How Is Mexico Real Estate Held by US Owners Impacted by New US Tax Laws for 2018
By Don D. Nelson, International Tax Attorney at Law
Partner in Kauffman Nelson LLP, Certified Public Accountants
Most buyers and sellers of real property in Los Cabos are concerned about the effect the US new tax laws will have on their ownership of real property in Mexico. The new law is complex and it provisions involving foreign matters are often confusing.
If you own your Mexican property in your own name or through a fideicomiso (bank trust) there may be some changes has under the new Trump tax laws. Most of the major rules are set forth below. However, you should consult a US tax expert to determine if there are other items not mentioned herein which might have an effect on the tax aspects of the property you own in Los Cabos.
You can deduct as an itemized deduction any mortgage interest on your Mexico residence when combined with the interest you may pay on a second home up to the interest paid on $750,000 face amount of the combined mortgages.. That limit applies to purchase money mortgages. Excess interest above this amount is not deductible You can deduct your Mexico property taxes combined with any other property taxes you pay on personal real estate plus any US state income taxes you pay up to a maximum of $10,000US per year. You will receive a standard itemized deduction of $12,000 if single and $24,000 if filing jointly. Therefore you itemized deductions including medical expenses, taxes, interest and charitable contributions must exceed this standard amount before you get a tax benefit. The personal exemption deduction for you, your spouse and children has been eliminated.
If your Mexico casa has been your primary personal residence for 2 out of the 5 years prior to sale, the first $500,000US in gains on sale are exempt from US income taxes. Any gain above that is taxed, but you can claim a foreign tax credit for taxes paid in Mexico against your US tax on that amount. Mexico has similar rules (with some variations from the US rule) on exclude part of the gain from tax on the sale of your primary residence for your Mexican taxes. You should consult you Mexican tax advisor to determine how to qualify for that benefit.
SECOND HOME: You may be able to deduct your property taxes and mortgage interest on your Los Cabo second home. These deductions are limited when combined with other personal mortgage interest and property taxes as set forth previously under the personal residence rules.
You must report on your tax return the rental property and its income and expenses in the same manner as you would report a US rental property. The special vacation home rules for property rented part time and used by you part time also apply to your Mexican property. You can get a foreign tax credit against the tax you pay in the US on that income for the income tax you pay in Mexico on that rental income. Yes you are obligated to pay Mexican income tax on your rental income though many foreigners in Mexico are trying not to pay that tax.
The main difference between property held in the US and that in Mexico is that in Mexico you must depreciate the residential rental building value over 40 years on your US return whereas if the property were located in the US if would be depreciated over 27.5 years.
You can include the Mexico property taxes but the total of all your US state income tax deduction and property tax deduction on your US return cannot exceed $10,000 per year. And then this deduction would only count if all allowable personal itemized deductions exceeded $12,000 if you are singled or $24,000 if married and filing jointly
FOREIGN FINANCIAL ASSET REPORTING
You are fortunate if your only asset in Mexico is real estate held in your name or in a fideicomiso since you are not required to report it in Form 8938 where a US taxpayer must report their foreign financial assets with values that exceed a certain amount. Foreign real estate held in the taxpayers name is excluded from the definition of a foreign financial asset. However, If you own your Mexico real estate in a Mexican Corporation it may be reportable as foreign financial asset.
FOREIGN BANK OR OTHER FINANCIAL ACCOUNTS
If you have bank account, brokerage account or other financial account in Mexico or located elsewhere do not neglect filing FORM 114 (FBAR) each year if the combined highest balances at any time during the year exceed $10,000 US. This form can only be filed on line and is very simple. It does not cause you to pay any taxes, but is a reporting form only. Failure to file this form can result in the IRS assessing a penalty of $10,000 or more
Don D. Nelson, US Attorney at Law and partner in Kauffman Nelson LLP, US Certified Public Accountants has advising US taxpayers on US taxes in Mexico for over 25 years. Assisting clients with the purchase, sale and ownership of their real estate located in Mexico is one of his specialties. Visit his website at www.taxmeless.com for more information.
.If you have questions on any of these changes, email Don at firstname.lastname@example.org