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1. How can a foreigner buy land in Baja?
There are currently only a couple of ways that foreigners can safely
own land in Baja. The primary issue is that virtually all of Baja lies
within the 'restricted zone' which is all land within 30 miles of the
coast and within 60 miles of the border. By law these lands cannot be
purchased by foreigners. HOWEVER, since that law proved to be so
detrimental to the economy of Baja, subsequent initiatives have made
it possible to circumvent the law legally(?).
The first, and most common method is the bank trust or fideicomiso.
This is a tool used to obtain full rights to a property while a Mexican
bank holds the title. It is not a lease. The owner, or beneficiary of
the trust has all the rights of ownership including right to use, sell,
develop, pass on to heirs and insure through a title insurance company.
He also has the right to pay property taxes. The term of a
fideicomiso is 50 years and is renewable for subsequent 50 year
terms. A fideicomiso costs $2,500 - $3,500 to set up and about
$500 per year to maintain. Initial cost will depend on a combination
of the purchase price, the appraised value, and which side of the bed
the Notario got out of that particular day. This is the recommended
method for purchase of a home, condo, lot, or other property that is
anticipated to remain in one piece.
Keep in mind that US owners of a Mexican fideicomiso must report to
the IRS on both Form 1040 Sched. B and Form 3520 that they own a
foriegn trust. All foriegn bank and financial accounts must also be
reported on Form TD F 90-22.1. Severe penalties can now be imposed
for failure to make these reports.
The second method is to form a Mexican corporation which will own
the property. A corporation can be fully owned by foreigners and
requires only two shareholders. This could be husband and wife or any
two people who agree on a sufficient number of things. One of them
can hold as much as 99% of the shares, so they don't have to agree on
everything. A corporation should be used for any property that may
be developed or sub-divided, or for anyone who may be buying
multiple properties which could all be owned under the same entity. A
corporation can cost about the same to set up, doesn't have an
expiration term, and can be set up to allow lots of flexibility without
requiring revisions along the way as a fideicomiso would. By law,
though, a corporation cannot be used to buy a residence for the
purpose of avoiding a fideicomiso. It is supposed to be for property
purchased for development or investment.
Proper reporting to the IRS of Foriegn Corporation ownership is also
required. Be sure to use a competent accountant or tax attorney who
is familiar with these reporting requirements, as they seem to change
quite frequently and noncompliance can be costly.
Finally, be aware that to sign any legal document in Mexico, you must
have a current tourist visa or a resident visa.
2. What is Ejido land and can it be purchased safely?
The Ejido system was initiated in Mexico in 1934 by President Lazaro
Cardenas. Originally intended to provide land to the landless masses,
it effectively deprived the masses of the benefits of property
ownership. An Ejido is a constitutional and legal concept which allows
groups of people to organize and jointly hold the rights to land
granted by the federal government under procedures established in
"Agrarian Law". Nearly all of the land in Baja was or is under the
Ejido system. It was intended that the land would be "owned" and
used jointly and could never be sold.
Finally recognizing the detrimental results of the system, the
government, in 1993, enacted changes to the Mexican Constitution
which created a process whereby Ejido land could be divided amongst
the Ejiditarios, (members of the Ejido), and titles of ownership
created for their parcels. This system made it possible to sell land
and actually remove it from the Ejido.
However, in order to benefit from this system, called Procede, an
Ejido must first accept the process through a vote of its membership,
and then follow the rules in dividing and registering the land parcels.
Unfortunately for some Ejidos, they failed to do this, sometimes for
lack of interest or understanding, other times because to register
meant the possibility of paying property taxes. And the sad fact is
that now the opportunity to use government funds for surveying and
doing all the paperwork has expired. Most Ejidos who didn't use that
opportunity are now unable to afford the cost of the process and,
therefore, are unable to divide and sell their land. Anyone attempting
to purchase from an Ejido in this position is very likely in for an
arduous and expensive ordeal that may never get anywhere.
But those Ejidos who did elect and then follow the process can sell
their land and the buyers can get clean titles and remove the land
from the Ejido and from the control of Agrarian Law. And that is the
number one question to ask when attempting to purchase from an Ejido.
When an Ejido divides its land, it issues a Certificado Parcelario for
the newly created parcel. This document is registered with RAN
(Registro Agrarian Nacional) and becomes a certificate of ownership
for the person named. While it is not a title, it gives the holder the
right to apply for and receive a title. Again, that further step is
usually not completed because it requires subsequent payment of
property tax. However, a Certificado Parcelario cannot be sold
except to a fellow Ejiditario. So when selling land under that
document, the original owner must first apply for the title and wait
for it to come from Mexico City before legally closing the sale.
