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Cabo Real Estate Facts about buying and selling real estate in Mexico

Primary Residence Tax Exclusion

Mexico, along with the United States, provides residents with Capital Gains tax incentives for a primary residence. In Mexico, the tax incentive states that if you sell your “primary residence” you pay no capital gains tax. (In Mexico’s case this means income tax). This exclusion law is only in place for “residents” which include Mexican nationals or foreigners of Mexico.

Claiming Mexico as your primary residence

Laws change frequently however as a general rule, you must be able to prove that your home in Mexico has been your primary residence for at least 5 years. At closing, you are required to provide the Notary with a copy of your Trust, which is in your name, a residence visa or working permit (FM2), as well as a bank account, water , phone, and electric bills, and paid tax receipts all in the same name as the Trust and including the address of the home. All of these documents must be in place for more than 5 years. In some cases a tax ID number is necessary.

Claiming Residency Status

Only a Notary can approve or grand residency status. It is important that your status is reviewed by a Notary prior to the sale of your home. Never assume you will automatically be approved. Unless you are actually going to live and work in Los Cabos for 5 years or more, don’t even consider trying to get the Primary Residence Tax Exclusion.

Does the Trust have to be in my name to claim this Tax Exclusion?

Yes, even if you live in Mexico for 5 years, have all or your utility bills in your name and satisfy all other criteria under Mexican Law, if the Trust is in the name of an LLC, a Living Will, etc. then you cannot apply for this tax exclusion.

The Capital Gains Tax Exclusion is intended for residents of Mexico, not for persons owning a second home or a vacation home.

**Info from this article provided by Snell Real Estate

What is a Fideicomiso?

A Fideicomiso is a Trust, similar to an Estate Trust in the United States which gives the owner of the property all of the rights of ownership.  This is not a land lease.  The Trust is established solely for the ownership of land in Mexico.  The Ministry of Foreign Affairs is the agency that issues a permit to the Mexican bank of the purchaser’s choice.  The bank acts as the “Trustee” for the Trust.  The Purchaser, (owner), is the  “Beneficiary” of the Trust.  The Trust is not an asset of the bank.  The bank simply acts as the Trustee to hold the Trust and takes direction from the Beneficiary regarding the Trust.  An annual fee is paid to the bank for acting as the “Trustee”. 

The owner’s (purchaser’s) rights are the same as a property owner in the U.S. or Canada.  These rights include the right to enjoy, sell, rent, and improve the property, etc. 

The term of the Trust when first set up was 30 years.  It is now a 50-year term and is automatically renewed at the end of the term an additional 50 years.  The Trust can be renewed for perpetuity, allowing for long-term control of the property and allowing the owner to pass the property on to heirs.  The Trust may be transferred to another Buyer or to another person via a Cession de Derechos (Succession or assignment of Rights.)  There are fees for each transfer, which are calculated by a Notary in Mexico.

Real Estate a good buy in Cabo

“Real Estate in México represents a great buy”

Jim Cramer, CNBC Mad Money Host, recommends investing in Mexico

 Wednesday, July 28, 2010

CNBC’s Stock Market Guru Urges Investing in Mexico

Jim Cramer, the Bombastic, high-energy investment Guru and host of CNBC’s massively successful show “Mad Money”, gave Mexico real estate investment a big boost this week. Cramer told his audience:

“It’s not such a bad idea to diversify away from stocks, I think that out of favor real estate in Mexico, that’s easily accessible to Americans, represents a great buy”.

With as many as 2.5 million investors viewing the show each week, the controversial host wields quite a bit of influence among his viewership and in the marketplace as a whole. His following is so intense that it has created a unique phenomenon in the stock market known as the “Cramer Bounce”, which can be best described “as the sudden overnight appreciation of a stock’s price after it has been recommended by Jim Cramer on his CNBC show”, “Mad Money”.

Why does Cramer have such clout? Well, after graduating magna cum laude from Harvard College, his first year as a rookie broker with Goldman Sachs, he made over $700,000. After he paid his dues at Goldman, Cramer started his own $450 million hedge fund where he earned 24% after fees, regularly taking home over $10 million a year. Cramer’s fund finished in 2001, up 36%, compared to -11% for the S&P 500 average and walked away with $100 million and change.

Since then, he founded TheStreet.com and has written five New York Times best selling books and his articles are featured in Time and New York Magazines. He also a frequent guest on Meet the Press, Today Show, 60 Minutes, NBC’s Nightly News, The Tonight Show and most major financial networks.

Following his own advice, Cramer recently announced to his audience that he had already purchased three properties in Mexico within the last few weeks. When asked about hyped headlines about drug violence and turmoil in Mexico, Cramer downplayed those fears, he said, “Mexico is a big country and not every province, every state is involved in the drug trade”, and he added, “it has to be one of the nicest places I’ve ever been.”

