Mexican Property Tax Obligations
The three tax layers every foreign buyer must understand before purchasing in Mexico -- ISR on rental income, ISR on capital gains, and IVA on new construction. Most buyers learn about these at closing, when it is too late to restructure.
1. ISR on Rental Income
Who owes it
Any foreign national receiving rental income from Mexican property owes ISR (Impuesto Sobre la Renta) to SAT, Mexico's tax authority. This applies regardless of whether you are a tax resident of Mexico.
Two calculation methods
Method 1: 25% flat withholding on gross rental income. Method 2: 35% on net income after deductible expenses (management fees, maintenance, utilities, insurance, property tax). You choose whichever results in lower tax, but you must elect your method at the start of the fiscal year.
Withholding obligation
If you use a property manager, they are legally required to withhold and remit ISR monthly on your behalf. If you self-manage, you file and pay quarterly. Airbnb Mexico also withholds 4% IVA from host payouts and reports earnings to SAT.
RFC requirement
To legally receive rental income in Mexico, you need a Mexican tax ID (RFC -- Registro Federal de Contribuyentes). Your notario or a Mexican accountant can obtain this for you. Without it, Method 1 gross withholding is mandatory.
US and Canadian tax credit
ISR paid to Mexico is generally creditable against your home country tax obligation on the same income under the US-Mexico and Canada-Mexico tax treaties. This typically eliminates double taxation -- but you must claim the credit, it is not automatic.
2. ISR on Capital Gains
The most overlooked tax
When you sell Mexican property, the notario is legally required to withhold ISR on any capital gain. Most buyers project returns without modeling this cost -- on a $300,000 property appreciating to $420,000, this tax can be $30,000 to $45,000.
Two calculation methods
Method 1: 25% of gross sale price. Method 2: 35% of net gain after deductions (original purchase price + closing costs + documented improvements + INPC inflation adjustment). The notario calculates both and withholds the lower amount.
Critical: documentation requirements
To use Method 2 (almost always lower), you must produce your original escritura (notarial deed), original closing cost documentation, and receipts for all capital improvements. Without these, the notario defaults to Method 1 -- 25% of everything you receive.
The INPC adjustment
Mexico allows an inflation adjustment to your cost basis based on the INPC (consumer price index) for the years held. This reduces your taxable gain. Over a 5-year hold with 4-5% annual inflation, this can save $15,000-25,000 in tax.
USD vs MXN calculation
The gain is calculated in MXN at the exchange rate on closing day. If the peso has depreciated significantly since you purchased, your MXN gain can be large even if your USD gain is modest. Factor this into exit planning.
3. IVA on New Construction
What IVA is
16% value-added tax applies to purchases of new construction from developers. This is built into the quoted price by most developers but should be confirmed. Resale properties do not incur IVA.
IVA on short-term rentals
STR income (Airbnb, VRBO, etc.) is subject to 4% IVA in addition to ISR. Airbnb Mexico collects and remits this on your behalf for platform bookings. Direct bookings you arrange yourself require you to issue facturas and remit IVA directly.
IVA on services
Property management fees, renovation contractor invoices, and most professional services also carry 16% IVA. Keep all facturas -- these are deductible against your net rental income calculation.
4. Predial (Annual Property Tax)
How predial works
Mexico's annual property tax is extremely low by North American standards -- typically 0.1% to 0.3% of assessed value per year. A $300,000 property might owe $300-900 USD annually. Assessed value (valor catastral) is usually well below market value.
Payment
Predial is paid annually to the municipal government, typically in January. Many municipalities offer a 10-20% discount for early payment. Your property manager or notario can handle this.
Municipality matters
Tulum is now a separate municipality from Solidaridad (Playa del Carmen). Puerto Morelos is in Benito Juarez (Cancun). Predial rates and cadastral values vary. Verify with your notario which municipality applies.
Use our calculators to see the real after-tax numbers on any deal.