What taxes a Mexican owner of a California home pays

Property tax, income tax if you rent it out and FIRPTA when you sell. The three items that define the real return on your property.

Buying is the visible part. Keeping the property and eventually selling it carries a tax burden worth knowing from the start, because it completely changes the return calculation.

1. Property tax

In California it runs around 1.1% of the purchase value per year, although it varies by district. Proposition 13 limits how much the taxable base can rise each year as long as ownership doesn’t change, which gives a good deal of long-term predictability.

On a $900,000 home that means about $9,900 a year. It is a fixed cost that always has to be added to the monthly mortgage payment.

Careful: a change of ownership can trigger a reassessment of the property at current market value, and with it a permanent jump in the property tax. It is one of the reasons the legal structure has to be decided before you buy.

2. Income tax if you rent it out

If you earn rental income you must report it to the IRS. The good news is that you report net income: you can deduct mortgage interest, property tax, insurance, maintenance, management and depreciation of the building.

Depreciation is the deduction most often overlooked and usually the most significant in cash-flow terms.

To file you need an ITIN. If you don’t have one, the property manager may be required to withhold a percentage of the gross income.

3. FIRPTA when you sell

The Foreign Investment in Real Property Tax Act requires the buyer to withhold a percentage of the sale price when the seller is a foreign person. That withholding is an advance payment toward the tax, not an additional tax: if your return shows you owed less, you claim a refund.

The practical problem is liquidity: you can receive considerably less than expected on closing day and wait months for the refund. There are mechanisms to reduce the withholding when the real gain is smaller, but they have to be requested before the sale closes.

Double taxation

Mexico and the United States have a treaty to avoid double taxation. In general terms, what is paid in one country is credited in the other. But you have to file correctly on both sides: it is where people who do it on their own most often go wrong.

What we recommend

1. An accountant with experience in both countries from before you buy, not after
2. Applying for the ITIN well in advance
3. Keeping receipts for every improvement to the property: they raise the basis and reduce the taxable gain when you sell
4. Planning for FIRPTA in your exit strategy

This information is for guidance only and does not constitute tax advice. Consult an accountant before making decisions. See also our legal and estate advisory.

If you are buying to rent, also look at the area with the best investment profile: Downtown San Diego.

We connect you with accountants who handle filing in both countries.