If you are interested in buying property in another country, it is important that you learn all of the rules relating to foreign investment. This will help you protect your investment and maintain control over your property in the future.
When it comes to Mexico, the Fideicomiso (pronounced fi-dei-co-mi-so) is one of the key legal arrangements you will need to understand. It is a long-term irrevocable bank trust that allows foreigners to buy property in Mexico. In this guide, we’ll explain how this type of trust works and how to establish a Fideicomiso in Mexico.
- A Fideicomiso is a type of trust that is required for foreigners to buy property in certain parts of Mexico.
- It lasts for 50-years but is perpetually renewable.
- A Fideicomiso gives foreign buyers all of the rights of property ownership, including the ability to sell, lease, improve, change, use, bequeath, or encumber the property.
- There are establishment fees and annual bank fees associated with using this kind of Trust.
How Does A Fideicomiso Work?
The Mexican constitution prevents foreign investors from purchasing land within 62 miles (100 kilometers) of any national border or within 31 miles (50 kilometers) of the ocean. In the early 1970s, the Mexican government created a new type of trust called a Fideicomiso, to sidestep these requirements and attract more foreign investment.
A Fideicomiso is a 50-year perpetually renewable and transferable Bank Trust which allows foreigners to acquire absolute and irrevocable ownership rights to property in Mexico.
The bank holds the legal title of the property, but grants all of the rights of property ownership to you. This means you can sell, lease, improve, change, use, bequeath, and encumber the property.
This type of trust is privately held, with the bank acting as the primary trustee. Fideicomiso trusts are not assets that are recorded on the books of the bank and banks are not allowed to take any action without receiving written instruction from the beneficiary of the trust. If the bank goes bankrupt, the trust is easily transferred to another bank, so there is no risk involved.
If you are going to purchase a property that is not within a restricted area, you can obtain the legal title of that property and a Fideicomiso will not be necessary.
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Why Mexico Uses A Fideicomiso For Foreign Ownership
To understand why foreign investors often need a Fideicomiso, you need to have a basic understanding of the history of property ownership in Mexico.
At the conclusion of the Mexican War in 1848, the Mexican government signed a treaty with gave the U.S. an additional 525,000 square miles of land. This land is what currently makes up all, or parts-of, Arizona, California, Colorado, Nevada, New Mexico, Utah, and Wyoming.
So, when the Mexican government created their constitution in 1917, they decided to protect their most precious asset — land. Article 27 of the constitution placed a complete ban on foreigners buying land within 62 miles (100 kilometers) of any national border or within 31 miles (50 kilometers) of the ocean, also known as the restricted zone.
However, by the late 1960s, the Mexican government realized that this restriction was stifling foreign investment in their country.
Their solution was to allow foreigners to buy real estate through a Trust arrangement called the Fideicomiso. The legislation, called the Foreign Investment Law, was approved by President Luis Echeverria in 1971 and became law in 1973.
This arrangement was successful and foreign investment flooded into Mexico. In 1989, the Mexican government made further changes that allowed a foreigner to have unlimited extensions of a Fideicomiso using a simple application process.
In 1994, the government made another change to the Foreign Investment Laws which allow a property beneficiary to have a trust for 50 years, with the application for extension and renewal remaining intact. This helps property owners safely bequeath Mexican properties to their beneficiaries.
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What Are Your Rights Within The Fideicomiso Trust?
When you enter into a Fideicomiso, you will have all rights of property ownership. This means you can buy, sell, lease, improve, change, use, bequeath, and encumber the property.
Is A Fideicomiso Like A Lease Agreement?
No, a Fideicomiso is different from a lease. As mentioned, when you have a property in a Fideicomiso, you will have all rights of property ownership. If you leased property, you would only have the right to use the property.
If you made a change to a leased property, like adding a new out-building, that asset would immediately belong to the landlord. You would have no right to sell a leased property or bequeath it to your relatives. It’s would also be impossible to borrow money on leased property.
How To Get A Fideicomiso In Mexico
Establishing a Fideicomiso is a relatively simple process. You can approach a Mexican bank and ask them to create one for you or have a lawyer do it on your behalf. The bank will provide you with all of the necessary paperwork.
You will need to provide the bank with personal information and details of the properties which are going to be included in the Fideicomiso. When you open a Fideicomiso, you will have to pay for a one year of fees in advance, an establishment fee, and a government fee (more on costs below).
The bank will work with you, the seller, and the participating lawyers to place the legal title of the property in the Fideicomiso. Once the process is complete, you will receive irrevocable ownership rights over the property.
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How Much Does A Fideicomiso Cost?
In most cases, the cost of establishing a Fideicomiso is between USD $2,000 to $3,000. This price includes an establishment fee, the cost of the first year, and a government fee. After that, you can then expect to pay between USD $550 to $1,000 in annual fees to your bank.
These costs are in addition to the usual costs of purchasing a property in Mexico, including property transfer tax, non-encumbrance certificate, city appraisal, notary costs, title insurance, and so on.
Do Fees Vary Between Banks?
Yes, they do, so it is worth shopping around. Many people find that working with a smaller bank is a better option as they offer more personalized service and are willing to negotiate on price. Talk to your lawyer to discover which financial institution they recommend.
How To Make Changes To A Fideicomiso
If your circumstances change due to a divorce or a death in the family, you may need to make changes to your Fideicomiso. This task is typically performed with the assistance of a lawyer, who talks to the bank on your behalf.
If you wanted to remove a party from the Fideicomiso, you would need to remove trustee rights from one party and assign them to the party who will keep the property. This process is similar to what occurred when you first purchased the property, with changes being made in the title deed.
There will be several fees associated with removing a party, including notary fees, transfer taxes, municipal and state constancies, legal fees, and bank fees.
If you are changing a benefactor, you would need to write an instruction letter that tells the bank to modify the trust. The letter would need to be ratified before a Mexican notary. All members of the Trust would also need to sign this document before a notary. There will also be several fees associated with this process, including notary fees, bank fees, and legal fees.
Should I Use A Fideicomiso Or A Corporation To Buy Property In Mexico?
Instead of establishing a Fideicomiso, you could create a Mexican corporation and use it to purchase your property. Because the law treats Mexican corporations the same as permanent residents, you will receive full title over the property and will not need a Fideicomiso.
Creating a corporation in Mexico is a relatively simple process. You will need at least two partners and USD $1,500. It doesn’t matter if the partners are foreign nationals or Mexican nationals.
It’s important to understand that there are a few significant downsides associated with using a corporation to purchase the property. One downside is that you will have to deal with the paperwork and annual accountancy fees, even if the corporation has zero income.
Additionally, you cannot act on behalf of the corporation as a partner, unless you have a residency permit. If you don’t have a residency permit, you will need to give a third party power of attorney.
This means they will have control over the corporation and everything the corporation holds. Unless you have a trusted lawyer or family member, this can be fraught with peril.
Another significant downside of using a corporation to buy and sell the property is that you will always have to pay capital gains tax, which can be substantial.
If you intend to buy investment properties or properties that will be used to run businesses, establishing a corporation is a great option. However, if you are simply buying a home for your family, a Fideicomiso is usually the best way forward.
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