By the Editors of Mexico Real Estate & Travel Publishing, L.L.C.
There are so many unusual stories circulating about buying real estate in Mexico that we want to begin by setting the record straight. A Mexican by birth or naturalization can freely buy real estate anywhere in Mexico. Now, everyone else can also buy real estate if the liberalized laws of Mexico are followed.
Border and Coastal Zone

Foreigners can buy property directly in Mexico's interior. However, the Mexican Constitution of 1917 designated the area within 100 kilometers (62 miles) of Mexico's borders and within 50 kilometers (31 miles) of the coastline as off limits to direct real estate ownership by foreigners. For many years this area was known as the Prohibited Zone. Because of recent beneficial legislation the area is now referred to as the Restricted Zone. Although direct ownership of real estate by foreigners in the Restricted Zone is not permitted even now, a foreigner can purchase the right to hold, occupy, use, improve, develop, rent and sell real estate by purchasing a beneficial interest in a bank trust which holds the legal title to the property. Technically it may not be outright ownership of the dirt under their feet, but it sure feels like it to the thousands of Canadians and other North Americans living in their own homes along Mexico's pristine beaches.

Bank Trust Ownership
With bank trust ownership, the bank holds legal title to the real estate and acts as trustee while the beneficial interest in the trust is owned by the foreign individual. The trustee bank is obligated to deal with the property only for the benefit of the beneficiary. The bank takes its instructions from the beneficiary owner. The beneficiary may be a foreign individual or other foreign legal person such as a corporation. This bank trustee arrangement is very similar to the way a trust works in the U.S.A. and Canada. The trust exists strictly for the benefit of the beneficiary who is for all practical purposes the owner of the underlying property.

The owner' s beneficial interest in the property may be passed on by will or inheritance, it can be used as collateral for a loan and the property can be freely enjoyed, rented or sold all as determined by the owner beneficiary.

Direct Ownership
The Foreign Investment Law of 1993 went even further and authorized the out- right ownership of nonresidential real estate in the Restricted Zone by a Mexican corporation which can be 100% foreign owned. This includes real estate purchased for development which will be sold off to foreigners for residential use. The corporation is considered Mexican and therefore the foreign shareholders can own the land directly through this Mexican person.

Notary Public
A Notary is needed to close any sale. In Mexico, a Notary Public is a quasi-governmental official who reviews all documents of importance with respect to the sale of real estate. A Notary Public in the United States typically has minimal training and responsibility. In the U.S.A, a notary typically attests to the fact that a person has signed a document.

The training, function and responsibility of Notary Public in Mexico is completely different. In Mexico, a Notary Public is appointed by the governor of a Mexican state for life. In order to seek appointment, the person must be a Mexico licensed attorney. This involves attending law school in Mexico, obtaining a law degree, passing an exam and being admitted to the bar in Mexico. To hope for appointment, the prospective Notary Public must then work as an apprentice for several additional years with a Notary Public. A notary does not act as an escrow service. The Notary Public' s job is to see that certain formalities have taken place. Although a notary is always an attorney, it is not the notary's job to provide any party with legal advice. Any buyer or seller who wants legal advice should hire a separate lawyer licensed in Mexico.

For more information please visit The Public Notary in Mexico at www.notariadomexicano.org.mx

Public Registry
In Mexico, deeds, usually known as public instruments, can be researched at the local Public Registry of Property which is open to the public. There is a Public Registry of Property in most cities and towns in Mexico of any significant size. The Public Registry of Property is a government office in which documents are taken for registration so that third parties may research the ownership of land titles and liens on such titles. A Public Instrument must be finalized and signed by a Notary Public. The Public Instrument will typically list the parties involved in the transaction including the notary, seller, buyer, and the trustee bank It will also identify the property. Once the Public Instrument is finalized and signed by the notary, by the seller, by the bank as trustee (if a bank trust is involved) and by the buyer (who will also be the trust beneficiary if a trust is used), the purchase price changes hands and the transaction is considered closed.

Title Insurance
Although title insurance has not been utilized in Mexico to a great extent, it is now available for purchase by foreigners through title insurance companies in the U.S.A. There are many U.S.A. companies that provide title insurance on real estate transfers which occur in the U.S.A. Now at least three U.S.A. title insurance companies are providing title insurance services for Mexican real estate transactions. In the U.S.A. virtually all real estate purchasers and lenders are protected by title insurance. As more foreign lenders begin funding loans on sales in Mexico, more title insurance policies will be issued on Mexican real estate transactions. Purchasing title insurance is a good investment when buying real estate anywhere. To the extent of the policy's terms, the buyer is protected from unforeseen problems with the title to the property.