A purchase from an Ejido requires a full understanding not only of
the applicable Agrarian Laws, but the individual Ejido rules and
customs, written and unwritten, which may affect the purchase. If the
leadership of the Ejido doesn't have the trust of the Ejiditarios, it is
not likely that any transaction will be approved. For an agreement to
be successful and free from future dispute, the process must follow
the very formalistic rules of the Agrarian Law as well as the internal
rules of the Ejido.
Now for the good news. If a purchase is made from an Ejido,
following all the rules, including the Ejido's internal rules, the
Agrarian Law, checking the tax, civil, administrative and other
registries, the land can achieve Dominio Pleno status. It is removed
from the Ejido and from Agrarian Law and is truly private property
under Civil Law. It can be protected with title insurance and can no
longer be subject to any prior claim. In this sense, it can be safer to
purchase than other types of private land.
3. Can I get title insurance on my purchase?
Yes. A few US title insurance companies are now insuring property in
Mexico. The three primary players are Stewart Title,
www.stewart.com.mx , Fidelity National Title, www.gs.fnf.com , and
First American Title, www.firstam.com
4. Can I get financing for purchasing real estate in Baja?
Yes. There are several sources for financing Mexican properties
from the US. Check with www.FinanceNorthAmerica.com, Stewart
Title Latin America or www.emexicomortgage.com
5. What will I pay in closing costs in Baja?
In Mexico it is typical for the purchaser to pay all closing costs with
the exception of any capital gains taxes due. These costs can be quite
high when figured as a percentage of the sale when the property is
inexpensive. For example, a lot costing $25,000 may have closing
costs of 30% of the price including a fideicomiso and the first year's
maintenance. This is because the fideicomiso and some other costs are
the same regardless of the price of the property. On the other hand,
a $500,000 property may cost less than 5% to close under some
circumstances.
In Mexico, unlike the US, the buyer is expected to pay for things like
an appraisal, a survey and a certificate showing that the owner doesn't
owe back taxes on the property.
While some items in the closing costs are fixed prices, there are a few
that are based on percentage of the sale. The acquisition tax is 2%
and a couple other fees are based on land value. But the charges can
change annually and vary in different locations. Please ask for a good
faith estimate for your specific transaction and avoid an unpleasant
surprise at closing.
There are currently only a couple of ways that foreigners can safely
own land in Baja. The primary issue is that virtually all of Baja lies
within the 'restricted zone' which is all land within 30 miles of the
coast and within 60 miles of the border. By law these lands cannot be
purchased by foreigners. HOWEVER, since that law proved to be so
detrimental to the economy of Baja, subsequent initiatives have made
it possible to circumvent the law legally(?).
The first, and most common method is the bank trust or fideicomiso.
This is a tool used to obtain full rights to a property while a Mexican
bank holds the title. It is not a lease. The owner, or beneficiary of
the trust has all the rights of ownership including right to use, sell,
develop, pass on to heirs and insure through a title insurance company.
He also has the right to pay property taxes. The term of a
fideicomiso is 50 years and is renewable for subsequent 50 year
terms. A fideicomiso costs $2,500 - $3,500 to set up and about
$500 per year to maintain. Initial cost will depend on a combination
of the purchase price, the appraised value, and which side of the bed
the Notario got out of that particular day. This is the recommended
method for purchase of a home, condo, lot, or other property that is
anticipated to remain in one piece.
Keep in mind that US owners of a Mexican fideicomiso must report to
the IRS on both Form 1040 Sched. B and Form 3520 that they own a
foriegn trust. All foriegn bank and financial accounts must also be
reported on Form TD F 90-22.1. Severe penalties can now be imposed
for failure to make these reports.
The second method is to form a Mexican corporation which will own
the property. A corporation can be fully owned by foreigners and
requires only two shareholders. This could be husband and wife or any
two people who agree on a sufficient number of things. One of them
can hold as much as 99% of the shares, so they don't have to agree on
everything. A corporation should be used for any property that may
be developed or sub-divided, or for anyone who may be buying
multiple properties which could all be owned under the same entity. A
corporation can cost about the same to set up, doesn't have an
expiration term, and can be set up to allow lots of flexibility without
requiring revisions along the way as a fideicomiso would. By law,
though, a corporation cannot be used to buy a residence for the
purpose of avoiding a fideicomiso. It is supposed to be for property
purchased for development or investment.
Proper reporting to the IRS of Foriegn Corporation ownership is also
required. Be sure to use a competent accountant or tax attorney who
is familiar with these reporting requirements, as they seem to change
quite frequently and noncompliance can be costly.
