own property outright, eliminating the need for a fideicomiso trust and their respective fees. This means that you, as sole owners of the corporation, own the property essentially in "fee simple," similar to the U.S.

Finally, by establishing the property in a corporation, you can then legally rent out the property, thereby generating attractive income if you are in a prime vacation destination such as Puerto Vallarta. Mexican corporations are set-up similarly to those in the U.S., with by-laws, articles of incorporation and the issuance of stock. You should discuss the pros and cons of forming a Mexican corporation with an attorney in Mexico who is familiar with the process.

Establishing a Mexican corporation for the purpose of purchasing real estate is relatively simple and can be accomplished within 1-2 weeks and generally costs from $1,500 to $2,500 USD, depending on the complexity and number of partners involved.