How the US Taxes Rental Income from Property in Mexico

Mexico (for non-resident landlords): Mexico taxes rental income earned by non-residents at a 25% flat rate on gross rent, withheld at source by the renter or, more commonly, by a Mexican property manager who acts as retention agent. This is governed by Article 158 of the Mexican Income Tax Law (LISR, Ley del Impuesto Sobre la Renta) and the related regulations from SAT (Servicio de Administración Tributaria), Mexico's IRS equivalent.

Important detail: the 25% rate applies to gross rent, not net. You don't get to deduct HOA fees, maintenance, mortgage interest, or management fees under the non-resident regime. That's why the 25% looks lower than the top US bracket — it's 25% of a larger base.

Alternative: Non-residents can elect to be taxed at progressive resident rates (up to 35%) on net rental income, computing deductions properly. This usually produces a lower Mexican tax bill once deductions are large. The election requires appointing a representante legal en México and filing regular returns. Most small landlords don't bother with this and accept the 25% flat rate for simplicity.

Mexico (for resident landlords): If you're a Mexican tax resident — either by having your primary home and vital interests in Mexico, or by spending 183+ days in Mexico in a 12-month period — you file a Mexican return and pay progressive rates from 1.92% to 35% on worldwide income, including rental income, with full deductions allowed. This is the regular Mexican personal income tax system under Title IV of the LISR.

IVA (Value Added Tax, 16%): Long-term residential rentals are generally exempt from IVA (Mexico's VAT). Short-term / vacation rentals (under 30 days) are IVA-taxable at 16%, which means Airbnb and similar platforms are supposed to collect and remit IVA on your behalf. As of 2020, Article 113-A of the LISR requires digital platforms to withhold both income tax and IVA from payments to Mexican property owners. For foreign owners, Airbnb Mexico became a retention agent under these rules — they withhold 20% income tax and 16% IVA from your gross payouts and remit to SAT.

US (for all US citizens, everywhere): You report 100% of the rental income on Schedule E of Form 1040. You can deduct mortgage interest, property tax (Mexican predial), HOA fees, insurance, repairs, management, travel to the property, and depreciation. You pay US tax at ordinary rates on the net amount. You then claim a Foreign Tax Credit on Form 1116 for the Mexican tax paid, which typically zeros out the US tax owed.

The US-Mexico Income Tax Treaty, signed in 1992 and most recently updated by protocol in 2002, is a genuine tax treaty — not just an information exchange agreement. For rental income specifically:

Article 6 (Income from Real Property): Rental income from real property may be taxed in the country where the property is located. This means Mexico has primary taxing right over Mexican rental income. The treaty does NOT reduce the Mexican tax rate to something lower than the domestic rate — it confirms Mexico's right to tax.

Article 24 (Relief from Double Taxation): Mexico will give a credit to Mexican residents for US taxes paid on US-source income, and the US will give a credit to US residents for Mexican taxes paid on Mexican-source income. This is the treaty basis for your Form 1116 FTC claim.

Article 25 (Mutual Agreement Procedure): If you have a dispute with either country's tax authority, there's a mechanism to escalate through the treaty's competent authority process. This rarely matters for small landlords but is the backstop for complex cases.

What this means in practice: the treaty doesn't lower your Mexican tax. The 25% Mexican non-resident rate applies whether you have a treaty or not. What the treaty does is (a) confirm that the tax you pay Mexico counts for US FTC purposes, and (b) prevent Mexico from taxing your US-source income if you're a US resident and don't have a Mexican permanent establishment.

The treaty's practical effect for a small American landlord is minor compared to domestic US tax law. The FTC exists regardless of treaty — you can claim Mexican taxes paid on Form 1116 whether there's a treaty or not. The treaty just adds certainty. For more on how tax treaties work mechanically, see our avoiding double taxation on foreign property post, and for the broader context on Schedule E for foreign rentals, see the FEIE won't cover your foreign rental income.

Schedule E is the form you'll use. It's the same form US landlords use for domestic rentals, and the foreign-rental modifications are relatively small.

Property A (address): Use the full Mexican address, e.g., "Avenida Mexico 123, Colonia Condesa, 06140 Ciudad de México, Mexico." Don't try to Americanize it.

Type of property: Code 1 (single-family) or 2 (multi-family) as appropriate.

Rents received: Gross rent in USD. Use the annual average exchange rate from the IRS Yearly Average Exchange Rates page for simplicity, or spot rates for each payment if you want to be precise. Consistency matters — pick a method and apply it to all foreign transactions.

