What is ‘Total Cost of Ownership’?

Total Cost of Ownership (TCO) is a moniker that describes a financial estimate used to express the total direct and indirect costs of owning something over time.  This article highlights the principal costs which make up the ‘TCO’ of residential property in Mexico, including some of the less apparent and sometimes overlooked costs associated with buying and owning property here.

Up-front property purchase costs

Before the exchange of a property can take place, buyers will have some up-front costs to budget for; for example:

Discovery visits

If you don’t live in Mexico yet, or if you live here and plan to move to a different region in Mexico, you will need to budget for transportation and accommodation costs to visit the place(s) you are exploring for property purchase.  We strongly recommend that you never purchase property in Mexico “sight-unseen;” it’s wise to always visit the location and locale, and the properties (or building site) that you are interested in buying, in-person.

Buyer surveys

While these are not common in Mexico, some buyers may choose to hire a professional building surveyor to inspect the property before they make an offer to ascertain the state of the current build and costs that might be required to ‘make-good’ any dilapidation, and to ensure that there are no severe structural faults (for example, that might have been caused by earthquakes or natural land subsidence) that could be expensive to deal with, or perhaps even impossible to rectify without reconstruction.  Surveys are more commonly undertaken on older properties, but any buyer can hire a surveyor to check any building if they wish to do so and if the seller objects to a surveyor’s visit, then that might be a warning sign to the buyer.

Property valuation reports

Some sellers will hire a professional property assessor to undertake a study of the property and its neighborhood and produce a property valuation report.  In Spanish, these are called an Avaluo and they cost between US$200-$300 to get commissioned by an experienced professional.  Buyers are advised to do their own research and not take these reports as Gospel. (They are commissioned by the seller, after all.)  Some buyers might commission their own valuation report; this is not a common practice, but not impossible if the seller is willing to allow an independent assessor to visit the property.

Property purchase closing costs

‘Closing costs’ is a term that describes the fees and charges that buyers need to pay when they complete a legal property transfer.  Once a buyer has made an offer and had that offer accepted, a contract will be drawn up to begin the property exchange procedure, and the assignment of closing costs will usually be documented in the contract to avoid misunderstanding between the parties.  These usually include how and who will pay costs such as Notary Public fees, sales taxes and any other charges that may be required to secure the property’s legal transfer.  Closing costs vary; as a rule of thumb they may range between 5% and 10% of the property’s sales value.  This should be priced in to your TCO as they’re part of the overall investment.

Ongoing property costs in Mexico

When you have taken possession of your Mexican property, there are a range of costs which may not be immediately apparent, but that ought to be taken into account when you calculate your budget.  These include:

Property taxes

In Mexico, the annual property tax is known as the Predial.  It’s pay-able by property owners once a year at your local Municipality.  Some regions send a bill, others don’t but all run local ad campaigns reminding property owners to pay.  Rates vary depending on the state, the area, and the size of your home. Typically, your property tax bill in Mexico will equate to a small few hundred dollars per year and could be less than US$100 a year if your home is small and in a rural area.  You can learn more about property taxes in our Mexico Cost of Living Guide

Property service fees

If you purchase a condominium, apartment, penthouse, or a property which is part of a gated community, you will need to contribute the ongoing maintenance and service fees which pay for the amenities and and services provided at the property.  These services may include a swimming pool, gym, club house, golf course, gardens and other common areas, sports facilities (e.g. tennis courts) as well as services like watering the lawns, lighting the common areas and paying for gate security/access if this exists on-site.

If you buy the property from new, the annual services may start out quite low, because everything is new and very little maintenance is required.   In due course, buildings will need maintenance and repairs done to them, and sometimes the owners may be asked for a lump sum to pay for a major project—for example, the swimming pool may need major repair or maintenance.

Co-operative ownership of spaces and services is a great way to enjoy facilities; for example, the cost of running a swimming pool between twenty owners is far less than maintaining your own, and it’s also more environmentally friendly as the resources are shared across a defined community.   However, when you buy into a shared community, be sure you understand what the maintenance and service fees are, and be realistic about their (highly) likely need to increase over time, especially if you buy into the project when the building is brand-new.

