U.S. Legal & Tax Issues Affecting Mexican Real Estate

Even though the property is in Mexico, U.S. individuals, companies and real estate brokers/agents that buy, sell, own, develop or finance Mexican real estate will need to address, or at least consider, certain issues involving U.S. law. These include liability protection, co-ownership issues, disposition/probate, tax, buyers’ rights, investors and securities laws, and financing laws and regulations.

Liability protection

U.S. owners of Mexican real estate face potential liability arising from their ownership of Mexican real estate and their activities on or related to the property. For example, as with U.S. real estate, if someone is injured due to an alleged dangerous condition or negligence on the property, the property owner may potentially be liable. Liability could also arise from contracts, leases, or commercial, development or construction activity related to the property. In any such instance, each owner of record (i.e., each holder of direct title or beneficiary of a Mexican bank trust) faces potential liability, and a successful plaintiff could seek to collect against each owner’s assets, including assets in the U.S. If the owner is an individual, then the owner faces unlimited personal liability for lawsuits involving the property.

To avoid such personal liability, it is often advisable that the owner of record be a U.S. or Mexican company, rather than the owner of record being the individual person(s). The individual owners of the U.S. or Mexican company then have protection against personal liability provided by the “corporate shield” of the company that is the owner of record. It is also always advisable to have appropriate casualty, liability and possibly other types of insurance in effect.

Our firm is experienced in forming and structuring U.S. and Mexican companies, partnerships and joint ventures for the acquisition, development, operation and/or financing of Mexican residential and commercial properties. We are familiar with the specific issues raised when U.S. companies and partnerships directly or indirectly acquire, own and sell Mexican real estate, and how to structure the entities and appropriate corporate governing documents and agreements accordingly.

Co-ownership issues

Although Mexican law governs legal issues regarding ownership of Mexican property, it is still possible for co-owners and investors to have agreements governed by U.S. law to establish rights, obligations and dispute resolution procedures among the co-owners. It is often preferable for multiple U.S. co-owners of Mexican real estate to have certain rights and obligations as co-owners governed under U.S. laws and agreements enforceable in the U.S. This is typically accomplished by forming a limited liability company (LLC) or corporation in a U.S. state, and that company will own the Mexican real estate directly or indirectly (through a Mexican bank trust or Mexican company). The U.S.-based LLC or corporation will then generally appear as the only owner of record in Mexico. The respective rights and obligations of the co-owners will be determined under the laws of the state in which the LLC or corporation is formed and pursuant to a written operating agreement, shareholder’s agreement or similar agreement governed by and enforceable under U.S. law.

It is highly advisable for co-owners of property to have a clear and detailed, legally enforceable agreement among themselves that establishes the rights and obligations of the co-owners, definitive voting rights and procedures, and whatever other specific agreements or rules the owners believe are important to establish at the outset, rather than leave to voting or deadlock in the future. Such additional provisions might include restrictions or conditions on transfers of ownership interests, buy-sell agreements, super-majority or unanimous voting requirements for certain major decisions, agreements on how to divide the use of or income from the property, restrictions on or requirements for renting the property, rules regarding if and when co-owners need to contribute more money (e.g., for maintenance, mortgage, etc.) or perform duties (e.g., maintenance), the consequences if a co-owner breaches its obligations, and mandatory dispute resolution alternatives to litigation.

There are a number of benefits from this approach. A detailed, enforceable written agreement is often the best way to avoid misunderstandings and disputes and maintain good relations among co-owners. It is best if co-owners think through and reach agreement on key, potentially contentious issues, at the outset of entering into the transaction. If the co-owners wait until an issue or crisis arises, then the chances of reaching agreement and maintaining good relations may be greatly diminished, especially if the owners have opposing interests or goals at that time. Also, to the extent that some disputes may be unavoidable, this approach provides (1) clear rules governing many co-ownership issues, and (2) means of resolving disputes through voting procedures, buy-sell procedures, binding arbitration and/or litigation in the U.S., rather than having to resort to claims under Mexican law and in the Mexican courts.

Disposition/probate

There are a number of issues that can arise from the sale, transfer or inheritance of direct or indirect interests in Mexican real estate. Some are Mexican legal and tax issues. In addition, for U.S. owners, there may also be U.S. legal and tax issues.

