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Alienation of Real Estate by Foreign Tax Residents: What Foreign Investors Need to Know

  • Writer: Jorge Alberto Cadena Lobato
    Jorge Alberto Cadena Lobato
  • Sep 15
  • 4 min read

Author: MF, CPC y PCPLD Jorge Alberto Cadena Lobato

 

The globalization of the real estate market has led to an increase in property sales in Mexico by individuals and legal entities who are tax residents abroad. This is particularly common in tourist areas like the beaches in Jalisco, Nayarit, Quintana Roo, and Baja California. This phenomenon raises important tax implications that must be understood by taxpayers, tax advisors, and public notaries involved.

For this reason, a thorough tax analysis is crucial, starting with a review of the seller's tax residency, taking into account the various international treaties Mexico has in place. For this analysis, we will consider the seller to be a tax resident of the United States (USA), properly supported by their tax residency certificate from that country, known as Form 6166, issued by the relevant tax authority.

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1. Tax Residency: The Starting Point

Article 9 of the Federal Tax Code (CFF) establishes that an individual is considered a tax resident of Mexico if their main home is in the country, or if their "center of vital interests" is in national territory. The latter is determined if more than 50% of their annual income comes from a source in Mexico or if the country is the main center of their professional activities.

It is vitally important to consider this distinction, as in practice, sellers have sometimes misinterpreted the law and applied the tax benefit for the sale of a personal residence (Article 93 of the ISR Law), which only applies to Mexican tax residents.

2. The Income Tax Law (LISR) and the International Treaty with the USA

The LISR's Article 160 states that income from the sale of real estate located in Mexico is considered a national source of wealth. Consequently, foreign residents are obligated to pay Income Tax (ISR) on these operations.

The general rate is 25% on the total income, without any deductions. However, there is an option to apply a fixed rate of 35% on the net gain (the profit) for the 2025 fiscal year, provided the taxpayer has a legal representative in Mexico and the transaction is formalized in a public deed.

The Treaty to Avoid Double Taxation between Mexico and the United States (Articles 4 and 13) allows gains from the sale of real estate located in Mexico to be taxed in Mexico, even if the seller is a US tax resident.

3. Allowable Deductions and Appraisals

Article 121 of the LISR allows for several deductions:

  • The proven cost of the property's acquisition (minimum 10% of the sale value).

  • Investments in construction, improvements, and additions.

  • Notary fees, taxes, duties, commissions, and mediation costs.

The law allows these deductions to be updated for inflation, bringing them to a current value as of the month before the sale. Additionally, constructions must have their Net Value determined by depreciating them at a rate of 3% per year.

4. Obligations of Public Notaries and Special Cases

Public notaries and other public officials are responsible for calculating and paying the corresponding ISR within fifteen days of the signing of the deed. They must also file tax information on the operations carried out, even if no tax is due.

Special Cases:

  • Difference between appraisal and sale value: If the appraisal value exceeds the agreed-upon price by more than 10%, the difference is considered taxable income for the buyer, subject to a 25% tax.

  • Acquisitions as a gift: A 25% tax is applied to the appraised value, except for gifts between spouses or from parents to children.

5. Comparative Law: United States

In the USA, long-term capital gains from real estate sales are subject to rates of 0%, 15%, or 20%, depending on the taxpayer's income level. This contrast with Mexico's fixed rate of 25% on the gross income can have significant implications for international tax planning. This highlights the importance of comprehensive fiscal planning between professionals from both jurisdictions to analyze and determine the tax effects of such operations.

6. Anti-Money Laundering (AML)

The Federal Law for the Prevention and Identification of Operations with Illicit Funds (LFPIORPI) considers real estate sales a vulnerable activity when conducted habitually. It's important to note that the authority's current criteria, which establishes "habituality" starting from the second sale, is an internal interpretation and not explicitly stated in the law.

Therefore, if a foreign resident sells a second property in Mexico, it's crucial to consider the obligations that arise from this administrative law.

Conclusion

The sale of real estate in Mexico by foreign residents is an operation that requires specialized attention. The correct determination of tax residency, compliance with formal obligations, and the proper application of deductions and international treaties are key elements to avoid tax contingencies and optimize the tax burden.

At Cadena Advisors, we are ready to guide you through these regulations and ensure your business successfully adapts to this new environment. Contact us for a detailed analysis of your situation.

References

Income Tax Law (2025)

Treaty to Avoid Double Taxation between Mexico and the United States of America

LFPIORPI (2025)

Federal Tax Code (2025)

 
 
 

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