Land trust fees

If you are not a Mexican citizen and plan to buy property within 50km (~30 miles) of the Mexican coast or 100km (~60 miles) of one of Mexico’s land borders, the law requires that the land be held in a Trust, known as a Fideicomiso.  (This is due to Mexico’s constitution prohibiting foreigner’s direct ownership of land near borders and the sea.)

The Trust that is set up when you purchase property through it ensures that the asset becomes yours in all but name. Trusts are usually set up through a local bank, and all banks in Mexico have a department dedicated to servicing Trusts for foreign property owners.  Trusts carry an initial set-up fee, plus an ongoing yearly fee to maintain.

The exact fees vary depending on the value of the property transaction, but set-up costs are around US$1,000 and ongoing Trust fees can range from between US$500 and US$2,000 per year.  Even at the lower range of the fee scale, this is a recurring cost that you need to take into account when you purchase land or property near the sea or a land border in Mexico.

If you purchase land or property inland of these distance limits, there is no obligation to set-up a trust and you may own the property in your own name. (Some owners choose to place the property into a Trust anyway, for estate planning purposes.)

Electricity supply to your home

To the surprise of many foreigners, electricity costs can be high in Mexico relative to local earnings, although if you keep your consumption in check, electricity can conversely be quite inexpensive here.

To keep your electricity bill low in Mexico you must remain within a subsidized ‘allowance’ of energy consumption every sixty days (the billing cycle).  The allowances vary by state and region, and local climate is taken into consideration; for example, if your home is situated in a hot climate zone, there is a higher subsidy (allowance) during the hot months, to help you cool your home.

If you exceed your subsidized allowance, two things happen: first, your unit cost increases for the entire amount consumed, not just the amount above the excess; second, the generous government subsidy is withdrawn —shown as a specific credit subtracted from your bill— leaving you to settle the entire so-termed “true” cost of the electricity.

The use of a modern ceiling fan consumes a low amount of energy; however, air conditioning units consume a lot of electric and these will usually cause a property to exceed its ‘subsidized’ kilowatts usage limit if used liberally, and you’ll need to budget for this during the hotter months of the year. You can learn more about electricity prices in our Mexico Cost of Living Guide.

Drinking water supply

If you live somewhere like the US or Canada, you’ll be accustomed to having potable water piped directly to your home, ready for human consumption straight from the tap.

Good quality hotels and resorts in Mexico purify their water systems so that guests may enjoy the same arrangement.  When you take possession of your home in Mexico, the water supply might or might not be fit to drink straight from the tap.  It’s a moot point: some people say it’s perfectly drinkable, others say no.

The truth is that it probably depends upon where your home is situated.  Many factors affect this issue: the supply itself, but more often the pipes which transport it to your tap.  In any event, most foreigners (and many Mexicans) buy bottled water.

A vessel containing twenty liters of drinking water will cost you between $15 and $40 pesos (US$1.60-$2.60), depending upon where you are situated in Mexico, and whether you pick it up yourself or have it delivered.  This can add around US$300-$400 a year to a household budget for two people. You can learn more about water systems in Mexico here on Mexperience.

Property management fees

If you won’t be staying full-time at your home in Mexico, you’ll need to hire someone to manage the property for you while you’re away.   Vacant properties are a favorite target for burglars and, in any event, it makes good sense to have someone looking after the property in your absence not only to mitigate burglaries, but to ensure the property is kept clean and checked after heavy storms, hurricanes, or earthquakes.

The precise fees will depend upon how much work the property manager needs to do.  If the property will be left vacant, and simply needs the post, bills, a bit of cleaning undertaken and routine checks made after storms, etc., the cost could be limited, perhaps US$75-$100 a month.  If you plan to rent out your property then property management fees will increase to reflect the extra services the property manager undertakes such as reception of your guests and providing a local point of contact should they need anything or something goes awry during their stay.

You’ll also have to pay agency commissions if a renter is found on your behalf.  Sometimes the property manager and the realty agent are the same person and sometimes they are not.  In any event, there are two separate fees to account for: the management fees and the rental fee commission.

Home insurance coverage

Sometimes overlooked, but vitally important to protect what is likely your most valuable physical asset in Mexico, is home owner’s insurance.

