Time to Legalize Rental Properties

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Late last year, the town of Todos Santos, located in the municipality of La Paz, was put on notice: get your rental properties in order or else. The state government was determined to put an end to the houses, hotels and B & Bs that were operating illegally in the area.  Authorities were even prepared to go door to door to find out what businesses were legit and what businesses weren’t.  And if you weren’t, the consequences could be staggering.

The newly formed Todos Santos and Pescadero Hotel Association stepped in; worried about the negative impact such a bold move would have on the tourism industry in such a small town.  All call was made to all houses and B & Bs that were renting out rooms or casitas to either legalize their businesses or to put an end to the illegal practice of charging rent without paying any form of taxes on their rental income.

One local B & B owner had this to say about the situation in Todos Santos.  “It is just not fair.  I pay my taxes, social security for my employees and business rates for all my utilities because that is how you run a business here in Mexico. It very difficult for me to compete with people who rent out their casita or apartment without paying taxes on it. I have to charge more to get the same return on my investment, so my prices have to be higher.”

Agustin Olachea, President of the La Paz Hotel Association (EMPRHOTUR) said this is an ongoing problem in La Paz that everyone is aware of. “Yes this is a problem here in La Paz.  But let me just say it is not just happening here.  It is a national problem. Authorizes cracked down on the problem in Los Cabos a few years back and continually monitor there. Now authorities are getting tough in Todos Santos. We know it is happening here in La Paz too and it is up to the authorities to crack down on these illegal businesses who are not paying their fair share of taxes.”

Olachea goes on to say that there are many rentals in the city that are not registered with Hacienda and he too agrees that it makes for an unfair playing field for businesses who are paying taxes on their rental income. Also, he said, many visitors renting houses or apartments pay for the rental on-line and the money doesn’t even enter Mexico, which does nothing to help the local economy.

Authorities are keen on putting an end to illegal businesses and have said they will take immediately action on those that are not legal enterprises. The Hotel Association in Todos Santos is encouraging all legal entities to have the following documents ready to produce if authorities show up and ask for paperwork.

Register with the tax bureau (Hacienda)

  • Obtain a corporate tax identification number (RFC)
  • Obtain a state permit to function as a commercial entity
  • Pay 3% hotel tax (a state tax)
  • Pay IVA of 16%
  • Pay ISR taxes of up to 35%
  • Register with the water and electricity companies as a corporate entity
  • Comply with civil protection laws (safety codes)

If you are renting out a property in the area and have questions that need to be answered, please contact your accountant or lawyer to get the best advice possible on your situation.

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