Over the last 5 years the Mexican tax authorities have cracked down on people that avoid paying taxes on rental properties. The tax administration, called SAT, now collects taxes directly from digital platforms, such as Airbnb, VRBO, and Booking.com on income obtained from rental properties.
In México, all for-profit companies are subject to taxation and there is no exception for rental activities, regardless of your citizenship or where you live. Mexican tax authorities, aware that a vast majority of people providing lodging services do not pay taxes, have been intensifying efforts to increase tax collection and to catch people trying to avoid paying taxes.
To rent your condo or house in México, you should do the following:
- Get a permanent residency visa.
- Go the Tax Administration (SAT) office, which is the equivalent of the IRS in the States, and get an RFC number, which is your tax identification number as well as your CURP number, which is similar to a social security number.
- Then you must pay monthly or bi-monthly taxes on income.
I don’t know how you can get the RFC number and pay Mexican taxes without an accountant. It was pretty simple when we obtained our RFC and our accountant held our hand throughout the process. But my wife and I are Mexican residents. If you plan on renting your place then find someone with a good accountant and hire them. Our accountant charges 1,050 pesos per month.
If you are not a resident then you will still be taxed on your condo rental, but it will be taxed at a higher rate since you are not legally able to rent it. If you don’t provide the RFC and CURP numbers to the rental websites then they will withhold a higher amount. I think it may be like the drug dealer in the States. Drug dealers still have to pay taxes on their illegal activities. If you are illegally renting your place, then the government still wants their income tax on that rental property.
The reservation on the left is from the rental property of an owner that does not have residency and is not registered with SAT. The guest paid $504.09, but the owner only received 55% of the guest payment, as they were charged a tax rate of 36%.
The reservation on the right is from the rental property of an owner with residency and registered with SAT. They received 71.5% of the guest payment, and were only taxed at 12%. The guest paid roughly the same amount in both reservations, but the owner received almost $100 more on the reservation to the right.
The Mexican tax authorities do not care if you only make a little money renting, if you use a property manager, or if rental payments are sent to your bank account in the States or Canada. They want their tax revenue, and they are coming for it. If you only rent occasionally then you may not want to bother with paying an accountant and obtaining your residency, but you also risk the possibility that SAT increases their taxable fees or shuts down illegal rental properties. There is already a lot of pushback from Mexicans concerning the number of rental properties and foreigners that are increasing the living costs for locals.
There are two taxes that rental property owners are required to pay: The Income Tax and the IVA or VAT (Value Added Tax). More on these taxes below.
Once you obtain your RFC and CURP numbers you can ask for a factura receipt for any expenses that have related to the rental of your home. If you are buying gasoline for your car, cleaning supplies, or anything else that is considered a business expense then you can ask the cashier for the factura and the amount you spend will be sent to the SAT offices for deduction from your taxes owed. The factura is sent directly to the SAT offices and you are emailed a copy of the factura.
The rental websites will pay half of the 16% VAT tax for you, with you being responsible for the remaining half. However you can use your deductions to cancel that additional half of the VAT tax. However, if you don’t have residency then you will be paying the full 16% VAT tax.
The VAT tax is a 16% fee on top of the rental fee. Generally the VAT tax is considered to be paid by the renter, with the income tax paid by the owner.
In the above reservation the rental website withheld $41.87 in VAT, and the remaining $41.87 (8%) is sent to the me as I am responsible for paying it at the end of the month. But if I pay a corresponding $41.87 in VAT taxes for business expenses in that month then I can keep the VAT payment sent to me. When I put 1,160 pesos of gas in my car, 160 pesos of that payment is the VAT, and I can deduct that from my monthly tax payment.
The new federal income tax law requires all digital platforms like AirBnB, VRBO, and so on to provide the government information, including:
- Registering with the Mexican authorities as tax withholding companies,
- Setting their websites to collect and deduct taxes on rentals
- Designating a legal representative in Mexico. The tax authorities will publish bimonthly, both on its website and in the Federal Official Gazette, the list of valid registered foreign entities who will be able to provide digital services in the country.
- They also have to provide to the tax authorities information on the property owners, such as: Full name or business name, Mexican federal taxpayer number, financial institution where the payment deposits are received, and the address of the property.
- The rental websites must provide to their rental owners tax receipts showing the withholdings made by stating the amount of the payment and the withheld taxes, no later than within five days following the month in which the withholding is made, which must be accompanied by the information listed above.
- The rental websites are also directed to withhold and pay the corresponding income tax and value added tax no later than the 17th of the month immediately following the month in which the withholding is made.
Income tax withholdings by the rental websites will be based on the amounts obtained and the following rates:
Monthly Rental Income (pesos) Withholding rate:
- Up to $5,000MXN: 2% Income Tax
- Up to $15,000MXN: 3% Income Tax
- Up to $35,000MXN: 5% Income Tax
- More than $35,000MXN: 10% Income Tax
In the event that the rental unit owners do not provide the necessary information to the rental websites that they use, income tax withholdings will be at a rate of 20%.
I highly recommend an accountant once you obtain residency. If you are renting your home consistency online, then you will ultimately save thousands of dollars by having the ability to deduct major expenses, like electricity, appliances, and furniture. Permanent residency has a built in work permit. Without permanent residency, a work visa, or citizenship, you are not legally allowed to make income in México.
Whether renting through digital platforms like VRBO and AirBnB or other authorized websites, tax legislation is clear and becoming stricter. Regardless of where the money is deposited or the nationality of the renter or owner, the income tax must be paid. The government has made it clear through this legislation that heavy fines and penalties may be imposed if income is not reported, including penalties associated to money laundering laws. In other words, tax evasion in México is considered a federal felony equivalent to “organized crime.”
If you are a U.S. citizen, remember that the United States government taxes citizens on their worldwide income. Canada taxes citizens on worldwide income unless they have officially moved their legal residence outside of Canada. If you earn any income in México it must be declared on your U.S. or Canadian tax return. You will get credit on your home-country return, however, for taxes you have already paid in México, and cannot get double-taxed.
Here’s the abbreviated version:
If you are a resident of México, then you will pay a 2% to 10% income tax on revenue from rentals. You will collect an additional 16% VAT tax on the total rental fee from the renter. Rental websites will pay the income tax and half of the VAT tax directly to SAT. You can deduct business expenses to cover the other half of the VAT tax, meaning your tax rate shouldn’t be more than 18% of the total rental cost.
If you are not a resident of México, then rental websites will withhold 20% of all rental income you receive. They will also collect an additional 16% VAT tax on the total rental that will be paid directly to SAT. Your effective tax rate will be 36%. It’s definitely worth it to get your residency!
This is all a bit confusing, but just take it a step at a time and if you are trying to do the right thing then it will all work out.