What is the fideicomiso? If you are going to purchase property in Mexico, you need to know the ins-and-outs of this important document.

Simply put, the fideicomiso is a long-term irrevocable bank trust. A Mexican fiduciary bank holds the title to the property and cedes the rights to own and occupy, remodel, sell, give away or leave to your heirs.

The fideicomiso is not a lease, but a renewable trust held currently for 50 years (and renewable) by the Mexican government. If you are buying property outside of the Restricted Zone – more on that later – you can hold title to the property.

Now, a little history on the origin of the fideicomiso. Legal ownership of real estate in Mexico for foreigners comes from the Foreign Investment Law that was approved by President Luis Echeverria in 1971. It became law in 1973.

This law exists because notaries and other businessmen in Mexico recognized the huge asset Mexico’s coastline represents. These leaders realized there was an opportunity to attract foreign investment. To have funds for economic development in the 70s was of paramount importance, and U.S. dollars were highly desired. How to make this asset available to foreigners and not violate the Mexican constitution was the dilemma. The key became the fideicomiso, or trust.

The 1917 Mexican Constitution banned foreign ownership of any land within the Restricted Zone, which is land located within 100 kilometers (62 miles) of any national border and within 50 kilometers (31 miles) of any ocean.

The Foreign Investment Law of 1973 allowed a different treatment of real estate within and outside the Restricted Zone. Foreigners can own land outside the RZ without the need of a trust. Chapala and Guadalajara are locations where a number of foreigners own with a simple escritura or deed. Land inside the RZ would be within a fideicomiso trust.

The investment trust program was very successful, and in 1989, the Mexican government signed into law the ability for foreigners to have successive extensions of the trust thorough a simple application process when time for expiration of the original trust period came due.

In 1994, the new Foreign Investment Law allowed a beneficiary to have a trust for 50 years, with the application for extension or renewal still intact.

The trust is privately held in a Mexican bank authorized to act as a trustee. The trusts are not assets on the books of the bank, nor are banks allowed to take any action without written instruction from the beneficiary of the trust. The bank holds title to the real estate in trust, and the foreigner is designated as the holder of the beneficial rights of the trust, which includes the right to sell, improve, and will to heirs, or exercise any legal right under law.

As beneficiary, the foreigner has the equitable interest in the property through whatever market variations may occur. In other words, any equity or the loss of equity accrues to the holder of the trust, not the bank.

When the actual sale takes place at the office of a notary, the foreign owner may assign his/her beneficial interest in the trust to the new buyer (for a Mexican National, he/she endorses the title in favor of the buyer). The new owner may wish to establish a new bank trust where he/she is named the primary beneficiary. In this case, he/she will issue instructions to the notary for this purpose.

Closing costs for the buyer are normally acquisition tax, city appraisal, foreign permits, bank trust set-up and first year administration fee, notary costs, title insurance or survey, if requested.

Closing costs for the seller include payment of capital gains tax, trust cancellation, if applicable, and real estate fees. Capital gains tax is computed using the declared value of the purchase price in the seller’s deed and the tax value, which form a basis to index appreciation or depreciation, and deduct allowable receipts to arrive at an amount of tax. Each individual case will be different and proper analysis by a qualified professional is necessary. This computation is usually done by the notary closing the sale.

This article is based upon legal opinions, current practices and my personal experiences in the Cabo San Lucas area. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.