Once you have purchased your new Villa or apartment, and do not use it all year long, it is perfectly legal to rent it out. But just like anywhere else in the world, if you receive income, you also have to give some back in the form of taxes. I hope this article will help you understand Mexican taxes a little more, while making extra money without risking your investment. 

Our fiscal code establishes that it is taxable income which individuals get from providing temporal use or enjoyment of real estate, such as:

Leasing or sub-leasing and in general for providing, for a price, the use and or enjoyment of  real estate.

The applicable taxes are:

1.- Income Tax. Impuesto Sobre la Renta. “ISR”.
2.- Added Value Tax. Impuesto al Valor Agregado. “IVA”
3.- Bed Tax. Impuesto sobre Hospedaje. “ISH”.

INCOME TAX

For Tax purposes only, the Fiscal law divides taxpayers into two categories:

Mexican Residents and 
Non Residents. 

Those individuals with a Mexican address, unless, in that fiscal year, they live in another country for more than 183 days and keep residency in that country for their tax purposes are Mexican Residents.

Non Residents are those individuals who live in another country for more than 183 days and keep residency in that country for tax purposes.

The requirements to sign up for a Tax Id are: (for foreigners)

Copy of FM3.
Proof of address (Telephone, water or electric bill. A letter from administrator of condominium will also work)

Having an FM3 can also help you save thousands of dollars in capital gain taxes when selling.

The benefits for signing up are:

Deductions: as a proper registered taxpayer, you can deduct some or most of the following expenses:

I.- Property Tax and other monetary cooperation paid to the city. 
II.- Maintenance fees. 
III.- Interests paid from loans to buy the property or to build or improve it. 
IV.- Salaries, commissions and professional fees plus related taxes, fees and contributions.
V.- The real estate insurance fees.
VI.- Any investments in remodeling, additions and improvements to the real estate.

Taxpayers can opt to pay taxes on 50% of the income instead of deducting any of the above expenses when they provide the use and or enjoyment of a residence. For commercial spaces they can opt to deduct 35% of the income instead of all the expenses mentioned above.

This is called blind autodetermination and has to be disclosed to the authorities, otherwise it will not be allowed. 

Besides the deductions described above, they can also deduct:

1.- Obligatory transportation to school of their children.
2.- Doctor bills (Dentist, hospital) including spouse and children. (With some exceptions).
3.- Funerary expenses.
4.- Legal Donations. 

There has been some confusion regarding how this activity should be registered. According to Hacienda (Tax Department), if the taxpayer rents his property by the month, then he must be “Leasing”.  The Ley del Impuesto sobre la renta (Income Tax Law), in its book IV, chapter III, defines the way individuals will pay their income taxes from leasing real estate. 

If the individual rents his furnished property, by the days, week and/or month, then he must declare taxes as a “Business Activity” (Actividad Empresarial) or they can sign up as “Small Contributors” (Pequeños Contribuyentes), which are also defined in the Income Tax Law. 

For individuals who rent their furnished property in short periods of time, to different people, I would recommend trying registering as Small Contributors. They are not authorized to deduct any expenses but the income taxes are minimal. A small contributor will be obligated to charge and collect the IVA and Bed tax.

A fiscal year will start on January 1st and it will finish on December 31st. 

An exception is, if you register with Hacienda after January 1st., then for that first year, your fiscal term will start on that particular date and it will finish on December 31st. 
 

THE ADDED VALUE TAX.   “IVA”
 

Individuals and corporations with the following activities are obligated to pay the IVA tax:

Those that provide the use and or enjoyment of goods. 

The tax will be 15%. 

The following real estate will not be taxed with IVA:

Non furnished real estate offered as housing. 

If the property is offered as commercial and residential, the residential part will not pay IVA taxes. THIS DOES NOT INCLUDE FURNISHED REAL ESTATE OR THOSE OFFERED AS HOTELS OR SIMILAR OCCUPANCY.

Individuals, who obtain income from rental activities, will have to submit partial tax reports (Income and IVA) in April, July, October and January. They will also have to submit an annual report in April.

BED TAX.
 

The Fiscal Code for the State of Jalisco establishes a 2% tax on property rental activity. The tax is paid, directly to the city, every two months. January and February is paid in March. March and April is paid in May and so on. 

There has been a lot of discussion on whether the Law is Unconstitutional or not since the Constitution says that all taxes will be applied to everyone in General and the 2% tax is applied only to those people who rent property as a Hotel, B&B, condos, etc., 

As it is, the law is perfectly enforceable so unless you decide to fight in a Court of Law, you will need to pay the 2% Bed Tax. 

NON-RESIDENTS.
 

Non resident, FOR RENTAL PURPOSES ONLY, is the person that is not registered in Hacienda. 

The Non residents who obtain payments in cash, goods, or services from providing the use or enjoyment of real estate will pay the following: Income Tax: 21% of the total income, without any deductions; 15% IVA Tax without the right to compensate paid IVA Tax; 2% Bed Tax. Total: 38% of total income.

IF THE RENTER IS A MEXICAN COMPANY, THE COMPANY SHALL WITHHOLD THE TAXES. IF THE RENTER IS AN INDIVIDUAL THEN THE OWNER SHOULD WITHHOLD THE TAXES AND THEN PAY THEM WITHIN 15 DAYS AFTER COLLECTING THE RENTAL INCOME.

If you own a villa I recommend Property Administration, if you own an apartment, a good English speaking accountant will be sufficient. This process should not be complicated at all and should offer substantial peace of mind.

ALEJANDRO NIÑO MERINO