When asked why he invested money in Mexico real estate, he replied, There is “no property tax,” the properties are “incredibly easy to maintain,” and there are “property managers everywhere.”

 There are property taxes in Mexico but compared to the US it feels almost like free.

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Can I own a home in Cabo San Lucas?

I am often asked if you can own property in Mexico and the answer is yes.  We purchased our first home, Casa Oasis, ( a spec home) in 1997 and sold it in 2005.  Our second home in Cabo was a fixer upper.  After a year of  renovations we moved in and continue to enjoy Pacific Ocean breezes and the fabulous weather in Cabo.

Casa Oasis is now in our rental inventory and we have many great memories of our time  in Casa Oasis.

As in the US, when purchasing a home in Cabo, you should work with a reputable Realtor.  Having lived in Cabo since 1998 I personally know a number of Realtors who I would recommend.  I have featured a short list on this blog but have several more I would also recommend. The process is similar to the US with a purchase contract (in English and Spanish), negotiations between buyer and seller, transfer of funds, closing and possession.  The following information will familiarize you with terms and people involved in the purchase of real estate.

Fideicomiso is a word you will want to know about.  In the “restricted zone” of Mexico, which is 100 kilometers from the border and 40 kilometers from the coast, a foreigner may purchase property only by means of a fideicomiso (fee-day-coe-me-so), commonly known as a trust.  A fideicomiso is a 50 year renewable bank trust granting a foreigner purchaser the right to use, improve, rent, sell or otherwise enjoy the property.  The foreigner purchaser is the beneficiary of the trust.  As the beneficiary, the buyer enjoys all the rights of home ownership, including the right to sell, lease, improve, mortgage or will the property.  A fideicomiso can be extended by another 50 years at the end of its terms.  To extend a combined 100 year term, the owner must apply for a new foreign affairs permit.  A buyer may elect to be assigned the rights of the seller’s existing trust based on the time left on the trust.  This process is called an assignment of rights (cession de derechos).  A minimal annual fee is paid to the Mexican Bank for the trust.

A notary in Mexico is an important person in any real estate transaction.  A notary, called a “notario publico”, is a licensed attorney certified by the state or federal government to act as an official and unbiased representative of the government of Mexico.  A notary in Mexico has much more responsibility than a U.S. notary, with responsibility to both the buyer and the seller.  The Notario Publico ensures the legality of the transfer of title:, calculates and retains the seller’s capital gains tax on behalf of the Mexican government; collects and pays the purchaser’s 2% acquisition tax; coordinates appraisals, certificates of no liens and certificates of no debt; and requests all corresponding permits.  The notary must record the transaction at the public registry and tax (cadastral) office after closing.  The buyer will be charged a fee based on the value of the property.  Any real estate transaction not ratified before a notary and duly recorded in the public registry is considered invalid and not enforceable.

What is the Trustee Bank?  This is the Mexican bank authorized to act as trustee.  It must be a Mexican registered financial institution with an established trust department.  The properties held in trust by the bank are not assets of the bank.  We have used BBVA Bancomer and ScotiaBank Inverlat, S.A. personally.  As a purchaser, you have the right to select any qualified Mexican bank as your trustee bank.  Check with your professional Realtor for additional trustee banks.

Title Insurance?  Yes    Title insurance is an insurance policy for property ownership.  Title policy is the only monetary indemnification a buyer can obtain to guarantee ownership of Mexican real estate.

How long does closing take in Mexico?  Normally closing takes 60-90 working days.  However, due to Mexican holidays, permit delays and the trustee bank delays may happen.  Such delays are not considered defaults by the buyer or seller as they are beyond their control.

What does a closing date mean in your contract?  This date is established in the Offer to Purchase or the Buy/Sell Agreement.  It is important that you understand that this “closing date” is a target date as the actual final closing date is determined by the notary.

Hopefully this information has been useful to you who are considering purchasing property in Mexico.  Our experiences in purchasing property in Mexico have been positive and rewarding.

Joanie Feinstein

Joanie and I first met at a Cabo Tomatoes meeting, a group for women, about 11 years ago when I first moved to Cabo. She has definitely made her mark on Cabo as being one of the top agents in the area specializing in The Pedregal. We have enjoyed both a professional relationship and friendship over the years.

Joanie Feinstein and her ex husband, Ed, arrived in Cabo the first time in 1981 and within 2 days had purchased property in The Pedregal for a home. They later purchased land to develop the condominium project Andalaya with the developers, which they completed and sold to many of their Chicago friends. And so the love affair with Cabo began. Her home was completed in Pedregal 17 years ago and she has been selling for the developers of Pedregal, the Diaz Rivera family, which has the franchise of Coldwell Banker. She has been the top sales agent in all of Mexico for Coldwell Banker for the past 5 years. Through these business transactions she has acquired many great friendships and continues to love every minute of this life.