Whenever something major happens in life, the taxman is never far behind. Buying property is one of those “somethings”. It’s slightly more special when outside the U.S. Here’s a non-exclusive primer on some U.S. tax aspects you may wish to consider when purchasing a dwelling for your use in Mexico.
If you rely on home equity loans or second mortgages to fund Mexico home purchases, know the new tax law curtailed deductibility of those. But the IRS clarifies the law: independent of what the loan is called, it could be deductible if used to buy, build or substantially improve the taxpayer’s home securing the loan. If your Mexico home is not loan security, the interest is not deductible.
Mexican mortgages: your interest could be deductible. We just lost the foreign property tax “predial” personal deduction for individuals. Now, predial is only deductible if the property is used for a business or for the production of income– rent.
Those who purchase and later rent out must depreciate (it’s an allowance for wear and tear) the property and take annual deductions for it (later “paying it back” when the property is sold). The new law changed the time period for foreign residential property from 40 to 30 years, leading to higher deductions. Don’t forget to depreciate if you must.
Documenting your purchase price is a critical. U.S. taxes are paid in dollars; make sure you document the Peso exchange rate. As back home, improvements call for an adjustment of “basis” in the property. It should be documented during the life of the property. You would be amazed at how many people try to reconstruct these numbers, years after the fact. Did you inherit the property instead of buying it? Get it appraised. You may need to report the inheritance if it came from a non-U.S. person. It may not be taxable, but reportable.
If your Mexico property meets the test as your “principal residence” the federal gain on its eventual sale can be excluded from your tax, just like a U.S. home. The same limits and rules apply.
If you are wiring money from the U.S. to buy, remember Foreign Bank Account Reports. And do yourself a huge favor: unless you have a really, really, very good reason, stay away from setting up foreign corporations to hold real estate. A well-structured fideicomiso (land trust) would be a far better way to go.
Now, welcome! Enjoy your Chalupa!
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico. He can be reached at firstname.lastname@example.org or Facebook: GotayTaxLawyer. This is just a most general outline. It is informational only and not meant as legal advice.