Mortgage and Buying a Property in Mexico
I received a call from a prospective client the other day trying to figure out how to purchase and mortgage finance a property in Tulum, Mexico. He and his wife's goal was to purchase a property just south of Cancun for their ultimate retirement in 15 years. Meanwhile, they would rent it out and the question was, can the mortgage interest be tax deductible on a foreign investment property?
In one of my website pages, I discuss mortgages for foreign properties with the conclusion that refinancing your principle Canadian residence and using the equity to purchase your foreign home is by far the simplest finance solution due to the fact that Canadian banks will only lend on Canadian properties. This article discusses an alternative way to view foreign property ownership.
In my client's case, his target property was $350,000 and he was going to refinance his 'free and clear' Toronto home and extract the equity to pay cash for the second home in Mexico. The question he had was whether he could write off the mortgage interest expense on his taxes?
My reply to him was a qualified yes.
- The mortgage refinance on his Toronto home had to be specifically made to purchase the property in Mexico as an investment.
- He also has to report the foreign income on his personal taxes as required by Canadian law.
- He can claim reasonable expenses to earn rental income (mortgage interest, insurance, utilities, repairs, etc), but he cannot claim travel to and from Mexico
- Finally, be aware that the Mexican government requires him to pay tax on (deemed) rental income and in fact has first dibs on taxation. A Canadian would then claim a foreign tax credit so that he is not double taxed. Here's a useful article I discovered on the topic.
There are other factors in owning foreign property. For example, who is going to maintain the property in his absence and is that reliable? Recently my wife and I went to Mexico for a month to stay in a condo we had rented from a friend of a friend. What a surprise for us (and the owner) that we could not get into his 'vacant' condo for 2 days as the condo manager had rented it out "under the table."
As I listened to my client, I asked him did he think that purchasing a property in Mexico for cash was in fact a good investment or was it just a lifestyle dream that he could duplicate in a different way?
That kind of stumped him. The alternative I proposed was what about taking the $350,000 and splitting it 5 ways into down payments for good cash-flowing rental properties perhaps in nearby Kitchener / Waterloo / Cambridge area with lots of rental demand. That way he'd have 5 times the leverage on appreciating stable Canadian income properties all going up in value over time and mortgages getting paid down. He or a Canadian property manager could manage those properties locally without fuss of distance. He could use the cash-flow for a month each year for a vacation rental anywhere in wanted in the world, including Tulum, Mexico with no fuss of foreign ownership, foreign taxation, property managers gone wild, or undesirable neighbors over time. In 15 years, his $1.8mil in income property purchases today would likely be doubled in value with only 50% of the initial mortgages balances remaining. Do the math and that's a $3mil capital gain over 15 years, more than enough to fund a retirement house - in fact enough to fund an entire retirement!
My goal was not to talk the client out of purchasing in Mexico but simply to give him another perspective on what an investment is and how he could still access the lifestyle he desired, perhaps in a different way. Why own the cow when all you want is the milk!
If you would like to talk about financing options, whether for foreign ownership or domestic revenue properties, please feel free to contact me. -Chris