Mexico: Rental income tax implications

Authored by the expert who managed and guided the team behind the Mexico Property Pack

Everything you need to know before buying real estate is included in our Mexico Property Pack

Who is the author of this content?

THE LATINVESTOR

A team specialized in real estate investing in LATAM countries

We are a team of financial experts, legal professionals, developers, and local real estate specialists dedicated to helping people like you avoid mistakes when investing in real estate in a foreign place, particularly in Mexico. If you'd like to learn more about us, you can check our presentation page.

How this content was created 🔎📝

At The LatinVestor, we explore the Mexican real estate market every day. Our team doesn't just analyze data from a distance—we're actively engaging with local realtors, investors, and property managers in cities like Mexico City, Guadalajara, and Playa del Carmen. This hands-on approach allows us to gain a deep understanding of the market from the inside out.

These observations are originally based on what we've learned through these conversations and our observations. But it was not enough. To back them up, we also needed to rely on trusted resources

We prioritize accuracy and authority. Trends lacking solid data or expert validation were excluded.

Trustworthiness is central to our work. Every source and citation is clearly listed, ensuring transparency. A writing AI-powered tool was used solely to refine readability and engagement.

To make the information accessible, our team designed custom infographics that clarify key points. We hope you will like them! All illustrations and media were created in-house and added manually.

How much gross rental income am I expecting to earn per month in Mexico?

Your gross rental income in Mexico depends heavily on location, property type, and market positioning.

In Mexico City's central neighborhoods like Roma Norte or Condesa, modern apartments typically generate $1,200-$1,400 USD per month for a 2-bedroom unit. Guadalajara offers slightly lower rents at $800-$1,200 USD monthly for comparable properties, while Playa del Carmen vacation rentals can command $1,500-$2,500 USD per month during peak season.

Residential properties across Mexico generally yield 5-8% annually of the property's purchase price. A $200,000 USD condo in Mexico City should generate approximately $10,000-$16,000 USD annually, translating to $833-$1,333 USD monthly before taxes. Beach destinations like Tulum or Puerto Vallarta often achieve higher yields due to vacation rental premiums.

Monthly rental income varies significantly by neighborhood within each city. Properties in Mexico City's Polanco district command premium rents 40-60% higher than similar units in outer districts like Tlalpan or Iztapalapa.

As of September 2025, Mexico's rental market remains strong, with consistent demand in major urban centers and tourist destinations driving steady rental income for well-positioned properties.

Am I renting out a residential property, a vacation home, or a commercial unit?

Most foreign landlords in Mexico focus on residential properties and vacation homes rather than commercial units.

Residential long-term rentals represent the most straightforward option for foreign investors, typically involving 1-2 year lease agreements with Mexican families or professionals. These properties benefit from stable tenant relationships and predictable monthly income streams. Vacation homes, particularly in tourist areas like Cancun, Puerto Vallarta, or Tulum, operate as short-term rentals through platforms like Airbnb or direct bookings.

Commercial unit rentals generally require more complex business structures and deeper understanding of Mexican commercial law. Most individual foreign investors avoid commercial properties due to higher capital requirements, complex zoning regulations, and the need for Mexican business entities to facilitate transactions effectively.

Vacation rentals can generate 30-40% higher gross income compared to long-term residential leases, but they also involve higher management costs, more frequent turnover, and seasonal income fluctuations. Beach properties in Quintana Roo or Jalisco often experience 70-80% occupancy during peak months (December-April) but may drop to 40-50% during slower periods.

It's something we develop in our Mexico property pack.

Is my tenant an individual or a business, and will payments come from Mexico or abroad?

The vast majority of tenants in Mexico's residential rental market are individuals rather than businesses.

Individual tenants include Mexican nationals, expatriates working in Mexico, and temporary residents. Business tenants typically involve corporate housing arrangements or commercial leases, which are less common for foreign property owners. Regardless of whether your tenant is an individual or business, Mexican tax law considers all rental income from Mexican properties as Mexico-sourced income subject to local taxation.

Payment source location does not affect your tax obligations in Mexico. Whether rent payments come from a Mexican bank account, international wire transfer, or foreign payment platform, the Mexican tax authorities treat the income identically. Many vacation rental guests pay through international platforms like Airbnb or Booking.com, but this doesn't change the underlying tax treatment.

For tax compliance purposes, the key factor is property location, not tenant nationality or payment origin. Mexican properties generate Mexican-sourced income regardless of where the tenant lives or how they transfer funds to you.

Am I renting the property furnished or unfurnished, and does that change the taxable rate?

Furnishing status significantly impacts your tax obligations in Mexico, particularly regarding Value Added Tax (IVA).

