Living in Los Cabos: Getting Into Trouble

By: Carol Billups

Jun 03 2015

Tags: , ,

Category: Uncategorized

Leave a comment

I’ve said it before and will no doubt have to say it again: yes, it is possible to get into trouble in Mexican real estate. And in every case I know of, it was because someone thought they could out-smart the system. Guess what? They’re not that smart. Here’s today’s example. And unfortunately, it’s a true story.

Several years back I was the seller’s agent on a transaction; it was a real steal. Well, everything is relative in real estate, but this house should have been valued at about a million, and we were dumping it at $650,000. For a reason. This lesson is only part of the story but worth repeating. Some years ago my client purchased it directly from another individual who convinced him that he could save closing costs by just buying the shares of the corporation that owned the house. Now, closing costs are significant here, the cost to set up the trust is only part of it. The government charges the buyer a 2% acquisition tax, and the seller pays income tax on the profit they’ve made on the appreciation. So it was popular back around the turn of the century for some ‘smart’ people to put their homes into corporations. The trust owned the house, but the beneficiary of the trust was a foreign corporation. So far, this is all legal. Not smart, but legal.

Then, when it came time for the house to change hands instead of going through a normal closing the seller would simply sign over the shares of stock thus evading taxation. Worse were the ones involving ‘off shore’ corporations based in places like the Cayman Islands, known for their liberal fiscal policies. This was going quite well until someone finally figured out that in addition to passing on the house the seller was also passing on a liability for taxes. In fact, it was a huge liability as the Mexican Congress, recognizing the problem, passed into law a penalty rate for any home held in a corporation based in any one of 30-some countries considered tax havens. That rate was 45% of the gross sales price with no deductions of any kind. Ouch! So just like a game of Musical Chairs, the music stopped and someone was left holding the bag. In this case it was my client. When I met him he was so disgusted with the situation he ordered me to just dump it quickly; hence the low price. So we sold his million dollar home for 650,000 and he went home with about a quarter million in his pocket.

There are still unknown numbers of houses in off-shore corporations scattered around Los Cabos, and I’m sure there are people buying and selling them, thinking they are out-smarting the system. Yep, there really is one born every minute. And that’s only half the story.

A delightful young couple bought the home; she a Mexican citizen and he a foreigner. Now remember, for a foreigner to own property within 50 KM from the ocean it must be held in trust, known as the Fideicomiso, with a Mexican bank. There are costs to setting up that trust, and the bank gets an annual fee which is usually under $500. Mexicans can own the property outright, so their closing costs are slightly lower even though they still pay the acquisition tax, registration, etc. So they decided to outsmart the system by putting it in her name only and avoiding all the fuss with trust and bank. Which was great for a while. Recently I ran into a neighbor of theirs and as we were chatting it came out that everything is not happily ever after for that couple. In fact, they have split and he is livid. You see, he paid for the house 100% with his earnings. Yet he put it in her name to save money on closing costs. And now he’s learning the magnitude of that mistake: it’s her house. He has no legal claim on it. Including closing costs he invested almost $700,000 US and just a few years later has absolutely nothing to show for it. If he had not tried to outsmart the system the trust would have guaranteed him at least a 50% share as co-beneficiary. Again, ouch. Oh, and how much did he save by gaming the system? I just ran sample closing costs. If the purchase were made today it would have cost $26,266 to put the house into a trust versus $21, 726 to put it into the wife’s name. So to save $4,540 plus a few years annual fees he lost $650,000. Very smart.

The system is in place to protect you; buying real estate here is safe and secure as long as you do it the right way. And the next time you hear some horror story about some innocent person who lost everything, ask a few more questions. In every case you’ll find they’re not so innocent after all: they brought it on themselves by cutting corners to save money. No, they were not smarter than the system.  Be smart yourself: use the system.

Carol Billups is Broker/Owner of Cabo Realty Pros. She has enjoyed working with both buyers and sellers for over fourteen years and still thinks hers is the best job on earth. She is also the real estate columnist for Los Cabos Magazine and a member of the Board of Directors of our Multiple Listing Service MLSBCS. You can read more of her articles on the website blog www.caborealtypros.com. You can reach her from the U.S. or Canada at 1-760-481-7694, or in Cabo at 044-624-147-7541. You can listen to our 24/7 broadcast on http://www.livecabo.net for a mix of happy music, weather reports and local information.

© 2015 Carol S. Billups

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: