HOW THE MEXICAN CAPITAL GAIN TAXES WORK ON THE SALE OF REAL ESTATE IN
[Excerpted from an Article by Linda Neil with Mario Valdez published in the Gringo Gazette on February 26, 2001)
Note: This article is currently being revised and is
not totally correct. Due to recent Mexican tax law changes it is now
possible to sell your personal residence in Mexico tax free under
Mexican tax law but you must have lived in it full time .
In Mexico when you sell your real estate by
selling your trust (fideicomiso) rights you must pay taxes on your profits
to the S.A.T. (previously known as the Hacienda) which is the Mexican IRS.
In order to pay the least amount of taxes careful attention must be paid to
structuring the purchase and sale. You should always obtain professional
advice from a knowledgeable Mexican tax expert.
Assuming John and Mary Smith
came to Los Cabos and purchased a condominium in 1998 and paid $75,000US in
cash plus notary fees, bank fees, etc. of $5,000US. The Smiths decided to
sell in March of 2001 for $75,000US. They are sure there will be no capital
gains on the sale because they made no profit. Wrong!
In reviewing their purchase
deed it is discovered the declared value of their purchase transaction
price was $30,000US which was the appraised value in 1998. Therefore, their
cost basis for tax purposes is $30,000US and not the $75,000US they paid for
the condominium. At the time of the sale March, 2001, the appraised value is
$60,000US. However, the law states the amount to be reported as the sales
price is the higher of (1) current appraisal value, (2) property tax value,
or (3) current selling price. Therefore they must report the $75,000 as
READ MORE ABOUT HOW MEXICAN REAL ESTATE SALES ARE CURRENTLY TAXED
AND THE TAX RATE FOR 2020 HERE
All buyers should insist their
purchases be reported a full sales price, regardless of the fact they may
have to pay a higher 2% acquisition fee. Later on sale that additional
acquisition fee will not seem as important. The Smiths in the above example
now have a taxable gain of $45,000US regardless of the fact they are selling
the property for the same amount they purchased it for. The capital gains
tax which must be paid on sale is paid on the lower of 20% of the gross
purchase price or 40% of the difference between the sellers original
declared value (adjusted for depreciation and inflation) plus commissions,
sales expenses, and IVA (sales tax) and the selling price. This means that
in the situation described above with commissions, IVA, etc.
With a normal ten percent
commission, this means the Smiths will have to pay a capital gains tax of
approximately $7,895US even though they made no profit.
It is important that a
memorandum be made in the original deed of the purchase price in US dollars.
If the purchase price is recorded in pesos, a seller could be hit with
additional taxes due to the devaluation of the peso.
Mexican citizens or permanent
residents who are selling their primary residence were permitted an
exemption from the capital gains tax if they have lived in the residence
for two years. In 2002 the law was amended to eliminate the 2 year holding
period so long as you can prove the property you are selling is your primary
residence and you live in Mexico full time. Many notaries and accountants
have tried to obtain this exemption for foreigners who are Mexican residents
and can prove they lived continuously in the house for 2 years. The tax
authorities currently are denying this exemption to any property held in a
fideicomiso (required method of holding title when foreigners own Mexican
property in the "restricted zone" close to the ocean. It would seem this
would violate the equal protection laws under the Mexican constitution. This
can only be clarified by further legislation or clarification by the Courts.