Knowledgeable Advisors
The acquisition of real estate in Mexico can be straightforward and simple, but common sense and the laws of Mexico must be considered if a buyer wishes to obtain good title and avoid problems. Mexico has a well developed legal system and a buyer should approach it with care and respect. A good real estate agent with a lengthy track record of success in Mexico and an excellent reputation is your best friend in buying property. The safest approach is to also obtain the advice of a Mexico licensed attorney regarding legal and tax issues.

Any foreigner or Mexican National can constitute a Fideicomiso (the equivalent to an American beneficial trust) through a Mexican bank in order to purchase real estate anywhere in Mexico, including the Restricted Zone. To do so, the buyer requests to Mexican bank of his/her choice to act as a trustee on his/her behalf.

The bank, as a matter of normal course, obtains the permit from the Ministry of Foreign Affairs to acquire the chosen property in trust. The Fideicomiso can be established for a maximum term of 50 years and can be automatically renewed for another 50 year period. During these periods you have the right to transfer the title to any other party, including a member of your family.
The bank becomes the legal owner of the property for the exclusive use of the buyer/beneficiary who has all the benefits of a direct owner, including the possibility of leasing or transfering his/her rights to the property to a third party or to a preappointed heir. During this period, the foreigner is considered as a Mexican National.

The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary. "Fideicomisos" are not held by the trustee as an asset of the bank.
For practical purposes, even in unrestricted zones many foreigners and Mexican Nationals, for that matter, prefer to hold their property under a Fideicomiso.

It is the Notario Publico who, in effect, acts as a "Holding agent" for the involved parties and for this reason there are few escrow companies in Mexico. At the present time there is no general use of title insurance in Mexico, although some American companies are providing coverage in some resort areas of the country. On the other hand, insurance companies do provide full home coverage-throughout Mexico.

First American is one of the leading, most experienced providers of title insurance, and number one in global title operations. This segment's businesses utilize information to protect real property buyers and lenders from problems that might affect title ownership. Through nearly 1,200 offices and thousands of agents in the United States and abroad, the company offers a wide variety of title insurance and associated closing and escrow services. Coverage is provided on residential and commercial properties, personal property collateral, aircraft, nautical vessels, and more.

Notario Público or Notary Public
The Notario Publico is a government appointed lawyer who processes and certifies all real estate transactions, including the drawing and review of all real estate closing documents, thus ensuring their proper transfer.
Furthermore, all powers of attorney, the information of corporations, wills official witnessing, etc. are handled and duly registered through the office of the Notario Publico, who is also responsible to the government for the collection of all taxes involved. In connection to real estate transactions, the Notario Publico, upon request, receives the following official documents, which, by law, are required for any transfer:
• A nonlien certificate from the Public Property Registry based on a complete title search.
• A statement from the treasury or Municipality regarding property assessments, water bills, and other pertinent taxes that might be due.
• An appraisal of the property for tax purposes.

For more information please visit The Public Notary in Mexico at www.notariadomexicano.org.mx

Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the sense in which it is determined in the United States. Here, the gain from the sale of the property is considered as normal income at a tax rate of up to 35%. In order to determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:
• The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes.
• Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above.
• Commisions paid to real estate brokers by the seller.
• The closing costs, including all expenses, taxes and fees paid by the seller. The Notario will retain the calculated gain after deductions forwarding it to the Mexican tax authorities. The seller will then deduct this amount against his/her annual tax return, which becomes an adjustable tax credit in the U.S. On the other hand, there is no capital gain tax in Mexico if there is conclusive proof the seller has had the property as his primary residence for the previous 2 years.

Cost of the Fideicomiso
Based on a present tariff, the bank charges the person requesting a fideicomiso an initial fee (approx.$500.00US) for the drawing up of the agreement and establishment of the trust, plus a percentage according to the value of the property. In addition the bank charges an annual fee (depending on the value of the propery) to cover its services as a trustee.