Inheritance and probate is one area where unexpected and costly issues can arise, sometimes due to legal and practical differences between Mexican and U.S. law. Common U.S. probate avoidance techniques, such as a living trust, may not be recognized in Mexico. Even in cases where probate would not be required in the U.S., a Mexican bank trustee might require a court order from a U.S. or Mexican court before it will recognize a new owner as properly inheriting from a deceased owner. With Mexican bank trusts, one way to avoid this problem may be to name a successor beneficiary within the Mexican bank trust public deed. This inheritance technique has typically been respected by the Mexican trust banks without requiring a probate. However, if the bank trust public deed creates any doubt regarding the proper successor(s), the Mexican bank might require a court order so that the bank avoids potential liability. This can occur, for example, if there is any doubt as the identity of the property successor(s) (e.g., if one or more successor beneficiaries has died and the trust deed doesn’t address that circumstance), or if the successor clause is poorly drafted (which is more likely to occur in older bank trust deeds and with complex successor beneficiary clauses that deal with multiple co-owners and/or multiple successors).

We can address these issues in conjunction with Mexican counsel and, if applicable, our clients’ estate planning advisors.

Tax Issues

U.S. tax residents may be subject to tax in both Mexico and the U.S. on rental income and capital gains from Mexican real estate. U.S. tax residents that own Mexican property through a Mexican bank trust might have annual reporting obligations to the IRS and/or Mexican tax authorities, even if they are not earning income from the property. Also, there are important differences between income and capital gains taxes in Mexico and the U.S. that should be understood, as well as the extent to which foreign tax credits are available in the U.S. for taxes paid in Mexico.

Because our firm does not give tax advice, we strongly recommend that U.S. owners of Mexican real estate seek the advice of tax professionals who can advise regarding the U.S. and Mexico tax and tax reporting obligations regarding the Mexican real estate. We have a network of trusted cross-border tax professionals with whom we have worked and are always glad to work with our clients’ tax professionals.

Buyers’ rights

In general, the rights of buyers of Mexican real estate are determined under Mexican law and the law that governs the purchase contract. In cases where the buyer will acquire a direct interest in a Mexican property, Mexican company or Mexican bank trust, the purchase agreement is commonly governed by Mexican law. However, U.S. statutory and/or contract law will apply in cases where the buyer is buying part of a U.S. company that owns the Mexican real estate. If the buyer is going to be a passive investor in a U.S. company that owns the Mexican real estate, then U.S. federal and state securities laws might apply. The offering and sale of Mexican real estate in the U.S. may be subject to U.S. federal and/or state statutes and regulations, such as the U.S. federal Interstate Land Sales Full Disclosure Act (“ILSA” or “ILSFDA”), state regulation of real estate offerings and sales, and/or state regulation of real estate brokers and agents.

When representing buyers of Mexican real estate, our firm helps protect and enforce their rights under U.S. law, where applicable, and works with Mexican lawyers to protect and enforce their rights under Mexican law. When representing sellers, developers and real estate brokers/agents, we advise on structuring transactions and procedures in order not to violate applicable laws and regulations and contractual obligations.

Investors and securities laws

Depending on the facts and the structure of the investment, the investors’ rights may be governed by Mexican, U.S federal, and/or U.S. state statutory law (including securities laws), in addition to the terms of the applicable contractual agreements (which themselves could be governed by Mexican, U.S federal, and/or U.S. state statutory law).
When representing investors, our firm helps protect and enforce their rights under U.S. law, where applicable, and works with Mexican lawyers to protect and enforce their rights under Mexican law. When representing developers, we advise on structuring transactions and procedures in order not to violate applicable laws and regulations and contractual obligations.

Financing laws and regulations

When U.S. lenders make loans secured by Mexican real estate, then U.S. federal and/or state laws and regulations may apply. Our firm advises U.S. lenders and borrowers regarding loans secured by Mexican real estate. We represent U.S. lenders in the creation and structuring of loan programs and with respect to the documentation and closing of loan transactions, due diligence and lender’s title policies. We also work with Mexican counsel with respect to the creation and foreclosure of Mexican mortgages (hipotecas) and guaranty trusts (fideicomisos de garantía).