Furnished rentals are subject to 16% IVA on top of income tax, while unfurnished long-term residential leases generally avoid this additional tax burden. The Mexican tax code treats furnished rental income as a commercial service rather than simple property rental, triggering VAT obligations that can substantially reduce your net income.

Unfurnished properties typically involve long-term leases where tenants provide their own furniture and appliances. These arrangements qualify for residential rental treatment, avoiding the 16% IVA that applies to furnished units. However, income tax withholding rates remain the same regardless of furnishing status.

Many vacation rental properties must be furnished to attract guests, automatically triggering IVA obligations. Short-term rentals in tourist areas like Playa del Carmen or Puerto Vallarta typically include furniture, appliances, linens, and kitchenware, making them subject to both income tax and VAT.

Which Mexican tax regime applies to me as a foreign landlord: small taxpayer (RIF), individual with business activity, or corporate?

Foreign non-resident landlords fall under a specific tax regime with limited options compared to Mexican residents.

The small taxpayer regime (Régimen de Incorporación Fiscal - RIF) is exclusively available to Mexican tax residents and cannot be used by foreign property owners. This beneficial regime offers reduced tax rates and simplified compliance but requires established Mexican residency status that most foreign investors do not possess.

Most foreign landlords operate as non-resident individuals subject to a flat 25% withholding tax on gross rental income. This regime requires no formal registration with SAT (Mexico's tax authority) beyond basic property ownership documentation, making it the default option for foreign investors.

Foreign corporations owning Mexican rental properties face a 30% flat tax rate on rental income. Some investors establish Mexican corporations (Sociedad Anónima) to own properties, but this involves significant legal complexity and ongoing compliance requirements that may not justify the marginal tax difference.

Individual business activity registration is possible for foreign residents who obtain proper visa status and establish Mexican tax residency, allowing access to deductions and progressive tax rates ranging from 3-30%.

What percentage of rental income is withheld by the tenant or property manager before I even receive payment?

Mexican law mandates a 25% withholding tax on gross rental income for all non-resident foreign landlords.

This withholding occurs automatically before you receive payment, whether collected by the tenant directly or through a property management company. The 25% rate applies to the full gross rental amount with no deductions permitted for expenses, maintenance costs, or property management fees.

Property management companies operating in Mexico are legally required to withhold this 25% and remit it directly to SAT on your behalf. Many international investors mistakenly assume they can deduct expenses before calculating withholding, but Mexican tax law prohibits this for non-resident property owners.

If you collect rent directly from tenants, you remain responsible for ensuring proper tax withholding and remittance. Failure to comply with withholding requirements can result in penalties and additional tax obligations for both landlord and tenant.

It's something we develop in our Mexico property pack.

What deductible expenses can I subtract legally in Mexico, such as maintenance, utilities, HOA fees, or property management costs?

Deductible expenses in Mexico depend entirely on your tax residency status and chosen tax regime.

Non-resident foreign landlords under the 25% withholding regime cannot deduct any expenses against rental income. This includes maintenance costs, utilities, HOA fees, property management expenses, insurance premiums, or repair costs. The 25% withholding applies to gross rental income without any expense reductions.

Mexican tax residents who register as individuals with business activity can deduct legitimate rental-related expenses including property management fees (typically 8-12% of rental income), maintenance and repairs, HOA or condo fees, property insurance, utilities paid by the landlord, professional services like accounting or legal fees, and advertising costs for finding tenants.

Residents can also deduct depreciation on the property structure (excluding land value), interest on mortgage payments if the property was financed, and travel expenses directly related to property management activities. These deductions can significantly reduce taxable income for those eligible to use them.

The inability to deduct expenses represents a major disadvantage for foreign non-resident landlords, making Mexican tax residency an attractive option for serious real estate investors with multiple properties.

How are depreciation rules applied to my Mexican property, and can I deduct them against rental income?

Depreciation deductions are only available to Mexican tax residents, not foreign non-resident landlords.

Mexican tax law allows residents to depreciate rental properties over specific periods: residential buildings at 5% annually (20-year depreciation schedule) and commercial properties at 10% annually (10-year schedule). Land value cannot be depreciated and must be separated from the building value for calculation purposes.

Foreign non-resident landlords under the 25% withholding regime cannot claim depreciation deductions. This restriction applies regardless of property type, age, or condition, representing a significant tax disadvantage compared to resident investors who can reduce taxable income through annual depreciation claims.

Residents calculate depreciation based on the property's acquisition cost minus land value. For a $300,000 USD property where land represents $75,000 of value, the depreciable building portion equals $225,000, allowing $11,250 USD annual depreciation deductions for residential properties.

What is the applicable ISR (income tax) rate I'll actually pay after deductions, and is there a flat simplified option?

The ISR (Impuesto Sobre la Renta) rate varies dramatically based on your tax residency status in Mexico.

