Mexico-US tax treaty: rent and gains on Mexican property

Article 6: income from immovable property

Article 6 of the convention reads, in substance, as follows (IRS text of the convention).

• Paragraph 1. Income that a resident of one State derives from immovable property, “including income from agriculture or forestry”, situated in the other State “may be taxed in that other State”. Mexico may therefore tax a US resident’s rent from a Mexican home.
• Paragraph 2. “Immovable property” has the meaning it has under the law of the State where the property is. The term always includes property accessory to it, farm livestock and equipment, “rights to which the provisions of general law respecting landed property apply”, usufruct, and payments for working mineral deposits and natural resources. Ships, boats, aircraft and containers are not immovable property.
• Paragraph 3. Paragraph 1 applies to income from “the direct use, letting, or use in any other form” of the property.
• Paragraph 4. The same applies to the immovable property income of an enterprise and to income from property used for independent personal services.
• Paragraph 5. A resident of one State who is liable to tax in the other on real property income “may elect for any taxable year to compute the tax on such income on a net basis as if such income were attributable to a permanent establishment in such other State”. The election is binding for the year of election and all later years, unless the competent authority of the State where the property is situated agrees to end it.

Because paragraph 2 sends the definition to Mexican law, the question of how Mexican law classifies a right held through a bank trust is a Mexican-law question, not one the treaty answers.

How paragraph 5 meets Mexican domestic law

The domestic rule for a non-resident is in article 158 of the Income Tax Law (Ley del Impuesto sobre la Renta, LISR): tax at 25 % of the income obtained, without any deduction, withheld by whoever pays; in a trust, the bank issues the receipt and withholds. The treaty election is what changes the base from gross to net for a US resident. The LISR text does not describe the mechanics of the election, and the procedures for claiming it were not read for this guide. Ask a Mexican tax accountant (contador público) or the tax authority (SAT) how the election is filed and documented, and note that the text makes it hard to undo.

The Canadian and British conventions read for these guides contain no similar paragraph; see the Canada guide and the UK guide.

Article 13: capital gains

• Paragraph 1. Gains a resident of one State derives from the alienation of immovable property, as defined in article 6, and situated in the other State “may be taxed in that other State”.
• Paragraph 2. For this article, immovable property situated in the other State includes: (a) the property referred to in article 6; (b) an interest in a partnership, trust or estate to the extent its assets consist of immovable property there; (c) shares in a company resident there whose assets consist, or consisted, at least 50 percent by value of immovable property there; and (d) “any other right that allows the use or enjoyment of immovable property situated in that other Contracting State”.
• Paragraph 4. Gains from selling shares or other rights in a company resident in the other State may be taxed there if the seller held, directly or indirectly, at least 25 percent of its capital during the previous 12 months.
• Paragraph 7. Gains from the alienation of any property not covered by paragraphs 1 to 6 are taxable only in the State where the seller is resident.

Paragraph 2(d) is worth reading with care if you hold your home through a trust: the wording covers rights that allow use or enjoyment of Mexican immovable property. Whether the beneficiary rights in a fideicomiso are such a right under Mexican law is not decided by the treaty; the sale of those rights is also within the Mexican tax law’s reach (LISR art. 158, second paragraph, treats the consideration for granting use and enjoyment rights over Mexican real estate as Mexican-source income, even when it comes from selling or assigning those rights). See how the trust works.

What the treaty text does not say here

• Articles 6 and 13 use the words “may be taxed”. They do not set a Mexican rate; the rate and base come from Mexican law (for a sale by a non-resident, 25 % of the gross price, or an option on the gain at the top rate of the annual tariff, LISR art. 160 and art. 174; see selling as a non-resident).
• They say nothing about what the United States does with the same income.
• The IRS file also contains the 1992 protocol and an additional protocol signed in Mexico City on 8 September 1994, which amends only article 27 (exchange of information). Any later amendment was not read for this guide.

Which professional to consult

A Mexican tax accountant (contador público) or a tax lawyer can file the election and the sale tax. A notary (notary) calculates the Mexican sale tax at the deed. A real estate lawyer (real estate lawyer) can read the trust. Check each professional’s registration yourself.