Renting out real estate is one of the popular ways to generate income in Mexico, especially in tourist regions. However, with the prospect of earning money comes the responsibility of complying with tax laws. Any commercial activity in Mexico is subject to taxation. In recent years, Mexico's tax authority (SAT) has increased its scrutiny of rental income, including income generated through e-commerce platforms such as Airbnb. We will analyze the main aspects of rental taxation when rented by individuals so that you can not only avoid fines, but also optimize your tax obligations.
Renting out real estate is subject to several taxes, depending on the type of rental (long-term or short-term) and your tax status. Tax Administration (SAT) requires all landlords of houses, apartments or commercial premises to provide VAT and Income Tax Returns (ISR). These taxes are defined in the Code of Taxation of the Federation (CFF), the Law on VAT (LIVA), the Law on Income Tax (LISR) and other Mexican tax legislation.
First of all, property owners in Mexico, you should register with the Federal Register of Taxpayers and obtain a tax number (RFC). Landlords' primary responsibilities include maintaining accounts and issuing electronic receipts for each rental amount received. Keep your books, request tax receipts, submit declarations: preliminary for income tax ISR, final for VAT and annual (during April of each year), and also informative. If you rent out your home and don't pay taxes, and the SAT finds you received income without paying or reporting taxes, the Treasury may be able to check your income for the last five financial years. In addition, cases of change of address, increase or decrease of obligations and suspension of activities are required to be declared to the SAT.
Here are the main taxes that apply to rental real estate.
- Income tax (ISR, Impuesto Sobre la Renta): tax on income received from rentals. The amount varies depending on your annual income and tax regime. The most commonly used standard progressive scale is from 1.92 to 35%. If you rent out your property through platforms like Airbnb, they automatically deduct a 4% upfront tax (before Airbnb fees and other expenses) and then you pay extra at the end of the reporting period. That is, the tax withheld appears on your tax return as paid in advance and can be offset against your annual income taxes.
If you rent out real estate to a legal entity, you are required to withhold 10% of the income as income tax. You have the option to deduct this amount from your returns. Renting houses and premises used for agricultural or livestock purposes are exempt from VAT.
ISR is calculated by applying a rate to the profit received, which is the difference between the income received and the deductible expenses paid.
- Value Added Tax (IVA, Impuesto al Valor Agregado): applies only to short-term rentals (less than 30 days). The IVA rate for private lettings is 8% (50% of the full rate) and this tax is also withheld by the platform.
VAT at the full rate of 16% applies to the rental of commercial premises, houses or real estate that are intended or used as hotels or when rented to legal entities. In addition, the IVA applies to Airbnb's fees for using the platform. Specifically, if Airbnb's commission is 15% of your income, the 16% IVA is assessed on that commission amount, reducing your net income. You have the option to request a refund of the IVA paid on Airbnb commissions.
- Local hotel tax (ISH, Impuesto Sobre Hospedaje): an additional tax imposed by state and municipal authorities, which varies from 2% to 5%.
In Mexico City (CDMX) it is 5%, in Cancun (Quintana Roo) — 3%, in the state of Jalisco — 3%.
Unlike income tax, VAT and ISH are charged to the client. In the case of VAT, you can then deduct the amounts you spend on electricity, water, gas, etc., plus the fees Airbnb charges for using the platform.
If you are an individual, the most common special tax regimes suitable for rental properties include:
- RESICO mode (Regimen Simplificado de Confianza). Suitable for individuals with low income (up to 3.5 million pesos per year). Simplified calculation and low ISR rates (from 1% to 2.5%). Expenses cannot be deducted.
- Rental regime (Regimen de Arrendamiento). Applies to income from rental property. Covers the chance to deduct expenses such as utilities, repairs, platform commission, etc.
However, in addition to this, the general tax regime (Actividad empresarial y profesional) may be applied, which requires payment of income tax and VAT on income from rental property as part of all your income. In this case, these are the same rates that apply to the taxation of salaries and other general income.