Foreign non-resident landlords face a flat 25% ISR rate applied to gross rental income with no deductions allowed. This simplified flat rate system requires minimal compliance but offers no expense deductions or depreciation benefits. There are no alternative simplified options available for non-residents beyond this mandatory withholding structure.

Mexican tax residents benefit from progressive ISR rates ranging from 3% to 30% applied to net rental income after legitimate deductions. Lower-income residents may pay as little as 3-12% on rental profits, while higher earners face rates up to 30%. The ability to deduct expenses often results in effective tax rates well below the 25% non-resident rate.

Foreign corporations owning Mexican rental properties face a flat 30% ISR rate, higher than the individual non-resident rate but with potential deduction benefits if properly structured and compliant with Mexican corporate tax requirements.

We did some research and made this infographic to help you quickly compare rental yields of the major cities in Mexico versus those in neighboring countries. It provides a clear view of how this country positions itself as a real estate investment destination, which might interest you if you're planning to invest there.

Do I also need to pay IVA (value-added tax) on my rental income, and under which conditions?

IVA (Impuesto al Valor Agregado) obligations depend primarily on whether your rental property is furnished and the rental duration.

Furnished rentals automatically trigger 16% IVA obligations, treating the arrangement as a commercial service rather than simple property rental. This applies to vacation rentals, corporate housing, and any residential property rented with furniture, appliances, or household items included. Short-term furnished rentals in tourist areas face this 16% VAT in addition to the 25% income tax withholding.

Unfurnished long-term residential rentals (12+ months) typically avoid IVA obligations, as Mexican tax law treats these as property use rather than commercial services. However, if you provide significant services beyond basic property access—such as daily cleaning, concierge services, or meal preparation—IVA may apply regardless of furnishing status.

Commercial property rentals always incur 16% IVA regardless of furnishing, as these transactions are inherently considered business services. Office spaces, retail locations, and industrial properties all face this additional tax burden on top of income tax obligations.

It's something we develop in our Mexico property pack.

Does my home country have a tax treaty with Mexico that prevents me from paying double taxes on this rental income?

Mexico maintains tax treaties with numerous countries to prevent double taxation on rental income, though specific benefits vary by treaty.

The United States, Canada, United Kingdom, Germany, France, Spain, and most OECD countries have comprehensive tax treaties with Mexico covering rental income. These treaties typically allow you to claim foreign tax credits in your home country for Mexican taxes paid, reducing or eliminating double taxation on the same income stream.

US citizens can generally claim dollar-for-dollar foreign tax credits for Mexican withholding taxes paid on rental income, effectively reducing their US tax liability by the amount paid to Mexico. Canadian residents benefit from similar treaty provisions, though specific calculations depend on provincial tax rates and federal foreign tax credit limitations.

European Union residents often enjoy favorable treaty terms, with many agreements allowing treaty shopping benefits and reduced withholding rates in certain circumstances. However, the standard 25% withholding for non-residents typically applies regardless of treaty status, with relief coming through home-country credit mechanisms rather than reduced Mexican taxation.

Countries without Mexican tax treaties—including some Asian and African nations—may face true double taxation, making Mexican rental investment less attractive for residents of these jurisdictions.

After Mexican taxes and any home-country obligations, what percentage of each $1,000 pesos of rent will I realistically keep in my pocket?

Your net retention depends on property furnishing status, home-country tax rates, and applicable treaty benefits.

For unfurnished residential properties, you'll keep approximately $750 pesos per $1,000 pesos of gross rent after Mexican withholding (25% ISR). If your home country provides full foreign tax credits for Mexican taxes paid, this represents your final tax burden. However, if your home country tax rate exceeds 25%, you may owe additional taxes domestically.

Furnished properties face both 25% ISR and 16% IVA, reducing your net income to approximately $590 pesos per $1,000 pesos of gross rent. This significant reduction makes furnished rentals less attractive despite their higher gross income potential, particularly when combined with higher management costs and vacancy rates.

US taxpayers typically retain 75% of unfurnished rental income and 59% of furnished rental income after Mexican taxes, assuming full foreign tax credit utilization. Canadian taxpayers may face slightly different retention rates depending on provincial tax obligations and federal credit limitations.

High-tax European countries like Germany or France may result in additional home-country tax obligations even after claiming Mexican tax credits, potentially reducing net retention to 65-70% for unfurnished properties and 50-55% for furnished units.

Conclusion

This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.

Sources

1. Global Property Guide - Mexico Rental Yields
2. The LatinVestor - Average Rent Mexico City
3. Sonia Diaz Mexico - Rental Income Guide
4. Rental Tax Mexico - Examples and Penalties
5. Global Property Guide - Mexico Taxes and Costs
6. Paradise Listings - Property Taxes in Mexico
7. Global Property Guide - Rental Yields
8. The LatinVestor - Average Rental Yield Merida