Mexico Capital Gains Tax Article

At the International Property Journal, there’s a good article on the potential capital gains that can come into play when selling real estate in Mexico, which excerpts taken from another article recently posted in the Baja Times.

Changes in Mexico’s tax laws have made it more difficult for foreigners selling real estate to avoid the country’s steep capital gains tax, which can run as high as 30 percent.

Under the new rules, homeowners must prove the house has been their primary residence for at least 5 years to qualify for an exemption to the tax on the sale of property. In the past the residency requirement was typically one or two years, and, to put it tactfully, foreign sellers often could find a way to qualify for the exemption.

There is “absolutely” a new focus on enforcement in Mexico, says Linda Neil of the Settlement Company, a Baja California-based firm.
“Foreign buyers who buy for rental or for vacations should not expect to receive the residence exemption,” Neil said.
This is important for people to realize. Unless the home really is your principal residence, you will not be exempted from this. Some have suggested that if you have an FM-2 of FM-3 that will help you get this. That’s just not so, or it certainly is no longer applicable. In order for it to be your principle residence you have to spend the majority of your time there, and that time is traced every time you enter the country, through immigration control, which is now computerized.
The residency exemption to the tax has been changed frequently in recent years, but the law has never been this strict, according to Raoul Rodriguez-Walters, managing director of Mexico Advisor, which has offices in Portland, Oregon, and San Miguel de Allende. (For the record, it’s not technically a capital gains tax, but simply a tax on the income from the sale.)
One could go farther and say its a “luxury tax” as there is a break for homes that are under the value of $500,000 USD (approximately – there’s a formula that changes this value regularly).
Some aspects of the law are still confusing and open to interpretation, Rodriguez-Walters says. For example, it’s unclear from the wording of the new law whether sales of less than $500,000 are exempt from the tax, as they have been in the past. (That confusion can be found in this recent article on the new tax.)

The issues are further complicated by a long-running debate about how the tax system classifies residents and non-residents, he says. In most cases a notario publico has tremendous leeway to determine residency status, and the interpretation and application of the law varies among notarios and jurisdictions.

“Some notarios are more comfortable granting exemptions to foreign nationals than others,” said Rodríguez-Walters. “It is important to find one that will provide an exemption if you feel you qualify.”

The easy residency exemption was particularly useful for developers and landlords, who could work the system to claim multiple properties, using evidence such as utility bills to verify residence. But a five-year benchmark sets a high standard.
“If you can’t prove you’ve been there for five years, it’s going to be practically impossible” to avoid the tax, Rodríguez-Walters said. 

In some cases, the tax can be a shock to sellers. In the past, buyers were often encouraged to record a lower property value when they buy a house, only to face a large capital gains hit when they go to sell the property.

“This is the reason [buyers] should definitely insist upon declaring full value paid in their deed so that when they sell they will pay an income or capital gains tax on only the profit,” Neil said.
Very good and important point. No buyer these days should do what was done in the past and declare less than the full value they pay for the property. If you do so there’s a very good chance you’ll get caught at the end when you sell and end up paying the tax that the original seller really should have paid.
U.S. and Canadian residents can typically declare the tax they pay in Mexico on their home-country income taxes, easing some of the hit.

“Foreign buyers need to be sure they do it right, declare full value, pay taxes and get the proper documentation to prove to tax authorities in their home countries that they need a credit/deduction on their Mexican properties,” Neil said.

Changes in Mexico’s tax laws have made it more difficult for foreigners selling real estate to avoid the country’s steep capital gains tax, which can run as high as 30 percent.

Under the new rules, homeowners must prove the house has been their primary residence for at least 5 years to qualify for an exemption to the tax on the sale of property. In the past the residency requirement was typically one or two years, and, to put it tactfully, foreign sellers often could find a way to qualify for the exemption.

There is “absolutely” a new focus on enforcement in Mexico, says Linda Neil of the Settlement Company, a Baja California-based firm.
“Foreign buyers who buy for rental or for vacations should not expect to receive the residence exemption,” Neil said.

The residency exemption to the tax has been changed frequently in recent years, but the law has never been this strict, according to Raoul Rodriguez-Walters, managing director of Mexico Advisor, which has offices in Portland, Oregon, and San Miguel de Allende. (For the record, it’s not technically a capital gains tax, but simply a tax on the income from the sale.)

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4 Responses to Mexico Capital Gains Tax Article

  1. With the current number of foreclosures, a lot of people ask, “Where are properties for back taxes in my area?

    • johnlifestyles says:

      Vallarta is a cash market for real estate sales primarily, very little financing. Foreclosures happen when people can’t make their mortgage payments – that’s not the case here when most properties are fully paid for. And property taxes are very, very low in Mexico, affordable enough for anyone to pay them.

  2. edmonton bookkeeper…

    […]Mexico Capital Gains Tax Article « Vallarta Real Estate Weblog[…]…

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