So, landlords are required to keep records of income and expenses associated with renting real estate, file returns and pay income tax and VAT. The first tax is declared and paid monthly, and if you have an annual income of less than MXN 2 million, then every 2 months. VAT payment must be made every month. The annual declaration is submitted by the end of April of the following year. If the platform withholds taxes, the landlord is required to include these withholdings in its reporting. If the platform does not withhold taxes, the landlord is responsible for calculating and paying them.
You can read more about taxation of individuals in Mexico in thispublications.
E-commerce platforms such as Airbnb are required to withhold taxes from landlords (if they are registered in the Mexican tax system) and submit the withheld taxes to the Mexican Tax Authority (SAT) on behalf of the landlord. Therefore, you will have to indicate your RFC when registering on the platform so that the platform can withhold taxes. This reduces your administrative burden since you are not required to calculate and transfer these advance amounts yourself. Even though Airbnb taxes are withheld, you are still required to file taxes. Airbnb provides a report of all withholdings, which you can use to prepare your declarations.
Example of tax calculation for short-term rentals through platforms like Airbnb
- Rental cost per day: 1000 MXN.
- Airbnb commission: 15% (150 MXN).
- Income before taxes: MXN 850.
Taxes withheld by Airbnb:
- ISR (4% from 1000): 40 MXN.
- IVA (16% from 1000): 160 MXN.
- ISH (3% in your state): 30 MXN.
Your interim income: 1000 — 150 (commission) — 40 (ISR) — 160 (IVA) — 30 (ISH) = 620 MXN.
However, in addition to Airbnb's 4% income tax withholding (ISR), you may be required to pay additional income taxes depending on your total annual income, expenses, and tax regime chosen. This 4% is treated as an advance payment of income taxes. After filing your annual tax return, SAT calculates your total tax based on all your income, expenses and deductions. You are required to pay the rest of the income tax or, conversely, you can purchase a refund.
If your tax regime is RESICO, then the tax rate is between 1 and 2.5% for income up to MXN 3.5 million per year. The 4% Airbnb withholds can be offset against your final tax amount, in other words, you can purchase a tax refund.
Rental mode — A standard progressive rate of 1.92% to 35% applies here, based on your annual income. The 4% withheld by Airbnb is taken into account when calculating the final tax, and most often you have to pay extra.
General tax regime — here, in addition, a standard progressive rate is applied from 1.92 to 35% depending on your annual income, and most often you will have to pay extra.
If you do not provide your RFC on the platform, Airbnb will withhold taxes at the maximum rates. Let's say ISR is capable of reaching 20%, and VAT will be at the full rate of 16%. Without an RFC, you are no longer able to factor withholding taxes into your annual tax base, which will increase your tax burden.
Example of calculating additional income tax
Let's assume:
- Monthly income through Airbnb: MXN 40,000.
- Annual income: MXN 480,000.
- Airbnb retained 4% (MXN 16,000 for the year).
If you are in RESICO mode:
- The annual tax is equal to 1.5% of income: 480,000 × 1.5% = MXN 7,200.
- Airbnb has already deducted MXN 16,000, for this reason SAT will refund the MXN 8,800 overpaid to you.
If you are in rental mode or on the general taxation system:
- Expenses (utilities, repairs, Airbnb commission, etc.) amounted to MXN 120,000. Taxable base: 480,000 − 120,000 = 360,000 MXN.
- Progressive rate: MXN 360,000 income falls within the 10.88% range. Annual tax: approximately MXN 39,168.
- The MXN 16,000 Airbnb withholding reduces your SAT debt. You need to pay an additional MXN 23,168.
To summarize, Airbnb only withholds 4% of ISR, but this rarely covers the entire amount of income tax. The final tax amount depends on your tax regime, taxable base (income minus deductions), and total annual income. A rough calculation shows that if your annual rental income does not exceed MXN 300,000 per year, you can consider this advance payment as your final payment.