October 2005
Realty Q&A: The Costs of Buying
In Mexico and Flipping Property
By Lew Sichelman
From Marketwatch
Issues on people's minds: What are the tax consequences to owning property in Mexico and more on the economics of flipping homes.
Question: I am considering buying property in Baja Mexico. Are there are any U.S. taxes, fees or penalties that I would need to pay Uncle Sam for owning land in Mexico? Also are there any hidden fees from the foreign country that I need to know about? Is there a Web site or publication that explain all of this to me? -- Kyle
Answer: Julie Kershner Hampton of Prudential California Realty/Cabo Gold Division has a wonderful booklet, "Beaches of Gold," on the topic.
She says that the lone requirement for Americans buying property in Mexico through the "fide icomiso" - bank trust -- is to file IRS Form 3520, followed by an annual filing of Form 3520A every year before March 15. If 3520A is not filed in a timely manner, there can be a penalty.
As long as your property does not produce income, you will not have any taxes to pay in either Mexico or the United States. But there is an annual trust fee to the bank holding the trust. According to Hampton, the fee is usually $350 to $550.
If yours will be a rental, your income will be taxed in Mexico. But at least the taxes paid there can be deducted from your income when you are filing your tax return here. Hampton says would-be landlords would be wise to contact an accountant for further tax advice.
Hampton also reports that real estate taxes are relatively low in Mexico. But when a property that is not the owner's primary residence is sold, you may owe a capital-gain tax. And finally she says closing costs are substantial across the border, averaging between 5% and 7% of the purchase price.
"Some of the costs are fixed, so the lower the purchase price, the higher the percentage," she warns. Worse, unlike in this country, they are all buyer-paid. Reach Hampton at www.JulieKershner.com.
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