In previous articles we reviewed some of the history of the bank trust mechanism that enables non-Mexicans to purchase real estate along Mexico's coasts, as well as the importance of working with a reputable real estate brokerage and United States accredited attorney to consummate your purchase. We have also addressed the importance of proper and thorough title verification and processing, as well as the peace of mind that quality title insurance provides.


In this article we will discuss your ownership options for the bank trust that will hold deed to your coastal real estate. These option are: ownership through a United States LLC; ownership as an individual; or ownership through a Mexican corporation. Each of these mechanisms has advantages and disadvantages:
OWNERSHIP THROUGH A UNITED STATES LLC: Forming a United States LLC for the purpose of acquiring Mexican coastal real estate is the most widely used mechanism, and for a number of good reasons. At our firm we process several LLC's a day for this just this purpose.
Advantages:
1) Properly structured, the rules and covenants within a United States LLC are highly adaptable to the specific needs of the purchaser or purchasers.
2) As an estate planning instrument, a LLC has great desirability because the LLC is a United States entity and United States law governs it.
3) For fractional ownership -- when the fractional owners are United States residents -- a LLC is the most desirable and cost-effective instrument, as the LLC operating agreement will work as the internal rules for the members of the LLC.
4) For all owners – single, or fractional -- the most useful part of forming an LLC is that by selling the membership of the LLC the interest in the Mexican Bank Trust is transferred to the new member (or members), which is very cost effective and takes very little time compared with the assignment of rights on an existing bank trust, or the organization of a new one.
Disadvantages:
1) This scenario does not work for people looking for financing at this time, unless the lender is willing to take as collateral the LLC membership, something which is very unusual unless you are dealing with a private lender.
2) On the tax side a LLC does not offer specific benefits anymore, because now the member who sells his/her membership will need to pay capital gain taxes to Hacienda, Mexico's taxation authority. The good news is that -- having obtained proper documentation of your tax payment in Mexico -- you will receive credit for that payment on your United States tax filing because of a United States-Mexico treaty that prohibits double taxation.
OWNERSHIP AS AN INDIVIDUAL: An option that suits a number of buyers, especially those seeking financing for their Mexican property.
Advantages:
1) The first possible advantage is that as individual some United States banks – as well as at least one Mexican bank -- are lending money for purchasing, refinancing, and in some instances building a house. If the opportunity to finance the acquisition of your Mexican property is important, there are good reasons to consider setting up your bank trust to reflect ownership simply as an individual. At OTP Trust we are processing several of our "Guarantee Trusts" with this exact objective, and are also securing fractional ownership financed by a Mexican bank with very competitive terms using this approach.
2) As an estate planning instrument this scenario works well for people who already have a last will, or retired people for whom their primary asset is the property in the bank trust.
3) When the property will be primarily a rental property, there are tax advantages, because -- with individual ownership -- the tax payer who will be the beneficiary of the trust can often have his tax obligation structured so that the tax obligations are very small.
Disadvantage:
The primary disadvantage of ownership as an individual is that when the property is sold there is high tax withholding in Mexico that the notary must calculate and pay to Hacienda, Mexico's taxation authority. There are few deductions allowed. Once again, the good news is that -- having obtained proper documentation of your tax payment in Mexico -- you will receive credit for that payment on your United States tax filing because the United States-Mexico treaty prohibits double taxation.
OWNERSHIP THROUGH A MEXICAN CORPORATION: An option that should be reserved for business, commercial, or development purposes.
A corporation is desirable only when the intent of your real estate purchase is business, commercial, or development. It is an illusion to imagine that buying property under a Mexican corporation for residential purposes will save you money. Why?
Because Mexican corporations are highly regulated and the maintenance of the corporation is much more than the simple annual fiduciary fee assessed on your bank trust. For example; fiduciary fees for bank trusts owned by LLC's or individuals average $500 USD per year and require zero reports to the Mexican government, or any other kind of maintenance expenses.
In contrast, a Mexican corporation must report taxes monthly: the average cost of a CPA to perform this service will be $1,800 USD annually. If monthly tax reports are not submitted on time there will be monthly fines. A Mexican corporation must file an annual report before the foreign investment registry. If not filed on time there are additional fines. A Mexican corporation must submit a report of properties purchased in the restricted zone if not another fine...and, frankly, on and on!
There ARE good reasons to form a Mexican corporation, but they only pertain to sophisticated investors making fairly large-scale investments where the maintenance costs associated make economic sense: not residential ownership, even of the grandest Gold Coast estate! At our firm we have had the pleasure of forming numerous Mexican corporations for commercial investors and real estate developers, and always welcome the opportunity to discuss investment and development goals with new clients.
As a residential purchaser your rational choices are ownership through a LLC or ownership as an individual. Making this choice is an area where your United States accredited attorney and experienced real estate broker can be very helpful to you, and we strongly suggest that you take full advantage of the knowledge, experience, and experience that informs their suggestions.
Always remember that Mexico wants it's non-Mexican real estate owners to feel perfectly secure that their investment in Mexico is as safe as their other holdings in their home countries. For over 35 years bank trusts have proved themselves a secure mechanism for the more than a million and a half Americans and Canadians who are now enjoying the lifestyle and financial benefits of Mexican property ownership. The mechanisms and procedures that we have described -- and will continue to outline in future articles -- have been carefully designed to serve that end. With just a small amount of prudent effort at the start of your journey into Mexican real estate, your ownership of part of Mexico's magnificent coast will be simple and safe!
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