If your home is on or near the coast, storms, winds and flooding are key risks; elsewhere, risks from earthquakes and volcanic activity as well as flooding from any nearby rivers and lakes need to be mitigated with an adequate home insurance policy to ensure that you are not left with huge bills (or substantial loss of your investment) should unforeseen events take a toll on your property.

Our detailed guide to insuring your home in Mexico explains what you need to know and key considerations you should take into account when choosing an insurance policy.

Property sales fees

One day, you or your heirs will probably want to sell your Mexican property.  We mentioned the cost of commissioning a sales valuation report earlier, and there are a range of other costs and fees that sellers need to take into account when they decide to sell their residential property, including the agency costs if a realty agent is retained to market the property.  Our article about the costs and taxes of selling property in Mexico explains these in detail.

Learn more about property in Mexico

Mexperience offers detailed insights about property in Mexico for buyers, owners, renters, and sellers.

• Latest articles and insights about real estate in Mexico
• Working with a realty agent in Mexico
• Insuring your Mexican home
• Enjoying your home and home life in Mexico

Prices may be agreed in US dollars, but official amounts are documented in Mexican pesos

In many towns and cities across Mexico, house prices are quoted in Mexican pesos when they are offered to the market for sale. However, in a few places —and most notably in Los Cabos, Puerto Vallarta, San Miguel de Allende, Ajijic/Chapala, and Cancun/Riviera Maya— home prices can often be seen quoted in US dollars.

Even though the sales transaction may be marketed (and agreed between the parties) in US dollars —or some other foreign currency— the amount to pay to close the transaction will be documented in Mexican pesos and the title deed will express that amount at the exchange rate prevalent on the date of the closing.

When you sell the property, any capital gains are calculated only in Mexican pesos and therefore shifts in the exchange rate can influence your tax liability as expressed in a foreign currency.

The ‘exchange rate effect’ when you sell

The best way to understand the ‘exchange rate effect’ is through an example.

Suppose you agreed to purchase a home in Mexico for a peso-equivalent value of US$500,000 dollars years ago, when there were $10 pesos to the dollar:

• your title deed shows a sale value of $5 million pesos;
• if you agree to sell the home today for the same US$500,000 dollars (with around 20 Mexican pesos to the US dollar), the peso value sales equivalent is close to $10 million—creating an effective $5 million pesos ‘capital gain’ on the property;
• so in this situation, even though you have realized zero gain in US dollar terms, you have realized a capital gain in Mexican peso terms, and you’re liable to pay capital gains tax on that peso gain when you sell.

If your home’s market value has doubled over that same time period, and you agree to sell for one million dollars:

• your sale price would be calculated and documented at about $20 million pesos creating a capital gain of around $15 million pesos ($20m less $5m pesos);
• in this situation, your gain in US dollar terms is US$500,000 (10 million pesos, at $20 pesos to US$1); however,
• your capital gain is calculated in pesos, on around $15 million pesos—equivalent to ~US$750,000 dollars;
• which means your capital gain is calculated on a sum that’s about 50% higher than your capital gain in US dollar terms.

Worthwhile tax allowances are available for residents

If you’re resident in Mexico and have a tax ID here, you may be able to avail yourself of some worthwhile tax exemptions and deductions that may reduce or eliminate any capital gain tax liabilities, but you cannot avoid the effect of the ‘capital gain’ expressed in pesos brought about through the exchange rate effect when the sales value was based in US dollars.

Keep this in mind when you are ready to sell if you purchased a home in Mexico negotiated using a US dollar value, because your tax liabilities are always calculated on the amounts documented on the title deeds in Mexican pesos, not any foreign currency equivalent.

Learn more about property in Mexico

We publish a range of free eBook guides about property and real estate in Mexico:

• View the latest articles about real estate in Mexico
• Free eBook: Comprehensive guide to buying and selling real estate and renting property in Mexico
• Free eBook: Guide to finding and working with a realty agent in Mexico
• More: browse all our Mexico real estate-related eBooks, available for free download.

These vary depending on the type of property and what state it’s situated in, and the Notary Public processing the legal transfer will advise you on which costs and taxes are applicable as part of your transaction.

