Structuring a Residential trust

The Political Constitution of Mexico provides that foreigners cannot acquire direct domain and ownership of land that is located within a stretch of one hundred kilometers along the border or fifty kilometers along the coastline. This area is known as the Restricted Zone. In accordance with the Foreign Investments Law, foreigners have the right and are entitled to exercise, through a trust (fideicomiso), the rights of use and enjoyment upon properties located within such Restricted Zone, exclusively for residential purposes.

The residential trust (fideicomiso) is an instrument by which the seller of a property located within the Restricted Zone irrevocably transfers the same to a Trustee, who shall hold the ownership rights to such property and shall permit its use and enjoyment in favor of the foreign purchaser, exclusively for residential purposes. In Mexico, banking institutions are the only entities that may act as Trustee.

A residential trust may be established in favor of any foreigner, whether an individual or an entity. The structure of the trust must be determined based on the intent and the needs that the real estate investor has for the property that the foreigner is purchasing; from vacation and leisure, a speculative business, or a vacation rental business. Always bearing in mind other relevant perspectives such as, fiscal planning, and estate/legacy planning. Several structures that are available abroad may be suggested, including holding companies, limited-liability companies (LLCs), Family Trusts and Family Partnerships, or the direct designation of individuals as main beneficiaries of the trust and the designation of substitute beneficiaries may work as a simple successors structure.

There is availability of title insurance, being provided by well-renowned foreign companies with affiliates authorized in Mexico. Trusts for residential properties located in the Restricted Zone, are legal title instruments that title insurance companies are very familiar with and are admitted for the granting of insurance coverage when applicable.

In accordance with the Mexican Law of Vulnerable Activities (Anti-Money Laundering Law), purchasing property in Mexico requires complying with certain special requisites and the submittal of essential information by the buyer and the seller entering into a transaction. And, either party is an entity, it would also require information from their shareholders, owners, directors, controllers and representatives, as well as to evidence the source of the money being used to purchase the property. This information may be required by the Trustee Bank, the Notary Public, the closing attorney, and by the seller, when the seller is a real estate developer, generally based on a form commonly known as “KYC” (Know Your Client)

Buyers and sellers of properties have the right to the protection of their personal information and data. Certain personal information and data will be required from them by some of the individuals and entities involved in the real estate transaction. For this purpose, the person responsible for keeping such private information must provide the corresponding privacy notice to the buyer and the seller, and it is by this notice that the person in possession of said information and data will be authorized to use it, as strictly and essentially required for the transaction.

Any legal documents issued abroad and intended to be used in the formalization of a title or trust in a real estate purchase or sale transaction, require to be validated in order to verify their authenticity and be recognized in Mexico, according to the Hague Convention of October 5, 1961. These foreign legal documents may be private documents, which execution or signature abroad has been acknowledged by a notary public; or public documents issued by a governmental authority. An Apostille issued according to the Hague Convention is the simplified method of legalization in the foreign country where the documents were issued, for validation in Mexico. The Apostille is the certification by way of a note or stamp normally issued by the Secretary of State or Province, which is then attached to the foreign legal document, confirming the authenticity thereof.

Taxes assessed to foreigners entering residential property transactions under a trust (fideicomiso), may be very similar to taxes assessed for Mexican nationals in a standard real estate transaction.

When buying, the purchase of a property causes a local tax, normally municipal, which is calculated at about 2% of whichever is the highest value between the purchase price of the transaction, the cadaster value of the property, or the value determined by the appraisal commonly obtained for this type of transactions. Normally, in high-end residential property transactions, the transaction value is the highest of the three. This tax is known as the “Acquisition Tax or Transfer Tax”.

When selling, a federal tax may be assessed if a profit is obtained from such sale. The Notary Public formalizing the transaction is responsible of calculating and withholding said tax, to be further paid to the corresponding authorities (in Mexico, a Notary Public is an attorney with a special license designated by the State Government to validate, execute and formalize real estate transactions). This tax is known as Capital Gains Tax. This tax will be the equivalent to 25% of the gross price of the sale transaction, or 35% of the profit determined by the transaction, whichever is lower. Payment of this tax is final and definitive concerning the transaction in question and requires no follow-up in an annual tax return at the end of the corresponding fiscal year in Mexico.

Property Tax, is a municipal tax payable bimonthly in advance. It is common for the Municipality to allow payment of this tax annually in advance and will apply discounts when so paid. Property taxes are calculated based on property values predetermined by the Municipality and updated yearly and a certain rate that is applied to such values; this rate may vary according to the type of property and construction. Property taxes are estimated on a case by case basis; however, it is safe to estimate 0.25% to 0.35% of the fair market value of the property.