All Forum Posts by: Val Berechet

Hey @Mike Lambert, thanks for the reply. 

I think the way I was viewing the VAT is the difference there, not that I received incorrect information. I was calculating it based on a $100/night rental amount to include VAT, so in reality the rental price per night would actually be $86.21 ($86.21 + 16% VAT = $100.00). But yes, if you rent it for $100.00 per night, the 16% would be on top. I think I was looking at it from a European standpoint where VAT is included in prices typically and thinking it was done the same way in Mexico, not from the US angle where tax is normally added on top.

Regarding point #3 you made above, I was stating that you get taxed on the net amount after taxes...not the gross collected, which we are saying the same thing. Meaning if you rent for $100.00 + 16% VAT for a total of $116.00, you dont get taxed on $116.00, you get taxed on $100.00 in the US, even if you actually collected $116.00.

Regarding #4, #5, and #6...that unfortunately is opposite of what I was told and if you are correct, then yes, I received very bad information. To reiterate, going back to the $100/night (we'll leave VAT out)...with a fideicomiso, you would owe $20.00 (20%) in income tax to Mexico, leaving a net profit of $80 and then that $80 would get taxed in the US at whatever tax rate you fall under and you would not get any credit for the $20 already paid (you would get essentially a deduction, as you are not paying US taxes on $100, you are paying it on $80) whereas with a Corporation, the $20 paid would be credited toward your US taxes...at least that is what I was told.

Had the phone call with MexTax, which seem very knowledgable. The information was quite enlightening in a sense and different than what I had understood previously.

When looking at taxes, you really need to decide and strategize on either setting up a Bank Trust (Fideicomiso) or a Corporation. It seems the most common recommended path is the Bank Trust. The general rule seems to be that if you only have one property, or possibly even two, its best to go with a Bank Trust for simplicity and because the rental income typically won't be that high and if you have multiple properties, then its worth to do the Corporation.

Apparently though its not the amount of properties, but more so the value and therefore the rental income. 

According to MexTax, you will get taxed twice with a Bank Trust, but not with a Corporation. The way the taxes are paid is also much different between the two as well. 

If you do a Bank Trust, then the STR platforms (Short Term Rental), say Airbnb in this example, will actually withhold the 16% VAT (sales tax for us Americans) plus 20% Income Tax (36% total) and they will send it off to the Mexican government. There is nothing else to file with the Mexican government, its simply and straight forward. You do however get sort of double taxed here. For example, say you rent out your condo for one night for $100.00 through Airbnb. $36.00 (36%) of that gets withheld by Airbnb and you get a net of $64.00 deposited into your US bank account. You now have to report this net of $64.00 as income, and that will no we taxed by the US. If you are saying paying taxes at 25%, your $64.00 ends up being $48.00 net. So out of your $100.00 you rented out the condo for, you end up with $48.00 and effectively paid 52% in taxes.

That's in contrast of how it works if you set up a Mexican Corporation. With a Mexican Corporation, you get issued an RFC, essentially like an EIN (or SSN) and now you pay taxes directly yourself to the Mexican government. Airbnb in this case would not withhold any of the $100.00, you could get the entire thing. You still have to pay 16% VAT and now you have to pay 30% in Income Tax to Mexico, however that can be offset by expenses. So if you have an HOA fee, or a management company, or you buy furniture for your rental, or repairs, that can all be deducted so your taxable income won't be the full $100.00, it may be $80.00, bringing down the effective tax rate. The BIG advantage here however is that due to a treaty between the US and Mexico, you can now use the taxes paid in Mexico as a credit on your US taxes owed. So if you rent out the condo for $100.00, and you pay $16.00 for VAT leaving a net of $84.00. You then pay the 30% Income Tax...not sure if the VAT is a deductible expense or not...I'm going to assume that it is, so you pay 30% on $84.00 leaving you with a net of $58.80, which means an effective tax rate of 41.2% vs 52% in the first example. Then when it comes to US taxes, say you owe $50.00 in US taxes...you already paid $41.20 in taxes to Mexico, so you only owe the US $8.80 additional and you would have paid a total $50.00 in taxes, which you would have paid anyway without the condo in Mexico since you owed the US $50.00 in taxes in the first place (from US income).

Hope all that makes sense. :)

The same apparently applies to Capital Gains Taxes. You only get credit on your US taxes if its set up as a Corporation in Mexico.

So then the question is why wouldn't everyone do the Corporation? Reason is, its a lot more expensive yearly and upfront in fees and there is a lot more involvement. This is where people say if you only have one rental, its not worth it. Its approx $2000.00 up front to set it up for the CPA firm and then about $1500 per year to file the required monthly and year end tax reports, etc. You have have to keep books and records of expenses and all of that in order to take the deductions off the taxable income. 

If you rent something out and its relatively cheap, say $150/night average at 65% occupancy and your income is ~$35,500 per year, the savings in tax by setting up a Corporation may be offset by all the fees plus all the headaches. However if you have multiple properties, or an expensive beachfront property that rents for $750/night average with a 65% occupancy, you're looking at ~$178,000 in yearly income and the tax rate and not being double taxes will make a huge difference. 

