Foreign ownership of real estate in Mexico

Latin America Alert

By:
  • Diego Martinez Rueda-Chapital

Acquiring real estate in Mexico, as in many parts of the world, may prove to be a complicated process. Typically, a real estate transaction in Mexico involves a large number of participants: a notary public; the Public Registry of Property (Registro Público de la Propiedad); the local tax collector; a real estate appraiser; and, when foreigners are acquiring property in a coastal or border region (the Restricted Zone), a financial institution in charge of a trust (fideicomiso) will also need be involved.

Real estate in Mexico is regulated at the federal level. However, the acquisition processes are governed by state law (legis rei sitae) and certain specific aspects are regulated by the municipality in which the real estate is located.

For purposes of determining the structure through which foreigners may acquire real estate in Mexico, Mexican territory is divided in two areas: the Restricted Zone and the Permitted Zone. Pursuant to Article 27 of the Mexican Political Constitution the Restricted Zone is defined as that "strip of one hundred kilometers along the international borders and fifty kilometers along the coastlines, where foreigners cannot acquire the direct ownership of lands and waters under any circumstances." The purpose of this prohibition was to guarantee that Mexican nationals would always own real estate property along international borders and in coastal areas. At the time this prohibition entered into force, foreign nationals were considered a threat to Mexico’s sovereignty and national security.

Over the years, however, the interpretation of Article 27 has evolved, and so have the laws enacted by Mexico’s Congress based on Article 27. Today, foreigners may acquire real estate in the Restricted Zone under certain limited conditions. Such acquisitions must be made for commercial and industrial purposes and must also be by a company duly organized and validly existing under Mexican law as a vehicle for such purposes. The company may be wholly owned by foreign nationals or, in the case of housing, through a fideicomiso. The real estate, being acquired is transferred to the fideicomiso. Such trusts have a maximum initial term of 50 years, which may be extended for another 50-year period. A permit must be obtained from the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores) to acquire real estate in the Restricted Zone.

The structure of such a trust is typically as follows:

Mexico Real Estate

This structure reflects the following characteristics:

a) The investors are non-Mexican individuals or entities.

b) The investors enter into a revocable fideicomiso with a Mexican financial institution (trustee).

c) The trust acquires the real estate.

Under the terms of Mexican tax laws, a trust organized under the laws of Mexico is considered to be a pass-through vehicle for tax purposes. Therefore, the tax implications arising from any income obtained by the trust will be governed by the laws of the home country that correspond to the trust’s beneficiaries (investors).

The Permitted Zone is the real estate area located outside the Restricted Zone. In the event there is doubt whether real estate property is located inside or outside the Restricted Zone, the Ministry of Foreign Affairs, in consultation with other governmental agencies, is empowered to make the final determination.

In all Mexican real estate transactions that exceed 365 times the daily minimum wage (approximately US$1,700), a notary public (notario público) must be involved. A Mexican public notary is not equivalent to a US public notary. In Mexico, as in other civil law countries, public notaries are specialized lawyers whose legal services are indispensable. Applicable law mandates their participation in carrying out many legal acts, including those pertaining to the transfer or conveyance of real property. With respect to real estate transactions, Mexican notarios públicos issue the title transfer deed and register such transfer or conveyance before the local Public Registry of Property.

Each Mexican state is in charge of creating and managing its own Public Registry of Property. In a nutshell, such Public Registries of Property keep track of the chain of title of real property in the corresponding state. It is important to point out that Public Registries are not liable to third parties for any mistake or fraud in the chain of title, but are subject to civil and criminal penalties with respect to the performance of their duties.

The recording process alone may be insufficient to protect the transferee against title defects. The risk of title defects can be reduced by conducting a title search, including all recorded interests in the chain of title and an investigation of any unrecorded interests such as tax liens, easements and ejido (a constitutionally based form of communal property) rights. Also in the interest of reducing risk, foreign clients normally acquire title insurance, which is available in Mexico. As a practical matter, clients acquiring such insurance in Mexico typically find it a difficult process to be paid.

Pursuant to Mexican law, if a defect in the seller’s title results in an eviction, the buyer may file an action for damages against the seller. Other contractual remedies may also be agreed upon to protect the buyer against title defects. Also, in the event of latent defects in the real property, the buyer may file an action for damages.

The transferor usually bears only the income tax consequences of a transfer of title to real property. The proceeds from the sale of real property in Mexico are Mexican-source income. In general, income to a seller that is a Mexican resident taxpayer is included in taxable income, subject to the applicable corporate or individual tax rate. In general, if the seller is a foreign resident taxpayer, the proceeds of the sale are subject to a flat-rate withholding tax on Mexican-source gross income. Alternatively, the foreign resident taxpayer may elect to be taxed on net Mexican-source income through a qualified representative in Mexico and report the net taxable gain on the proceeds from the sale.

The transferee usually bears the notary fee and other costs associated with title transfer, including the appraiser’s fee, recording fees and real property acquisition and ad valorem taxes. The most significant tax consequence of acquiring real property in Mexico is the municipal tax assessed as a percentage of the value of the real property (including fixtures). If the real property includes buildings or other fixtures, a value added tax may also apply. Outstanding local ad valorem taxes must also be paid.

The legal forms most commonly involved in commercial credit transactions involving real estate in Mexico are the mortgage, the conditional sale and the lease with a purchase option.

Perhaps the most widely used security device for transactions involving real property is the real estate mortgage, whereby a debtor or a third party guarantor executes a mortgage instrument as a guaranty in rem, naming the creditor as mortgagee and giving the creditor the right, in the event of default, to be paid with the value of such property in accordance with the degree of preference established by law. A mortgage securing an obligation in excess of a minimum threshold value must be in writing and must be executed before a public notary. The mortgage, which should precisely describe the property to be encumbered and the term, must be recorded in the appropriate public registry of property to have effect against third parties. The mortgage lien takes priority over other liens, except tax liens, past due wages and previously recorded liens.

Instead of passing title to the property and securing the debt separately, a seller may retain title to the property in a conditional sale. Through a conditional sale agreement, a seller agrees to transfer title to the property to the buyer only after the buyer has paid the full purchase price. The seller generally surrenders possession of the property when the agreement is executed, but records the retention of title in the property registry to give notice to third parties. The sales agreement also should specify remedies in the event of default by either party in keeping with those provided under state law.

The seller may also protect its interest in the form of a lease with a purchase option, duly recorded to give notice to third parties. In addition to the terms regarding the purchase option, the lease agreement should follow the general rules with respect to real estate leases.