Renting Out Your Mexican Pad

Let’s talk about depreciation
BY: ORLANDO GOTAY

It is incredibly tempting to rent out your Mexico home when you’re not there. Online apps and services like AirBnb and VRBO make this very easy. List, rent, collect the cash, repeat.

But you shouldn’t be surprised to learn that the taxman lurks. Sigh, of course. Today, I want to talk about some important items people frequently miss: depreciation and depreciation. Yes, I said it twice. Read on.

Depreciation is the monetary amount that reflects the wear, tear and use of an item over the course of its economic life. Anything wears out as it is used. For that reason, when you put a residential unit up for rent, depreciation needs to be computed each year so it can be included in deductions against the income produced by the rental. Normal stateside residential property is depreciated over 27 ½ years, but foreign real estate is depreciated much more slowly, over 40 years. In terms of real estate, buildings and structures depreciate. Land does not wear out so it cannot be depreciated.

The second thing you need to know is the “allowed or allowable” rule. If you are entitled to the depreciation deduction as part of figuring the rental income, either you take it or you get dinged for it later. Why? Because the day you sell or exchange the property, your basis in the property will be adjusted to reflect all that depreciation you took, or should have taken, and you will be taxed on it. In tax terms, it gets “recaptured.” Recapture for depreciation you never took really sucks. It also happens all the time and a lot of people miss out. However, if you’ve been missing out up until now, you could go back and amend returns for “open” years.

In the case of folks who use the property part of the time for their personal use and part of the time for rentals, the record keeping becomes a bit complex. It can include days when you or relatives used the property, maintenance days, and days the property was rented. Those are used to figure how much of the expenses can be included in deductions against rental income.

On the Mexico side, of course you are subject to ISR (income tax) and VAT on the rental itself.  A US (federal) foreign tax credit, based on the Mexican income tax paid, might be available to offset against the federal income tax due. There are lots of rules, and lots of special quirks when it comes to foreign real estate, so it pays to get acquainted with them.

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Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com, online radio at mixlr.com/orlandogotay or Facebook: GotayTaxLawyer.