I am setting up another consultation with a CPA that specialized in international real estate to see how their services and pricing compares and will likely go the Corporation route with one of them.

Good to see this! https://www.theyucatantimes.co...

A credit..not a deduction haha. A deduction in US taxes is different than a credit. 

@Mike Lambert Ah ok! I misunderstood where you said "you'll deduct the Mexican tax withheld from the US tax" but now I see you meant subtract, not an actual tax deduction. 

Ok well that's not bad then. 

And I think you're right about that drink! :D 

Thanks @Mike Lambert.

Ok, so on the income taxes, the taxes paid to Mexico are a deduction off of US taxes, not a credit? As you stated, it does give a different result.

For example, on a bigger scale, say the yearly income from the Airbnb rent is $100,000 (~$421 avg nightly rate at 65% yearly occupancy). Per your earlier post, the withholding tax in Mexico is 21%, so $21,000 is paid to Mexico leaving $79,000 net.

Now, if I understand correctly from your post, the $21,000 is a deduction from the taxable US income (of $100,000), meaning that you "only" get taxed on $79,000 at whatever the US tax bracket you fall in for the US. Lets say thats 25%, so $79,000 x .75 = $59,250 net. Out of the $100,000, $40,750 went to taxes, am I seeing that right?

Vs if it was a credit instead of a deduction, the first part would be the same leaving a net of $79,000 after Mexico taxes...but the second part would be $100,000 x 25% US tax = $25,000 due in taxes, but credit the $21,000 already paid to Mexico would leave a US tax balance of $4,000 and a net "in pocket" of $75,000, not $59,250.

@Mike Lambert

I was only mentioning the Mexican resident part because I've seen some sites mention that in order to get certain deductions, you have a be a Mexican resident, and same with the tax rates. Some times mention it, some don't, I want to find out from a tax advisor what the actual facts are.

Thats good that the STR platforms (had to look it up...Short Term Rental platform) withhold the tax, makes it simpler and then it would make sense that the US only taxes on the actual money that goes into the bank account I assume (so again, say it rents for $200 per night, 20% is the withholding tax, and $160 makes it into the US bank account).

I've found a lot of information online but some of it is contradicting and some of it is not very clear, which is why I have a call set up with a tax advisor. 

I've seen contradicting information that you can only deduct expenses if you a a Resident of Mexico for example, not sure if that is true or not. 

I've also seen info that what you pay in Mexico can be used as a credit on your US taxes...but also another site say you can deduct it off your US taxes, which are very different things. 

I also read that Airbnb and VRBO actually automatically deduct taxes from the money paid out to the "landlord" and only pay out the net amount, sending the rest to the Government? Apparently this is a fairly new thing in just the past year or so?

Regarding the percentage amount...the US long term (asset owned for over a year) Capital Gains Tax is currently 20% of the net gain (selling price minus purchase price minus certain expenses/deductions). 

Specifically what I'm going to discuss with the tax advisor is...

1. Does the US tax based on the gross or net of taxes income for rentals. For example, say the gross income for the month is $5,000. My understanding is that the Mexican Gov't is owed a certain percentage of that in taxes, let's say 20% or $1,000. On the US taxes, would one be taxed on $5,000 or $4,000? Essentially is it double taxed or not. From what I've read, it appears that no it is not double taxed due to some treaty between the two but definitely need clarification. 

2. When it comes to Capital Gains, again, what is the actual percentage (and of course this can and likely will change over time). The 35% on the net certainly sounds much better then the 25% on the gross sale amount, I have no idea who would ever take that 25% deal. But again, say you buy a property for $500,000 and sell it for $700,000 years later, deductions aside, that would be a net gain of $200,000 x 35% = $70,000 in taxes owed to Mexico. How would the US treat that? If the Capital Gain tax is lower in the US at the time, is nothing owed to the US? And if there is a "balance", say the US rate is 20%, which would be $40,000 in taxes...does the extra $30,000 paid to Mexico get applied to US taxes owed at all or?
 

This link some some information covering the above: http://www.taxmeless.com/mexre...

If I am reading it right, it says that when you sell, the net gain ($200,000 in the example above) is taxes in the US at 20% (current rate as an example), which means $40,000...and then you can claim a credit on the $70,000 paid to Mexico? So you pay $40,000 to the US plus $70,000 to Mexico but then can use the $70,000 as a credit against your US taxes owed, essentially canceling out the amount paid to Mexico?

@Tak Ogihara I'm working with MexLaw for the due diligence and closing portion on a unit. So far Ive been very impressed with their process and responsiveness. The company is HQ in Canada I believe and is one of the biggest/best available from the feedback I've received from sources. They also have a division called MexTax that Im going to contact regarding the tax questions.

Wait did I read that right? They tax at 25% of the sell price (full amount without deducting what is was purchase for originally) or 35% if you do the actual gain amount?

So in the first scenario, if you buy a place for $300k and sell it 5 years later for $350k you pay 25% tax on $350k?

Or scenario two is to pay 35% on the $50k gain?