Rental of your property in Mexico part time can result in the following US tax consequences on your US tax return:
If you rent it for fewer than 14 days per year you do not have to report it on your US tax return. You still for US tax purposes treat it the same as a personal residence or second home and within the limits prescribed for those types of property get to deduct your mortgage interest and property taxes.
If you personally use your Mexico property more than 14 days or 10% of the number of days it is rented, for US tax purposes it is still considered your personal residence or second home. You can deduct expenses allocable to the rental up to the amount of rental income, but you cannot deduct losses.
When you rent out your house more than 14 days you become a landlord in the eyes of the IRS. You must report your rental income but can deduct expenses up to the limit previously stated.
If you limit your personal use to 14 days or 10% of the time the property is rented, it is considered a business. You can deduct all of your expenses, depreciate the property on your tax return, if if that results in a net loss may be able to deduct up to $25,000 of such a loss against your other income (subject to limits measured by the amount of your other income).
If you do have to pay taxes on the rental income in Mexico, you can either deduct those taxes or claim as a tax credit against the tax shown due for the rental on your US federal tax return. Most US states do not allow this tax credit.
Remember, that your rental income may also be subject to taxation by the Mexico tax authorities, Failure to pay the Mexico taxes can have severe consequences. Go http://rentaltaxmexico.com/ to learn more about that tax obligation. The Hacienda has been known to look on the internet to find local Mexican properties that are being rented out for which no Mexican taxes are being paid.
Don D. Nelson is a US Tax Attorney who has been assisting clients in Baja with their US International and Expatriate tax matters for over 18 years. He lives in Los Cabos part of the time. He can be reached by email at firstname.lastname@example.org and by US phone at 949-480-1235. Learn more at his website at www.taxmeless.com