Closing costs you need to budget for when you buy a house in Mexico

Here is a list of the principal closing costs you’ll need to take into account.  There might be other fees, but these are the main ones most buyers face when they purchase a residential home in Mexico.

Property acquisition tax

This tax is paid on the sale value of the property and is typically equivalent to about 2-4% of the sales value, depending on the Mexican state in which you buy. (Some states are raising this rate that can be as much as 6.5%.) This tax is paid whether the property is sold, transferred, donated, placed into trust, split-off, or merged.

Sales tax (IVA) on residential property

Mexico’s sales tax us known as IVA that stands for Impuesto al Valor Añadido (Value Added Tax).  No IVA is payable on residential property.  Commercial property transactions are liable to IVA at the current rate in addition to the acquisitions tax.

Property appraisal tax

The tax authority might choose to perform a commercial appraisal (audit) of the property after you purchase it. If the appraisal value is greater than 10% of the price you paid for it, you will be asked to pay 20% tax on the difference between the two amounts.

Federal Register registration fee

When purchasing a home, the buyer pays a fee (based on the value of the transaction) to have the public records updated and the legal Title Deed (re)issued. The rates vary depending on what Mexican state you buy in, and you should budget for about 2-4% of the sales value.

If you purchase property on agrarian terms you don’t need to pay this, but you might have to pay a similar fee to the local comuneros as part of the paperwork involved in that transaction.

Fees for Public Notary services

Buyers are required to pay fees to the Notary Public for services provided to transact the legal matters related to the sale. Notary fees are based on the transaction value and vary by state.

The buyer gets to choose which Notary Public to use, so it makes sense to check several Notaries locally for their current rates —and if you are working with a realty agent ask for their recommendation too. Typically, Notary Public fees work out to between 4%-7% of the sales value.

Fees for the property trust, fideicomiso, if relevant

If you purchase property within the 50km/100km ‘restricted’ zones (near coasts and land borders), you will need to pay a local bank to set up and manage a property trust for you, and there are government fees to pay as well.

• Banks charge around US$1,000 equivalent in Mexican pesos to set-up and manage the trust through the bank.
• In addition to the bank fee, there is a one-time government fee to pay to set-up the property trust permit in Mexico, amounting to about an additional US$1,000.
• The bank makes an annual service charge amounting to between US$1,000-$2,000 equivalent in Mexican pesos. The annual service fee covers trust administration and certain legal obligations (e.g., the filing of necessary documents annually) by the bank on your behalf.
• If you want to expand or alter the trust, e.g., add or remove beneficiaries, there are additional bank administration fees and government fees to do this.
• When you sell the property, you will need to cancel the trust, and the bank charges around US$1,000 fee to do this.

Some people choose to place their property into a trust even if it’s not situated in the restricted zone as part of their estate planning preparations. You should seek professional financial planning advice about whether this is appropriate in your circumstances.

Foreign national acquisition permit

If you are not a Mexican national (natural or naturalized) and depending on which Mexican state the property or land is situated in, the transaction may require a special permit that grants a foreign national the right to hold title deed of a property logged in their name on the Federal Register.

Check with your Notary Public, who advise you if this is necessary in your case and will usually manage the filing on your behalf if it is.

If you need this permit, its cost will add around US$300 government administration fee to your closing costs. If you hire a Notary Public or attorney to file this on your behalf, you will have those costs to pay in addition to the government fee.

Other attorney fees

If you hire a lawyer in addition to the Notary Public (the legal process must be filed through a Notary Public), you will also need to pay they lawyer additional fees for services they undertake on your behalf. These should be negotiated in advance.

Buyers may need to hire a lawyer in addition to the Notary Public if there are complications with the purchase and they need specialist advice on the matter.

Land and/or building surveys

Unlike some states in the US, sellers are not legally liable for any deficiencies that might be found on a property after its sale.  For this reason, it’s prudent to hire a professional land and building surveyor to assess the property before you sign a contract.

Pre-purchase surveys are optional and their cost falls entirely on the buyer. The fee for the survey/study will depend on type, extent, and complexity of surveys undertaken, and the size and type of property being surveyed.  Ask your realty agent, architect, or building project manager for advice and details about this. Some local architect firms might offer survey work as part of their services.

