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What is a Fideicomiso and How does it work?

FIDEICOMISO/ MEXICAN TRUST: A three-party fiduciary relationship in which the first party, the trustor or settlor, transfers a property upon the second party for the benefit of the third party, the beneficiary.

What is a Fideicomiso and how does it work? 

A Fideicomiso is a 50-year perpetually renewable and transferable Bank Trust through which foreigners acquire irrevocable and absolute ownership rights to property in Mexico. This Trust is the legal equivalent for fee-simple ownership and is provided specifically for non-nationals to own coastal and border property. Essentially, it is like a Trust in the United States —the bank holds the legal title to the property, with all rights and privileges of ownership, including exclusive use and enjoyment, held by the Trust beneficiary—you. You retain the use and control of the property and make all decisions concerning the property. You have the same "bundle of rights" as owning property with fee simple title. You have the right to use and enjoy, lease, improve, mortgage, sell, inherit and will the property.

Is a Fideicomiso like a lease agreement?

No. A Fideicomiso grants the beneficiary (buyer) all the rights of ownership: the rights to buy, sell, lease, use, bequeath, improve, transfer, and encumber. A lease grants only the right to use. If a lessee makes improvements (such as building a house) on the property, that house belongs to the landlord. Nor can the lessee sell the property or borrow money on it. Before 1971, the bank trust was not available, and leasing was the only option for Americans and other foreign Buyers.

Why does Mexico use a Fideicomsio for foreign ownership?

In 1848, Mexico signed a treaty with the U.S. to end the Mexican War, through which it gave over rights to the land, which became the western United States. When Mexico formed its federal constitution in 1917, it aimed to protect Mexico's most valuable resource: land. Article 27 of the Mexican Constitution prohibited foreigners from owning land or businesses within the restricted zone, which measures 100km from the borders and 50km from any coast. An amendment to the Mexican Constitution in 1992 and the Foreign Investment Act of 1993 have since made it possible for foreigners to own property in the restricted zone through the Fideicomiso system.

Can the Mexican government take away a foreigner's property at any time?

No. A Fideicomiso is established by the government and gives foreigners the same rights of ownership as Mexican citizens. The only difference is that they never receive the actual fee simple title. A bank holds it in trust for them. The Trust system of ownership is sanctioned by the Mexican government, provided for under the Mexican Constitution, and secured by the Central Bank of Mexico, all exclusively for the purpose and protection of enabling foreign ownership of coastal property in Mexico.

Are there differences in other aspects of property ownership in Mexico?

Closing costs to the buyer tend to be roughly 2 to 4 times higher in Mexico than they are in the U.S. or Canada, averaging 4 to 7 percent of the purchase price. Financing options are limited but it is no longer impossible to mortgage a purchase in Quintana Roo. Escrows are now starting to become a regular practice and may cost from $1,500 to $1,800 per transaction. The buyer and seller need not be present at closing but may be represented by their sales agent via a power of attorney. All legal real estate sales are presided over by a Notario, who serves as the government-licensed agent of record.

Fideicomiso or Mexican Corporation ... Which is best for You?

In Mexico, under article 27, section 1 of the Political Constitution of the United States of Mexico (the real name of our country), foreigners are not allowed to acquire property on the coastline or 50 kilometers inland and 100 kilometers from our borders. The reason is quite simple: Our constitution was passed in 1917 and very few things have been changed ever since. In those years, the risk of invasion seemed imminent (we had faced quite a few by then and one of them cost us half of our territory), so the prohibition against non-Mexicans acquiring land in strategic locations seemed only logical.

Many years have passed, and even though the prohibition seem pretty ridiculous now, it still exists because many people and institutions profit from it, mainly banks. Many attempts (or announcement of attempts) to modify the constitution and change this article have been made, but nothing solid, and we can say with a good level of certainty that this is something that may never change.

It’s because of this that the expats who come to the Yucatan Peninsula (particularly Mérida and the beach) with the intention of acquiring real estate have only two options: obtaining Fideicomiso from a Mexican bank OR through their own Mexican corporation.

The two of them are quite different and satisfy very specific needs.

A FIDEICOMISO is the most common option chosen by the foreigners who attempt to buy property in the area. A Fedeicomiso is unique because it doesn’t have an exact equivalent in United States or Canada, so an exact translation is impossible. The closest we can get would be a “real estate trust.”

A Fideicomiso de Zona Restringida (Real Estate Trust of a Restricted Zone) is a legal document with which a Mexican bank will, for lack of a better word, lend you their name so you can use and manage the property. Technically the property will be under the bank’s name (as shown in the catastral cedulas of houses that are under Fideicomisos) but in the course of the 32-40 pages that the Fideicomiso deed contains, it explains how, by paying a yearly fee of around $700 USD (depending of the banking institution) the bank will be responsible for the ownership of the land, but that’s about it. The use, administration, maintenance, civil responsibility, rental income, mortgage loans, and income from its sale, belongs exclusively to the trustee. The trust institution makes very clear that they have no responsibility to the property and trustees can do pretty much whatever they want with it.

There are many benefits to a Fideicomiso. One of them is that it works like a will. In the deed, you designate beneficiaries who inherit the trust upon your death by presenting a death certificate and a simple letter. Another benefit is that nobody can put a lien of your lot, simply because it is not in your name, so your legal/economic issues won’t affect the property. But that the biggest advantage is that, if the property qualifies and the trustee gets resident status, at the time of sale, the seller (trustee) can exempt 100% of the ISR tax (capital gains) up to a selling price of $3,800,000 MXN.

The downside of forming a Fideicomiso would be the price. The initial bank fees (that include the permit, one yearly fee in advanced and expenses) are between $2,000 and $2,500 USD, which you pay on top of all the closing costs (acquisition property tax, rights, certificates, notary and attorney fees, etc.). Also, a bank takes around three weeks to issue the permit, but this is from the moment the permit is paid and all the proper documents and forms have been submitted. To get those documents and fill out those forms takes usually a good two or more weeks, so the closing time frame of a Fideicomiso is usually two to three months.

CORPORATIONS are simpler. A Mexican corporation can be formed in two weeks with at least two partners. (They can both be foreigners; no Mexican citizen is needed, so don’t fall for that story.) It costs a maximum of $1,500 USD and from there you can use it to acquire property through a normal transaction as a Mexican national would (basically because the corporation is a considered Mexican person and can do everything that a Mexican can do). So in a month and a half you can have the corporation formed and the property under its name. You can also buy a car and pretty much anything you want with it. But price and speed are its only benefits.

The corporation ties you to an accountant for life. Even if it reports zero income, an accountant will charge you a fee. To act on behalf of the corporation as a partner you need to get your resident status, otherwise you will have to act through powers of attorney given in the corporation to Mexicans (which means that somebody else will have, for lack of a better word, control of your money, land, car, and everything you buy or do through a corporation). Everything, and we mean everything you buy through a corporation, has to be done through a check and or wire transfer made from the corporation bank account, so cash is not an option. And finally, the biggest downside: there is no way to avoid capital gains when selling the property. If you manage the property properly and get fiscal receipts for everything you do in the house, you can deduct that against the profit at the time you sell to lower the tax bill, but you can´t avoid it completely.

That makes this the best option for people interested in starting a business. If you intend to open a business or even buy property for a non-residential reason, a corporation is the best route. It will save you some money on income tax, and most of all, it will allow you to create a legal source of income in the country.

In our opinion, a Fideicomiso is the way to go if you plan to buy a property and use it for residential/personal reasons that will not generate an income. If you intend to open a business or if you’re buying the property to function as a business, then you will want to form a corporation.