A $3 million property in the Hamptons will cost you $60,000–$90,000 per year in property taxes. The same $3 million property in Los Cabos will cost you $3,000–$6,000. That 15–20x differential is not a typo — it is a structural feature of the Mexican tax system that makes Cabo one of the most favorable holding environments for luxury real estate anywhere in the world. Here is the complete tax picture for foreign investors.
The Predial: Mexico's Annual Property Tax
Mexico's predial is the annual property tax levied by each municipality on real estate within its jurisdiction. In Baja California Sur — including the Los Cabos, La Paz, and Loreto municipalities — predial rates typically run 0.1% to 0.3% of the assessed cadastral value, not the market value.
This distinction is critical: Mexico's cadastral assessed values lag market values significantly, often by 30–60% in rapidly appreciating markets like Los Cabos. A property with a $3M USD market value may carry a cadastral value of $1.2M–$1.8M, producing an annual predial bill of $1,200–$5,400 USD — even at the high end of the rate range.
Additional features of the predial system that benefit foreign owners:
- Early payment discount: Most BCS municipalities offer a 10–15% discount for paying predial in January or February. Paying in full at the start of the year effectively reduces an already-low tax rate further.
- No reassessment on sale: Unlike California's Proposition 19 or New York's market-value reassessment, Mexico does not automatically reassess cadastral values when a property sells. Your assessed value may stay well below market for years after purchase.
- Paid in pesos: Predial is billed and paid in Mexican pesos. When the peso is weak against the dollar — historically a recurring condition — your USD cost of this already-low tax decreases further.
ISAI: The Acquisition Tax
The Impuesto Sobre Adquisición de Inmuebles (ISAI) is a one-time transfer tax paid at closing by the buyer. In BCS municipalities, the ISAI rate is approximately 2–3% of the higher of the purchase price or the cadastral value.
On a $1.5M purchase, budget $30,000–$45,000 for ISAI. This is paid through the notario at closing and is non-negotiable — it is a municipal tax, not a fee subject to negotiation. Factor it into your total acquisition cost alongside notario fees, attorney fees, and fideicomiso setup costs.
ISR on Rental Income
Mexico's ISR (Impuesto Sobre la Renta) applies to rental income earned by foreign beneficiaries of fideicomisos. The default withholding rate is 25% on gross rental income, withheld by the property manager or tenant and remitted to the SAT (Mexico's tax authority).
However, foreign owners who register with the SAT and elect to file as "residents with business activity" can instead pay ISR at graduated rates on net income (after deducting allowable expenses including depreciation, maintenance, management fees, and fideicomiso costs). For well-managed properties with legitimate operating expenses, the effective tax rate under the net income election is typically 10–20% — significantly lower than the 25% gross withholding.
This decision — gross withholding vs. net income election — should be made in consultation with a Mexican contador (accountant) and your US CPA. The right answer depends on your gross income level, expense structure, and how the Mexican ISR coordinates with your US federal income tax obligation.
IVA: VAT on Short-Term Rentals
Mexico's IVA (Impuesto al Valor Agregado) — equivalent to VAT — applies to short-term rental activity at a rate of 16% on gross rental income. Rentals classified as short-term (defined as stays of less than 30 days in most contexts) are subject to IVA in addition to ISR.
If you operate your property through a licensed rental management company, the management company typically handles IVA registration, collection from guests, and remittance to the SAT. Platforms like Airbnb Mexico now collect and remit IVA directly on transactions processed through their platform, simplifying compliance for owners who list directly. Your Mexican accountant sets up the IVA registration and coordinates with your management company on filing.
Capital Gains on Sale: ISR
When you sell a Mexican property, the gain is subject to ISR at rates that vary based on how the sale is structured. Foreign sellers who do not have SAT registration face a default withholding of 25% on the gross sale price — regardless of the actual gain. This is the worst-case scenario and is avoidable with proper planning.
Sellers with SAT registration can elect to pay ISR on the actual net capital gain (sale price minus original purchase price, plus capital improvements, closing costs, and indexed cost basis adjustments for inflation). Under the net gain method, the effective tax rate for most foreign sellers runs 10–28% of the actual profit — a dramatically better outcome than 25% of gross proceeds.
The notario calculates and withholds the estimated ISR at closing; the final tax liability is settled in your annual SAT filing.
Frequently Asked Questions
US citizens are taxed on worldwide income regardless of where it is earned — so yes, Mexican rental income and capital gains must be reported on your US federal return. However, the US-Mexico tax treaty (in force since 1993) provides a foreign tax credit mechanism that prevents double taxation: Mexican ISR paid on rental income or capital gains is generally creditable against your US federal tax liability on the same income. The coordination requires a CPA familiar with both systems; the combined effective tax rate is typically lower than what you would pay on equivalent US-source income in a high-tax state.
Yes. Rental income from Mexican property is subject to Mexican ISR, either at 25% gross withholding or at graduated rates on net income if you elect SAT registration. For short-term rentals under 30 days, IVA at 16% also applies. Compliant operation through a licensed management company simplifies this considerably — the management company handles withholding and remittance, provides annual statements for your SAT and US filings, and manages IVA compliance. Non-compliance with SAT rental income requirements carries penalties and creates complications on eventual sale.
Mexico does not have a direct equivalent of the US Section 1031 like-kind exchange that defers capital gains tax on reinvestment. However, Mexico does allow a primary residence exemption (exención de casa habitación) for sellers who have lived in the property as their primary residence for at least three years — this can eliminate ISR on gains up to approximately $700,000 USD. For investment properties, the best capital gains mitigation strategies involve maximizing the cost basis (documenting all capital improvements with invoices), indexing the cost basis for inflation using the INPC index, and ensuring SAT registration so you pay on net gains rather than gross proceeds. Your Mexican accountant and US CPA should coordinate on exit planning well before you decide to sell.