Many foreigners buy property in Mexico to earn an income by renting it out and eventually pay off their future retirement home, and some rent out rooms to supplement their income while living in Mexico. There is a lot of confusion around renting out property in Mexico when it comes to tax obligations. Many homeowners are not aware of Mexican tax laws or merely disregard the laws. As in any country, it is essential to educate yourself on your tax obligations if you gain revenue in another country.
It is plain and simple any income derived from Mexico including renting out your home is subject to ISR (Impuesto Sobre la Renta).
We have answered some of the most common questions we receive about rental income below.
If I rent out my condo which taxes do I need to pay?
The tax is called ISR (Impuesto Sobre la Renta) it is an income tax assessed at 25% of the gross income. If the unit is furnished, there is an additional 16% IVA (impuesto al valor agregado) value-added tax. The tenant pays the 16% IVA tax and declared by the landlord.
My tenants pay directly to my U.S. bank account with no financial transactions showing in Mexico, do I need to claim the income in Mexico?
Yes, any income derived on Mexican soil is subject to tax regardless of which country the funds are deposited. You must pay ISR in Mexico. Mexico has a tax treaty with 32 countries including the U.S., meaning the tax you pay on Mexican income can be used as a tax deduction in the U.S., avoiding double taxation.
How will anyone know if I am making an income on my home?
Depending on how you advertise your rental, the government is aware many rentals are advertised on social media and host websites. If you are investigated, you may be assessed taxes and penalties based on an income they perceive to be the occupancy rate in your area. Obviously, they will use full occupancy rates which may result in a higher income than what you earned.
Are there any real consequences of failing to report the rental income in Mexico?
If you are investigated, penalties and interest charges will vary, depending on whether this is a first-time offense or not. If you have not been investigated or served notice, you do not need to pay back taxes; the important thing is to register as a taxpayer and begin claiming your income. Property owners who do not comply with Mexican tax laws and ignore warnings from the authorities could lose their rights as the property owner, fines, deportation from Mexico and forced sale of the property.
I want to rent out my Mexican home just one time while I travel, do I need to claim that income?
Yes, you should report and pay ISR on any income generated from property located in Mexico.
Do I need an accountant to maintain my SAT account?
It is a good idea to have a Mexican accountant help you understand the Mexican tax laws and maintain your account, especially if you do not live in Mexico full time. The tax obligations are to be filed with El Servicio de Administración Tributaria (SAT) monthly plus a year-end declaration.
How can I reduce my taxes on a rental property?
Consult with an accountant to find out how to lower your taxes and ensure you are receiving all available deductions and discounts. An accountant will reduce your taxes by applying property expenses such as property management fees, property taxes, utilities, repairs, maintenance, strata fees, insurance, and depreciation.