Property in Mexico: Tax Rules Every American Should Know

Disclaimer

MoXi® does not provide tax advice. The information in this article is for general purposes only and should not be considered tax, legal, or financial guidance. Tax laws are subject to change, and every individual’s situation is unique. Always consult with a qualified U.S. CPA who specializes in cross-border real estate and a licensed Mexican attorney before making decisions about purchasing, refinancing, renting, or selling property in Mexico.

Buying, Refinancing, or Accessing Equity in a Mexican Property: What U.S. Taxpayers Need to Know

If you’re considering buying property in Mexico or already own a home there and are exploring refinancing or equity access, understanding the tax implications is essential. U.S. taxpayers must navigate two tax systems: the U.S. taxes global income, while Mexico taxes income generated within its borders. These systems interact through the U.S.–Mexico tax treaty and foreign tax credits. By understanding how these rules work together, you can avoid unexpected issues and minimize errors.

MoXi® assists U.S. taxpayers daily with these scenarios. Many clients purchase second homes for part-time use, rent them out to offset costs, or refinance to expand their portfolios. Currently, foreign owners hold an estimated $150–$200 billion worth of Mexican housing stock, and tax-related questions often accompany this demand.

This guide provides an overview of the basics. Be sure to discuss your specific circumstances with your advisors.

How Mexican Taxes Align with U.S. Tax Returns

• Predial (local property tax): Predial is relatively low compared to most U.S. cities. If the property is used as a rental, predial is deductible on your U.S. tax return. However, foreign property taxes on personal-use homes are not deductible under current U.S. law.
• Closing costs: Expenses such as notario fees, acquisition taxes, and related costs increase your property’s basis. For rental properties, these costs can be recovered through depreciation.
• Mortgage interest reporting: MoXi® loans secured by the property are serviced by a U.S. subservicer that issues Form 1098, enabling you and your tax advisor to determine interest deductibility. Loans that are not secured by the property do not qualify for Schedule A mortgage interest deductions.

Key Points to Understand Early

• The U.S. taxes its citizens and green-card holders on global income, including rental income and capital gains from Mexican properties.
• Mexico taxes income derived from property within its borders. The foreign tax credit helps prevent double taxation on the same income.
• Even if you live, work, or spend most of your time in Mexico, you are still required to file an annual U.S. tax return.

Common Scenarios for U.S. Taxpayers

1. Purchasing a Vacation Home with Occasional Rentals

• If your loan is secured by the property, MoXi’s servicer reports interest to the IRS via Form 1098. Consult your advisor to determine how this applies to your situation. Many clients report being able to deduct this interest on their U.S. tax returns.
• If you rent the home for 14 days or fewer per year, you are not required to report that income on your U.S. return.
• Renting the property for 15 days or more requires you to report rental income and allocate expenses between personal and rental use.
• Interest and predial remain deductible for rentals that meet IRS requirements. However, losses may be limited if the property is frequently used for personal purposes.
• The SALT cap has increased to $40,000 USD per return under the OBBB Act, but it phases down as income rises. Foreign property taxes on personal-use homes remain nondeductible.

2. Purchasing an Investment Property for Rental Income

Rental income is reported on Schedule E.

• Deductible expenses include repairs, utilities, insurance, management fees, and predial.
• Depreciate the building over 30 years using the Alternative Depreciation System (ADS), which is required for foreign residential real estate.
• Bonus depreciation and Section 179 deductions do not apply to properties primarily used outside the U.S.
• Losses are considered passive unless you or your spouse qualify as a Real Estate Professional and materially participate.

3. Expanding or Refinancing with Existing U.S. Rentals

• Maintain separate records. U.S. residential properties are depreciated over 27.5 years, while Mexican properties use a 30-year ADS schedule.
• A 1031 exchange cannot be completed between U.S. and Mexican properties. IRS rules restrict exchanges to properties within the same country.
• MoXi® employs a fideicomiso for all loans, which standardizes title, protects both parties, and ensures proper lien recording.

Frequently Asked Questions

Q: Does the OBBB Act allow 100% bonus depreciation for Mexican properties?
No. Bonus depreciation applies only to properties primarily used within the U.S. Furniture, appliances, and improvements located in Mexico are not eligible.

Q: Can Real Estate Professional Status (REPS) apply to Mexican rentals?
Yes. If you or your spouse qualify as a Real Estate Professional and materially participate, you can group all rentals, including those in Mexico, into one activity using the Section 469 election. To qualify, you must meet IRS requirements, including at least 750 hours of real estate work annually and spending more than half of your total work time in real estate. Time logs are required.

Q: Can I complete a 1031 exchange between U.S. and Mexican properties?
No. 1031 exchanges are only permitted within the same country.

Q: Does MoXi® handle fideicomisos?
Yes. MoXi® uses a fideicomiso structure for all loans, ensuring consistent title work and proper lien recording.

Q: Are Mexican property taxes deductible on U.S. returns?
Yes, if the property is a rental. Predial is deductible as a business expense. However, foreign property taxes on personal-use homes remain nondeductible.

Key Takeaways for Planning

• The U.S.–Mexico tax treaty and foreign tax credits help reduce double taxation.
• Worldwide income must be reported to the IRS annually.
• Mexican residential properties are depreciated over 30 years using ADS.
• Bonus depreciation and Section 179 deductions do not apply to properties outside the U.S.
• REPS status can make Mexican rental losses deductible if you qualify and elect to group rentals.
• Cross-border 1031 exchanges are not allowed.
• MoXi’s fideicomiso structure ensures secure title and a smooth refinancing or cash-out process.