Expenses:

• Line 5 (Advertising): Listings fees paid to Airbnb, Vrbo, local classifieds. Convert to USD.
• Line 6 (Auto and travel): Cost of your trips to visit the property — airfare, hotels, meals (50% deductible), local transport. You must document that the trip's primary purpose was the rental business, not personal use.
• Line 7 (Cleaning and maintenance): Cleaning fees, garden, pool maintenance, routine repairs.
• Line 8 (Commissions): Property manager commissions. In Mexico, this typically runs 10-20% of gross rent.
• Line 9 (Insurance): Property insurance (seguro de casa).
• Line 10 (Legal and professional): Attorney, accountant, notario fees related to the rental.
• Line 12 (Mortgage interest): Mexican bank mortgage interest is deductible. Get a statement from the bank showing interest paid each year; ask specifically for a year-end constancia de intereses.
• Line 14 (Repairs): Non-capital repairs.
• Line 16 (Taxes): Mexican property tax (predial) paid. Receipts available from the local tesorería municipal.
• Line 17 (Utilities): If the landlord pays water, electricity, gas, or internet.
• Line 18 (Depreciation): 30-year straight-line on the building portion of the purchase price. Form 4562 in year 1. This is the line most Americans forget entirely.
• Line 19 (Other): HOA fees (called cuotas de mantenimiento in Mexico), fideicomiso annual fee if the property is held in a trust.

Total expenses: Sum of all deductions.

Net income or loss: Rents minus expenses. If negative (a loss), you're limited by the passive activity loss rules in IRC §469 — losses from rental real estate can only offset passive income, not your wage income, unless you qualify as a real estate professional (which most foreign landlords don't) or use the $25,000 special allowance for active participation (which phases out between $100K-150K AGI).

Then, on Form 1116: Claim the Foreign Tax Credit for the Mexican tax paid. This is a separate calculation that typically happens after you've finished Schedule E. You need the net Schedule E income in the "passive category" basket, the Mexican tax paid on the same income (in USD), and the US tax attributable to the passive category income (which is proportional to your overall US tax). The FTC is limited to the smaller of (a) actual Mexican tax paid, or (b) US tax on the passive category income.

If your Mexican property is in the "restricted zone" — within 50 km of the coast or 100 km of a land border — you can't own it outright as a non-Mexican citizen. You hold it through a bank trust called a fideicomiso, where a Mexican bank holds legal title and you hold beneficial interest. This affects how you file on Schedule E in a specific way:

The fideicomiso is generally treated as a "grantor trust" for US tax purposes, meaning the IRS looks through the trust to the underlying beneficial owner (you) and treats the rental income as yours directly. You file Schedule E as if you owned the property personally. You do NOT file Form 3520 or 3520-A because the fideicomiso is not a foreign trust in the §6048 sense — the IRS issued Revenue Ruling 2013-14 specifically confirming this. This was a big deal when published because it eliminated a compliance headache that had haunted American fideicomiso holders since the 1990s.

The annual fideicomiso fee (typically $500-700/year to the Mexican bank trustee) is deductible on Schedule E as an operating expense (Line 19 Other). The one-time fideicomiso setup cost when you bought the property is capitalized into the basis of the property, not deducted currently.

What you must NOT do: treat the fideicomiso as a "foreign grantor trust" and file Form 3520/3520-A. The Revenue Ruling makes it clear this is unnecessary and incorrect. Several early-2000s accountants recommended this approach and it created years of wasted compliance work. The Greenback Expat Tax Services guide to fideicomiso reporting is the cleanest layperson summary, and our fideicomiso glossary post covers the Mexican side of the structure.

One edge case: if you have multiple properties in a single fideicomiso or a fideicomiso set up with unusual beneficial-interest structures (e.g., splitting beneficial interest with non-US family members), the §6048 analysis gets more complex and you may have a reporting obligation. For simple sole-beneficiary fideicomisos on a single residential property, Revenue Ruling 2013-14 is the end of the analysis.

Let's run actual numbers for a typical Mexico City rental. Our fictional American owner, Alex, bought a 95 sqm 2-bedroom apartment in Mexico City's Condesa neighborhood in 2023 for $280,000 USD. The building allocation (via the Mexican avalúo catastral) is 85% building, 15% land, so $238,000 is depreciable building. Alex rents the apartment long-term for 48,000 MXN/month to an American expat couple.

Annual gross rent: 48,000 MXN × 12 = 576,000 MXN ≈ $33,900 USD (at ~17 MXN/USD average rate)

Mexican expenses:

• Condominio (HOA): 3,500 MXN/month × 12 = $2,470
• Predial (property tax): 8,000 MXN/year = $470
• Property manager (12% of gross): = $4,070
• Repairs and maintenance: $1,500
• Mortgage interest (Mexican bank): $5,200
• Fideicomiso annual fee: $600
• Insurance: $800
• Total deductible expenses: $15,110

Mexican tax (non-resident, 25% flat on gross):

• 25% × $33,900 = $8,475 withheld/remitted

Note: Alex's Mexican manager handles the withholding and remits to SAT quarterly. Alex gets a constancia de retención (retention certificate) each year showing the total Mexican tax paid — this is the document Alex uses for the Form 1116 FTC claim.