Gated community and condo service fees

If you are buying a house in a gated community, or a condominium, be sure to check on the annual service fees, and have these put in writing.

Service fees can range from a few hundred to a few thousand dollars a year, depending on location, number of houses or apartments in the enclosure, and the scope of the amenities present.

Keep in mind that service fees tend to rise year-on-year, especially as developments get older and more maintenance or structural repair is needed, e.g. to water cisterns and swimming pools.

Property title insurance

When you buy property in Mexico, you might consider purchasing title insurance. You must purchase this at the point of purchase, before you close on the property.  Rates are based on the sale value of the property. Learn more on this article.

Costs and taxes when selling a Mexican Property

When you eventually sell a residential property in Mexico you will need to budget for a range of additional fees and taxes as part of the sales transaction.  You can learn about these on this sister article: Costs and Taxes of Selling a Property in Mexico.

Learn more about property in Mexico

Mexperience offers detailed insights about property in Mexico for buyers, owners, renters, and sellers.

• Latest articles and insights about real estate in Mexico
• Working with a realty agent in Mexico
• Insuring your Mexican home
• Enjoying your home and home life in Mexico

The three main costs when you’re selling a property in Mexico are:

• Selling fees;
• Professional service fees; and
• Taxes.

Selling fees

It’s possible to market and sell your property without the services of a local realty agent; however, as we explain in our Guide to Realty Agents in Mexico, a good realty agent provides a marketing service, a conduit between the negotiating parties, and someone who will help to work through the paperwork to bring a property sale to successful completion.

Realty agents in Mexico typically charge between 5% and 8% of the sale price in commission—and you need to add Mexican sales tax (IVA) to this (16%), so if the agent’s commission is 5%, the tax-inclusive payment will be 5.80% of the final sales price; and if the agent’s commission is 8%, the tax-inclusive payment will be 9.28% of the final sales price.

Professional fees

In Mexico, the role of the Notary Public is paramount in property transactions.  As we explain in our Mexico Real Estate Guide, a Mexican Notary Public is a legal professional with very important statutory roles.  The fees for the Notary Public are paid for by the buyer.  Some buyers also choose to hire a lawyer, which can add several thousand US dollars to their total fees, but this is not necessary for most transactions. If the property you are selling is held in a Bank Trust (fideicomiso), then you will also need to budget for a ‘trust cancellation fee’ that is levied by the bank; the amount varies, but you should budget for around US$1,000 to cover this.

Taxes on the sale of residential property in Mexico

Taxation on residential property sales is a complex area of Mexican tax law and every case will be slightly different depending on the circumstances.  Also, keep in mind that tax laws are subject to reform and because house purchases tend to be long-term investments, the tax laws which apply today might apply entirely, in-part, or not at all when you come to sell your property years from now.

These are the key principles of residential property taxation as of the date of this article, and guidelines here are intended to help you compose an estimate of the taxes you will be expected to account for when you sell a residential property in Mexico. (Different tax rules and rates apply when you sell commercial property.)

We recommend that you seek professional advice from a Notary Public, tax accountant, or other professional/legal service firm in Mexico to get a detailed appraisal of your situation.

Note also that if you are not a Mexican national then you might also be liable to taxes in your home country and you should seek advice from a specialist tax accountant in that respect, too.

Capital Gains Tax

Mexico applies a capital gains tax on residential property of 25% on the gross sales value of the transaction without any deductions OR between 1.92% and 35% on the value of the gain (purchase costs less allowable exemptions and deductions): the percentage is calculated on a sliding scale in relation to the gain and we recommend you assume 35% as residential property sales with a gain above $250,000 pesos (c.$13,000 US dollars) will be subject to this rate.

One-time tax allowance exemption

A one-time tax allowance exemption is available under Article 92, Fraction XIX a) of Mexican income tax law that reduces the tax liability for many family homes, although you and the property must meet certain criteria to qualify for the exemption:

• you must be resident in Mexico* with a Mexican tax ID (known as a RFC, or Registro Federal de Contribuyentes); and
• the property you’re selling must be your primary residence in Mexico; and
• the land subject to the sale must not exceed three times the size of the construction on that land (measured in square meters); and
• you can only claim this exemption once every three years.

