Legal requirements to use your Mexican home as "vacation rental"
In our previous blog, we discussed how modification to the land use and the use of an intermediary (third party) to perform vacation rental operations is necessary for properties owned through a Trust, in Spanish a Fideicomiso.
Due to the Mexican law's command that individuals without Mexican citizenship are not permitted to legally own property within the Restricted Zone, which includes all coastlines, for years many foreigners have purchased their property through a trust with a Mexican bank. The option to purchase property in such a manner has allowed for many people around the world to accomplish their dream to own a beach house on the Mexican Caribbean, Cabo San Lucas, Vallarta, and many other coastal cities in the country.
A few of those dreamers may be in for a wake-up call if they are using their property for vacation rentals without proper government compliance. Over the summer of 2020, digital platforms, like AirBnB and VRBO, began to impose government mandated tax withholdings on non-compliant Hosts. A Host is an individual that rents a property, commonly through digital platforms. A property's Host could be the property owner, the beneficiary to a trust or a property manager, among others.
According to applicable rules and procedures, vacation rental activities are considered a business operation and Hosts must comply with certain requirements, which includes enrollment with the corresponding registries, obtaining the proper licenses and filing monthly and yearly tax declarations.
At a federal level, the two types of taxes that apply to vacation rental activity practiced under the circumstances we discussed above (for property owned by a non-resident alien through a trust) are Sales Tax (IVA for its acronym in Spanish) and Income Tax (ISR abbreviated in Spanish). These taxes are usually paid through a withholding exercised by the digital platform that administers the rental activity. In addition to these taxes, Hosts are required to provide the federal government with their information and data about the operation, including but not limited to their full name, their Mexican tax ID number, their tax domicile in Mexico, the property's address and the Host's bank account details used to receive any payments for this activity. Since the summer of 2020, Hosts that do not provide their Mexican tax ID number, are subject to much higher, and even doubled, withholding rates.
Currently, the state of Quintana Roo charges a 3% lodging tax, that is also typically paid to the respective government through the digital platform that administers the rental and requires all Hosts to enroll within its State Registry of Hosts. The municipalities of Quintana Roo require each vacation rental operation to obtain and hold a valid Operational License. Application and approval of the Operational License requires the Host to provide a Mexican tax ID number for the operation and enrollment within the Taxpayer's Registry.
If you are currently looking to purchase a property in Mexico as a non-citizen, keep an eye out for our upcoming blog posts that explain what may be in your best interest to purchase your property.