US Schedule E calculation:

• Gross rent: $33,900
• Operating expenses (same $15,110 as above, plus audit of which expenses the US accepts)
• Depreciation: $238,000 ÷ 30 = $7,933/year
• Net Schedule E income: $33,900 − $15,110 − $7,933 = $10,857

US tax on $10,857 of passive income (assuming Alex is in the 24% marginal bracket): ~$2,606

Form 1116 FTC:

• Mexican tax paid on this income: $8,475
• US tax attributable to this income (limit): $2,606
• FTC allowed: min($8,475, $2,606) = $2,606
• Excess FTC carryforward: $5,869 (can be used in future years or carried back 1 year)

Net US tax on Mexican rental income: $0

Combined total tax: Mexican $8,475 + US $0 = $8,475 (25% of gross rent).

If Alex instead elected to be taxed at resident Mexican rates, the math changes: Mexican net income would be ~$10,800 (similar to US) and the Mexican tax at the ~16-24% progressive bracket for that level would be ~$1,700-2,500. That's a huge reduction from the 25% flat rate, but requires filing an annual Mexican return with a legal representative, which costs $500-1,500 in fees and adds compliance work. For landlords with more than ~$20,000/year of gross Mexican rent, the resident election usually makes sense. For smaller rentals, the flat 25% is simpler.

The SAT rental income instructions in Spanish and the MX Law Group English explainer on non-resident rental tax both cover the election. For US-side tax modeling, the IRS Form 1116 instructions are authoritative if dense.

Over the last few years of reading American landlord tax threads, these are the recurring failure patterns:

1. Not claiming depreciation. The single most-forgotten deduction on foreign rental Schedule E. It's not optional — even if you don't claim it, the IRS treats you as having claimed it for recapture purposes when you sell. So failing to claim depreciation means you lose the deduction currently AND still owe recapture later. Catch up with Form 3115 (Application for Change in Accounting Method) if you missed it in prior years.

2. Mixing personal-use and rental days without the §280A allocation. If you use the property personally more than 14 days or 10% of rental days (whichever is greater), the IRS treats it as a mixed-use "residence" and you can't deduct losses exceeding rental income. This kills the depreciation benefit for anyone who uses their vacation rental for their own vacations. For many Americans with Mexican beach condos, this is the rule that surprises them after the first year.

3. Not reporting the fideicomiso fee properly. As noted above, it's deductible on Schedule E Line 19. Not on Schedule A. Not on Form 8938 (the fideicomiso itself is reported on Form 8938 as a foreign financial interest, but that's a reporting form, not a deduction vehicle). See our Form 8938 and foreign real estate post for the reporting side.

4. Wrong exchange rate methodology. Using different rates for different transactions (some IRS annual average, some spot rates) creates inconsistency that makes your return defensible only with line-by-line documentation. Pick one method for the whole year and stick with it.

5. Claiming FEIE on rental income. This is the topic of our FEIE won't cover foreign rental income post. It's the single biggest misconception on expat forums and it leads to amended returns every time the IRS catches it.

6. Not reporting the Mexican bank account. If you have a Mexican bank account for rental deposits (virtually every landlord does), it's reportable on FBAR (FinCEN Form 114) if the balance exceeds $10,000 at any point in the year, and potentially on Form 8938 under the higher thresholds. See our FBAR foreign real estate post.

For American landlord-specific resources, r/mexicocity, r/mexico, and r/ExpatTaxes are all useful. The Mexico US Tax Consulting blog has specific Mexican-landlord case studies worth reading.

The Mexican tax on your rental income is real, meaningful, and usually 25% of gross — and it doesn't go away because of a treaty or an exclusion. The US tax on the same income is technically due, but after Schedule E deductions, 30-year depreciation, and a properly claimed Foreign Tax Credit, most small American landlords end up paying nothing additional to the US.

The result: your total worldwide tax burden on Mexican rental income is essentially the Mexican tax, full stop. The complexity is in making sure the US side doesn't accidentally demand a second bite from you, which happens if your preparer doesn't know foreign rentals or if you try to DIY without understanding Form 1116.

The practical plan for a new Mexican rental owner: (1) use a Mexican property manager who handles withholding and gives you a year-end retention certificate; (2) maintain clean records of all Mexican expenses in MXN with receipts; (3) hire a US cross-border CPA for the first year's return, learn what they did, and decide whether to DIY the subsequent years; (4) don't get creative with entity structures without specialist advice. Done correctly, the tax work is annoying but not expensive. Done incorrectly, it can easily cost 10-20% of your gross rent in unnecessary double taxation.