The flat-rate exemption is the peso equivalent of 700,000 UDIs; the value of UDIs fluctuates and you can get current UDI exchanges rates on the Bank of Mexico website. At the time of writing, 700,000 UDIs equates to approximately $5.06 million Mexican pesos, and you can deduct this amount from the sale price if you qualify.

Co-titled property

If the same home is properly co-titled with your spouse or other family member and they are resident in Mexico* with a Mexican tax ID, and the house is their primary residence too, you can deduct an additional 700,000 UDIs in their name.

The tax-deductible allowance is not automatic: you must qualify, and you must prove the qualification.  Talk to your Notary Public about how to arrange this and what you need to do to present the necessary records for proof.

Talk with a licensed accountant or other professional firm who is experienced in property matters about getting a RFC if you hold legal residency in Mexico but don’t currently have a RFC number and want to use this as a means to claim the tax deductible allowance when you sell your residential home.

* Mexican income tax law does not expressly state whether the foreign person selling a property must have temporary or permanent residency status to avail themselves of capital gain tax exemptions; it does, however, expressly state that the seller must be selling his/her primary residence in order to qualify for tax exemptions on capital gains. The Notary Public dealing with the matter will interpret the law; some will apply the capital gains exemptions only if the seller has residente permanente status; some Notary Public offices may apply the exemptions to foreign residents with residente temporal status.  You can read about the differences in these two residency statuses on our Mexican visas and immigration page.

Deductions allowed for capital improvements

You can deduct the costs of any capital improvements (e.g. building extensions, new flooring, swimming pools, new rooms) while you owned the property, as well as some closing costs commonly incurred when purchasing a home.  You need official receipts —in Mexico, these are known as ‘facturas’— for all services and building work to claim these allowances when you sell, so be sure to take advice from your Notary Public and/or accountant on how to account for these—and follow it.

Any capital improvements made using a firm or builders who didn’t issue you with facturas for the work cannot be deducted.  General maintenance and home improvements, like remodeled kitchens or new bathrooms, do not count as capital improvements.

The currency exchange rate effect

In most towns and cities across Mexico, home prices are quoted in Mexican pesos when they are offered for sale. However, a few places and most notably in Los Cabos, Puerto Vallarta, San Miguel de Allende, Ajijic/Chapala, and Cancun/Riviera Maya, home prices are often seen quoted in US dollars.

Even though the home may be marketed in dollars and the transaction amounts may be quoted in dollars, the deed will show the amount in Mexican pesos at the exchange rate prevalent on the date of the closing. Any capital gains are calculated only in Mexican pesos and therefore, shifts in the exchange rate can affect the capital gain calculation as expressed in a foreign currency.

Learn more: Read Exchange Rates and Capital Gains on Your Mexican Home to understand how foreign exchange rates can influence capital gains calculations on property in Mexico, because your tax liabilities when you come to sell are calculated in pesos, not dollars.

Selling your Mexican home as a non-resident

If you are not a resident in Mexico and/or you don’t have a Mexican tax ID, you cannot claim the one-off allowance exemption explained above, although you can claim qualifying deductions, so long as you have the official receipts (facturas) to prove the expenditures which can be deducted.

Your Notary Public is a key contact

The Notary Public (in Spanish, Notario Público) is the most important professional person you will deal with when you buy and sell property in Mexico.  Don’t rely on hear-say and instead get the Notary Public to assess your individual situation and the taxes that will likely apply to it.

When you’re buying property, talk with the Notary about what you need to do to plan your estate efficiently, how to structure your arrangements, and how to keep the proper records you need to ensure that when you come to sell your property you (or your heirs) are prepared.

Every property transaction has its own quirks and unique characteristics; cultivating a good relationship with your Notary Public is a crucial aspect of successful property investment in Mexico.

Learn more about property in Mexico

We publish a wide range of guides and articles about property and real estate in Mexico:

• Learn about the costs and taxes of buying property in Mexico
• How do property owners value their Mexican house?
• What drives house prices in Mexico
• Putting your house on the market for sale
• Comprehensive guide to buying and selling real estate and renting property in Mexico
• View the latest articles about real estate in Mexico

The information published in this article is provided for general information in good faith and is not intended as personal, legal, financial or investment advice.