Mexico Real Estate Capital Gains Explained

The following contains an excerpt an article about real estate in Mexico that was written by David Connell and his team at David Connell and Associates, a law firm located in Puerto Vallarta, as well as Ixtapa and Mexico City. Their website is an excellent source for articles dealing with legal and fiscal issues regarding real estate in Mexico. For the full article and others, visit his website at www.mexlaw.com.mx.

Capital Gains Tax on the Sale of Homes in Mexico

In 2007 the Mexican government modified the rules pertaining to the exemption of income tax obtained in the sale of primary residences. The main reason they did this was to close loopholes that allowed the upper class to avoid paying taxes on any homes they owned.

In order to understand how the tax authority views a sale we must go through a few definitions:

Definition Of “Sale”.- For tax purposes a sale of real property occurs when there is:

a) A transfer of property, including a sale where the selling party “reserves ownership rights” (or what is known as “reserva de dominio”).

b) A transfer of trust (fideicomiso) rights, changing the beneficial rights of the trust.

Definition Of “Fiscal Residence”.- You are considered a fiscal resident of Mexico when you have established your home in Mexico. However, when you have a home in another country, you will be considered a tax resident in Mexico if Mexico is where you have your “center of vital interests”.

Definition Of “Center Of Vital Interest”.- You will be considered to have a center of vital interests in Mexico when more than 50% of your total income comes from Mexico OR when you have set up the “main center of your professional activities” in Mexico.

Note.- Tax rule I.2.1.3. states that you do not have a primary residence in Mexico when you temporarily inhabit a home with tourist, vacation or recreational ends.

Those are the three definitions and one rule you really need to understand BEFORE we can talk about taxes on the sales of homes and allowable exemptions.

Exemptions On The Sale Of A Home For “Fiscal Residents”

Case 1.- When the amount of the sale does not exceed one million five hundred thousand investment units (approximately $550,000 USD as of February 2008), the sale is exempt from income tax if you are a “Fiscal Resident” of that property. (see definitions above)

Case 2.- If you are a “Fiscal Resident” and the amount of the sale exceeds the above amount, you will pay tax on the amount that exceeds the exemption (550,000 USD) “proportional to the amount that results from dividing the amount that exceeds by the total amount of the sale”. What????? Let’s look at an example to clarify:

Case 3.- If you are a “Fiscal Resident” for more than 5 years of a home, the sale of the home is exempt.

Who Calculates The Taxes, How Do You Pay It and What Documents Do They Ask For to Prove “Fiscal Residence”?

The notary is the person responsible for calculating, withholding and paying the tax on the sale of homes that belong to physical persons (not corporate entities). In our experience most notaries have “tax advisors” assist them with the calculation of taxes. We strongly advise that you get an independent advisor to do your own calculation of this tax. While notaries have very competent advisors, other experienced counsel can sometimes save you tens of thousands of dollars in taxes.

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