I recently connected with a U.S. citizen who is looking to buy property in Mexico and wanted to know what the tax implications of that purchase would be. Here’s what I told her:
The purchase itself is not a taxable event. Just like in the U.S., simply buying property doesn’t trigger any tax obligations or reporting requirements.
The purchase process might trigger an FBAR filing requirement. U.S. citizens are required to file an annual report with the Financial Crimes Enforcement Network (FINCEN) if they have more than $10,000 USD (or the equivalent in foreign currency) in foreign financial accounts they control at any point during the year. If funds for the purchase pass through a foreign account that you control during the purchase process, that would trigger the FBAR filing requirement for the year.
There may be taxes due when the property is sold. The difference between the value in dollars when you sell the property vs. its value when you bought it may result in a “capital gain” that is taxable in the U.S. If you lived in the property as your primary residence, however, you may be able to exclude all or part of that gain from taxation.
If you rent out the property, you’ll owe U.S. taxes on your profits. You may be able to claim a credit for taxes paid to Mexico.
If you buy the property through a trust or other legal entity that you control, you may have to file extra tax forms for the entity. U.S. persons with ownership stakes in foreign entities may have to file Form 5471 with their personal tax return for as long as they own the foreign entity.
If you have a mortgage, you may be able to deduct the interest on your tax return. Mortgage interest on loans is deductible for your primary or second home (up to certain limits), regardless of where it is located, as long as the loan is secured by the property.
This is only helpful if your itemized deductions are larger than the standard deduction – for 2023 that’s $13,850 for single taxpayers and $27,700 for married couples filing jointly.
Foreign real estate taxes are not eligible itemized deductions. However, if you’re renting the property, you can deduct all or a portion of those taxes from your rental income.
Also be sure to look into the tax laws in the country where you’re buying the property. In Mexico for example, value added tax (IVA) is due on the purchase price for investment properties (but not for your primary residence), and there may be capital gains taxes due at the time of sale (though like the U.S., you may be able to avoid those taxes if the property is your personal residence and you have legal residency in Mexico and a Mexican tax ID number (RFC).
Thinking about buying or selling property abroad and wondering about the tax implications? Let’s talk.