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LETTER FROM THE EDITOR GUEST COLUMNIST
The Mexican government is finally cracking down on tax evasion by foreigners and citizens who own condos in Mexico (not only in PV) and pay no tax on the rental income, either in Mexico or in the US. It's about time. Common sense would tell anyone that they owe tax on this income SOMEWHERE... so I've never bought the "I didn't know" excuse.
I think that this effort by Hacienda (the Mexican tax authority), along with a cooling of the overheated condo market of recent years, will return a healthier balance to the local real estate market.
For a good many years, now, there has been excessive speculation in the condo market in Vallarta. Prices in some developments have been doubling every year (leading to “flippers,” a sure sign of a bubble underway). This has been fueled by several factors:
° 1. Easy mortgage money in the US... many buyers take out mortgages on their primary residence in the US and pay cash here in PV. That is now happening a lot less due to the collapse of the housing bubble in the US. ( and by-the-way: The market here in Puerto Vallarta has not collapsed at all... it has merely cooled considerably... a great time to buy, actually)
° 2. The prospect of tax free cash flow from vacation rentals (not because it was legal, but because it was easy to skirt the tax laws). That is now changing.
° 3. Demand fueled by retirees or soon-to-be-retired's.
Both #1 and #2 have led to more demand than supply for several years. Now, we have more supply than demand, because projects that got underway a couple of years ago are now on the market. Developers thought they'd make big profits back in 2006, so began some huge condo projects...these projects have a long lead time from drawing board to market... but the market not what it was in 2006.
The speculation bubble in the local condo market has also hurt the hotel industry... thus, no new hotel rooms have been built in Puerto Vallarta in some years. For hotels, which have higher costs than a condo speculator who is evading taxes, it has become impossible to compete.
In a nutshell, the vast number of vacation rental condos has driven down rental rates (great for short-term tourists, but not a healthy situation for the Puerto Vallarta economy as a whole). For condo speculators, recent low rental rates have not been a big deal. If they cover the condo fees and management commissions, and get a few weeks of use themselves. And that was OK because they figured they would at least make a killing when they sold the unit. With this new crackdown on rental income tax evaders, that's no longer certain.
By Paul D. Crist - Owner/Director - HOTEL MERCURIO Puerto Vallarta, MX
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