Finally, be aware that to sign any legal document in Mexico, you must
have a current tourist visa or a resident visa.
2. What is Ejido land and can it be purchased safely?
The Ejido system was initiated in Mexico in 1934 by President Lazaro
Cardenas. Originally intended to provide land to the landless masses,
it effectively deprived the masses of the benefits of property
ownership. An Ejido is a constitutional and legal concept which allows
groups of people to organize and jointly hold the rights to land
granted by the federal government under procedures established in
"Agrarian Law". Nearly all of the land in Baja was or is under the
Ejido system. It was intended that the land would be "owned" and
used jointly and could never be sold.
Finally recognizing the detrimental results of the system, the
government, in 1993, enacted changes to the Mexican Constitution
which created a process whereby Ejido land could be divided amongst
the Ejiditarios, (members of the Ejido), and titles of ownership
created for their parcels. This system made it possible to sell land
and actually remove it from the Ejido.
However, in order to benefit from this system, called Procede, an
Ejido must first accept the process through a vote of its membership,
and then follow the rules in dividing and registering the land parcels.
Unfortunately for some Ejidos, they failed to do this, sometimes for
lack of interest or understanding, other times because to register
meant the possibility of paying property taxes. And the sad fact is
that now the opportunity to use government funds for surveying and
doing all the paperwork has expired. Most Ejidos who didn't use that
opportunity are now unable to afford the cost of the process and,
therefore, are unable to divide and sell their land. Anyone attempting
to purchase from an Ejido in this position is very likely in for an
arduous and expensive ordeal that may never get anywhere.
But those Ejidos who did elect and then follow the process can sell
their land and the buyers can get clean titles and remove the land
from the Ejido and from the control of Agrarian Law. And that is the
number one question to ask when attempting to purchase from an Ejido.
When an Ejido divides its land, it issues a Certificado Parcelario for
the newly created parcel. This document is registered with RAN
(Registro Agrarian Nacional) and becomes a certificate of ownership
for the person named. While it is not a title, it gives the holder the
right to apply for and receive a title. Again, that further step is
usually not completed because it requires subsequent payment of
property tax. However, a Certificado Parcelario cannot be sold
except to a fellow Ejiditario. So when selling land under that
document, the original owner must first apply for the title and wait
for it to come from Mexico City before legally closing the sale.
A purchase from an Ejido requires a full understanding not only of
the applicable Agrarian Laws, but the individual Ejido rules and
customs, written and unwritten, which may affect the purchase. If the
leadership of the Ejido doesn't have the trust of the Ejiditarios, it is
not likely that any transaction will be approved. For an agreement to
be successful and free from future dispute, the process must follow
the very formalistic rules of the Agrarian Law as well as the internal
rules of the Ejido.
Now for the good news. If a purchase is made from an Ejido,
following all the rules, including the Ejido's internal rules, the
Agrarian Law, checking the tax, civil, administrative and other
registries, the land can achieve Dominio Pleno status. It is removed
from the Ejido and from Agrarian Law and is truly private property
under Civil Law. It can be protected with title insurance and can no
longer be subject to any prior claim. In this sense, it can be safer to
purchase than other types of private land.
3. Can I get title insurance on my purchase?
Yes. A few US title insurance companies are now insuring property in
Mexico. The three primary players are Stewart Title,
www.stewart.com.mx , Fidelity National Title, www.gs.fnf.com , and
First American Title, www.firstam.com
4. Can I get financing for purchasing real estate in Baja?
Yes. There are several sources for financing Mexican properties
from the US. Check with www.FinanceNorthAmerica.com, Stewart
Title Latin America or www.emexicomortgage.com
5. What will I pay in closing costs in Baja?
In Mexico it is typical for the purchaser to pay all closing costs with
the exception of any capital gains taxes due. These costs can be quite
high when figured as a percentage of the sale when the property is
inexpensive. For example, a lot costing $25,000 may have closing
costs of 30% of the price including a fideicomiso and the first year's
maintenance. This is because the fideicomiso and some other costs are
the same regardless of the price of the property. On the other hand,
a $500,000 property may cost less than 5% to close under some
circumstances.
In Mexico, unlike the US, the buyer is expected to pay for things like
an appraisal, a survey and a certificate showing that the owner doesn't
owe back taxes on the property.
While some items in the closing costs are fixed prices, there are a few
that are based on percentage of the sale. The acquisition tax is 2%
and a couple other fees are based on land value. But the charges can
change annually and vary in different locations. Please ask for a good
faith estimate for your specific transaction and avoid an unpleasant
surprise at closing.
US Toll Free 1-866-828-3089
BAJA LAND SOLUTIONS
San Quintín… where the real Baja begins