Closing Costs
It is common practice that the buyer pays the tranfer or acquisition tax as well as all other closing costs including the Notario fees and expenses, and the seller, pays his capital gains tax and the broker's commission.
Since January 1, 1996, the federal law regarding the real estate transfer tax, which was 2% for all the Republic of Mexico, was modified in order to allow each of the Mexican States to determine its own tax. The range may be from 1-4%, of the tax appraisal value, generally less than the sales value.
The rest of closing costs, which excludes the transfer cost mentioned above, may vary from 3-5% of the appraised tax value or more, depending on each particular State. These percentages are applied to the highest value of the following:
• The amount for which the property is sold.
• The value of the official tax appraisal.
• The value designated by the property assessment authorities.

Title Insurance
A policy of title insurance is a contract with an insurance company in which it agrees to indemnify (compensate or reimburse) the insured against a loss sustained as a result of defects in the title, other than those outlined as exceptions. The title policy may insure the owner, a lender, a mortgage holder, a holder of any interest, as indicated by the buyer of the policy. The title insurance company agrees to defend, at its expense, any lawsuit affecting title which is based upon defects insured in the title policy.

Stewart Title Guaranty Company of Houston Texas underwrites US style title insurance for Applegate Realtors customers, should they choose to have it. The cost of this insurance will be approximately $7US per $1,000US of the insured amount. We view this commitment by the one of the largest and highest rated financial Title Insurance Guaranty companies in the World as a endorsement of the security of the Real Estate business in Mexico. Should this be something you wish to have additional information on, please make a point of asking your Sales Associate for more detailed information as to the process.

Taxes
Property taxes are very low in Puerto Vallarta. Known as 'Predial' -- the mil rate is .08% of the assessed value, paid every bimester. Values are determined at the time of every sale as one of the requisite documents needed for a legal closing is the assessment tax appraisal which is completed by a competent and licensed appraiser specializing in these valuations. Property taxes have historically been low in Mexico because they have never been considered to be significant source of governmental income.

Insurance
Various types of insurance -- including vehicle or property, liability, damage, and earthquake -- are all readily available in Mexico, at reasonable rates. PVRealty is a registered agent for SEGUROS AMERICAS, the largest general insurance company in Mexico. We are able to offer our customers competitive bids for all types of policies. They can also be written to pay claims in U.S. dollars. When the time comes for insurance, simply let your Coldwell Banker Sales Associate or Property Manager know and they will prepare a quote tailored to your property.

Financing
Real estate purchases in Mexico are virtually all-cash transactions, with limited cases of owner financing available. Most individuals arrange financing in the country of origin based on their existing assets in that country. Banks in the US and Canada are restricted by law from lending on foreign property.

Most people that may be interested in real estate in Puerto Vallarta would be obtaining regularized land known as a fideicomiso, in which title can not actually be obtained directly by a foreigner, but title can be placed in trust with a bank the next best thing. This system has been in effect for many years and has worked very well with literally thousands of people purchasing Mexican property without any problems.

However there are lands, generally outside of Puerto Vallarta, especially to the north in popular areas such as Sayulita and San Pancho, that have not been regularized and which are Known as Ejido properties. This type property was established in 1917 after the Mexican Revolution to break up the large landholdings of foreigners and wealthy Mexicans the land is still owned by the government but control is given to an assembly of Ejidatarios or community members of the ejido. They can apportion the property to individuals, but up until 1992 when some changes were made to the system no one individual could have title to a particular piece of ejido land.

The 1992 Agrarian law changes recognize the individual property rights within the ejido and under certain conditions allow for the lease and sale of property to non-ejido members. This allows the land to transfer from government control and places it in the public land registry where it can then be leased or sold. With over 50 million acres of land presently in ejidos, this would open up substantially the amount of land available for development in Mexico.

However, very little of this transfer has actually taken place, and it will not take place at all if an Ejido Assembly does not wish it to happen. Secondly, this was established primarily for agricultural reasons, not so those foreigners could buy a parcel of land to build upon. It is especially uncertain how this effects ejidos with tropical land forests - will the government allow this type of land to enter under the agrarian law adaptions? Thirdly, it is presently illegal to promote or sell ejido land, and there are severe penalties that could be enforced to those that do so.

Our recommendation and that of the realtors we spoke to be careful. There are still many uncertainties and no one can promise you for sure that your interests will be protected or indeed the ejido land you're interested in will become regularized. If you aren't comfortable with this, stick to regularized property, there's plenty of that in and around Puerto Vallarta...