All Rental Income Must Be Declared

If you are the owner of a property in Mexico and rent it, you must declare that rental income with SAT!

Taxing Department

The Tax Administration Service (Spanish: Servicio de Administración Tributaria, SAT) is the revenue service of the Mexican federal government. The government agency is a deconcentrated bureau of the Secretariat of Finance and Public Credit, Mexico’s cabinet-level finance ministry, and is under the immediate direction of the Chief of the Tax Administration Service. The SAT is responsible for collecting taxes, as well as applying fiscal and customs law, with the purpose of funding public spending in a proportional and equitable manner. Additionally, it is the bureau’s responsibility to generate and collect information necessary for the formation and evaluation of fiscal policy.

Recently, the SAT has become more aggressive in cracking down on landlords to ensure that they meet their tax obligations. Reports from the Ministry of Finance and a study by the University of the Americas Puebla have found that 73.5% of all landlords have been evading paying of the taxes on that income. To combat this, the Treasury implemented a reform that has allowed the SAT to inspect all landlords.

This includes foreigners who own homes here but use the property as vacation rentals when they are not living here in order to earn money from the rentals.

Checking against CFDI’s

In 2004, the SAT created the legal framework that defined the implementation of CFD (Digital Tax Receipt), its first e-invoicing system. It was successful, in that many businesses adopted its use, leading to the compulsory CFDI (Digital Tax Receipt by Internet) e-accounting system throughout Mexico. This makes it easy for businesses to account for their income, but it provides an exceptionally fast and easy way for the government to assure that businesses are paying their taxes.

SAT officials are checking social media and vacation rental sites, such as Facebook Groups and Airbnb, to easily locate property rentals throughout Mexico. If a landlord has not been reporting the income, the court may enforce penalties based on the area’s occupancy rate to arrive at a perceived rental income. This could potentially increase the actual taxable rental income to landlords, leading to a much higher cost.

Landlords must verify that they have been issuing CFDIs for their income from rentals. Often, when a tenant does not pay the rent and the landlord chooses to go to court to claim the rent due, the judge will ask the landlord to show the CFDIs that prove the income. If the landlord cannot provide the CFDIs, the judge must notify the SAT no later than five days after the deadline. At this point, the judge will rule in favor of the tenant and the landlord will not be paid the rent due, and the landlord will be visited by the SAT officials, leading to a judgment against the landlord.

Property owners that do not comply with these laws may lose their rights as a property owner, face possible jail time, fines, and experience a forced sale of the property for back taxes owed.

The Law

Article 118 of the ISR (Impuesto Sobre la Renta) has been updated to read as follows:

“In the case of real estate lease judgments in which the lessee is ordered to pay the overdue income, the judicial authority shall require the creditor to verify that he issued the tax receipts referred to in this section. In the event that the creditor did not issue the tax receipts, the judicial authority must inform the Tax Administration Service of the omission mentioned within a maximum period of five days from the expiration of the period granted by the judicial authority to the creditor to comply with the requirement.”

Past History

For decades, landlords throughout Mexico have not been paying taxes on rental properties, under the misconception that they can stay under the radar. This has kept rental rates low — until now. The crackdown will obviously lead to increases in prices of rental property.

If you have been renting a property in Mexico and not paying taxes on the income, you can be assured that some renters who are aware of the law will cease paying rent, knowing that you are not reporting the income and have a judge rule in their favor. It would be wise to visit the SAT offices and register your property immediately. And, you must start issuing CDFIs to prove the income.

Foreigners in Mexico

Foreigners who are investing in, doing business, or simply retiring in Mexico, need to know the Mexican tax system. Foreigners should consult a Mexican tax attorney before making any investment purchase or consider property rental.

All foreigners are compelled to follow the Mexican tax laws that come with investments and property ownership in Mexico.  Any rental property in Mexico, whether it is just a small bungalow or a luxury home is considered taxable income. If you rent the property part-time and live there part-time or you rent it full time, the tax laws apply.

Many foreigners who own homes in Mexico and rent the property are not complying with the laws, whether they choose not to, because they think anything goes in Mexico, or they are not aware of the Mexican tax laws and tax system. The reality is you can not escape taxes, no matter where you live. Avoiding these laws will put your property at risk of forfeiture.

It would be an error to assume that because the income from the property is paid to a bank account in another country that you do not need to pay taxes on the property in Mexico. Any rental property in Mexico is subject to tax in Mexico, no matter which country or bank account the rent is paid to.

Property owners that do not comply with these laws may lose their rights as the property owner, face possible jail time, fines, deportation from Mexico and forced sale of the property.

That is a risk that you cannot afford to take. Register with the SAT office immediately, before they catch you.