Capital Gains Tax in Mexico
Capital gains tax law in Mexico states that tax is owed on the profit you receive when you sell your home or property.
1. You pay 35 percent* of the net profit. (There are a variety of deductions included in this option.) And usually is the best calculation to provide you with the lowest amount of tax to pay
2. You pay 25% of the selling price no deductions
3. The capital gains tax calculation is done in pesos based on the exchange rate when you purchased and the exchange rate when your sale closes, to determine the gain on the sale of the property
Although a 35 percent capital gains tax may seem high, Mexico does have several laws and procedures that will assist you in maximizing your cost basis, thereby reducing your net profit and lowering your capital gains. The key is to understand these laws before you buy, not when you decide to sell.
*Percentages reflect the 2017 tax code
Always record your true Purchase Price at closing.
In the past, some real estate companies have recorded values lower than the actual purchase price in an effort to “save” taxes for their client; they thought they could save money on the two percent acquisition tax. This is a major error. Never record a lower value than what you actually paid for the property. Doing so simply establishes a lower cost basis for the property, which increases your capital gains tax liability. The first step in calculating your capital gains is to subtract the value you have recorded in your trust, or Fideicomiso (fee-day-co-me-so), from the sale price of your property.
An oversimplified example is: You wisely purchase a property for $1 million USD, but unwisely record a value of $500,000 USD. In the eyes of Mexican tax law, your cost basis is now $500,000. If you sell the lot for $1.2 million, "you" see a profit of $200,000. However, according to your recorded cost basis, Mexico sees a profit of $700,000. Engel & Volkers Snell Real Estate’s approach to ownership in Mexico, specifically the trust process, has been established to protect you and provide you with the legal means to safeguard your investment. Recording your authentic purchase price with proper documentation is the only way to maximize your potential profits. The bottom line is to always secure your property trust for the true value of your purchase.
Never allow anyone to convince you to record a lower value than what you have actually paid for your property, or you will assume the Seller’s capital gains tax liability. Recording a lower value today can cost you, should you decide to sell in the coming years. If a Seller can convince a Purchaser to record a lower value, the tax liability is simply passed along, and eventually someone will have to pay. Don’t let anyone tell you, “That’s how we do it here.” Mexico is like everywhere else — the capital gains tax is the responsibility of the Seller.
Fact: Recording a property’s true value benefits you and establishes your cost basis in the eyes of Mexico.
Fact: The amount you pay for a property has no impact on your yearly property taxes.
Fact: Capital gains taxes you pay in Mexico can be applied to your U.S. taxes.
How do I know if my value is recorded correctly?
Snell Real Estate’s closing officer oversees the creation and completion of your trust. We review the documents with you to make certain everything is in order, and we are present when you sign your trust. You can verify the value yourself by examining your trust and noting the amount written in text, which is indicated in U.S. dollars or Mexican pesos and includes the exchange rate of that day. (We will provide a certified translation of your Spanish trust.) Simply divide the current exchange rate into the peso amount and make sure the result reflects the actual dollar amount you have paid. If you would like to review an old trust, simply determine the peso rate for the day and year the trust was executed. We can assist you in finding the exchange rate, as can the bank and the Internet.
What is inflationary credit?
As soon as you pay your two percent acquisition tax to receive your trust, you are eligible to receive an inflationary credit from the Mexican government for each year you own the property. This credit is added to your cost basis when you decide to sell your property. The credit is based on consumer index adjustments (inflation) and can be quite significant. In the past when inflation was higher, we have seen credits in excess of 15 percent per year applied to a cost basis when you acquired your property some years ago. On a million-dollar property, this can be as much as $150,000 USD per year added to your cost basis, significantly reducing your capital gains tax should you decide to sell in the coming years.
Fact: You are not eligible to receive the inflationary credit unless you have paid your two percent acquisition tax.
What about the primary residence capital gains exclusion?
Mexico, as well as the U.S., provides its residents a capital gains tax incentive for their primary home. This law is in place for “residents” (Mexican nationals or foreigners) of Mexico only, and there are several items required to establish residency status. In order to claim your home as your primary residence in Mexico, you must be able to prove that it really was your primary residence for a period of five years. At closing, you will be required to provide the Notary with a Permanent Residence Visa, as well as a bank account, water, phone and electric bills, paid tax receipts and your Trust — all in your name, all with the address of the home, and all in place for more than five years. You will need an RFC tax ID number. You will also need from the federal tax office (SAT) Constancia de Situacion Fiscal. You also may need proof of income within Mexico. Please keep in mind that this is just a guideline of the requirements. It is necessary to communicate with the Notary prior to closing your transaction in order to know if you are eligible for exemption. Don't wait until the closing to determine if you are exempt or not. The calcuation is not made by a simple 100% exemption status, only a portion of the proceeds are exempt so you may also need to have a tax strategy prepared and a notary who will accept such.
Fact: A foreign permanent resident has the right to be exempt from $700,000 UDIS
The seller must be immigrated and fulfilling the requirements as Mexican Tax ID etc. and obtains only a partial exemption.
The UDI is the Finacial Mexican Index with a current value (October 2019) $6.301316 Pesos
$700,000 x $6.301316 = $4,410.921 pesos (approimately $240,000 exchange rate October 2019)
This is the maximum amount that a seller can be exempt of the said tax.
Example property selling price $415,000 USD
The seller shall pay capital gains tax on the difference $415,000 - $240,000 = $175,000
The preliminary calculation takes into consideration the following deductions:
*Real Estate Commission
*Acquistion tax from time seller purchased the property.
*There may also be an additional inflationary credit applied for each year of property ownership.
For a complete evaluation of your tax exemption status you should have a consultation prior to listing and selling your property.
Fact: You cannot have two primary residences at the same time. Therefore, if you claim the home in Mexico as your primary residence, you give up your primary residency status in your home country.
Fact: The capital gains tax exclusion is intended for residents of Mexico, not for persons owning second homes or vacation homes.
Just as there are no shortcuts or legal ways around taxes in the U.S. or Canada, there are no shortcuts around taxes in Mexico. Your home is a sizable investment and following proper legal steps will ensure a safe and enjoyable experience in Mexico. If someone says, “This is Mexico, and that’s the way we do it here,” then beware. Seek another agent or Broker. If you plan on building a home or doing a major remodel to an existing home, please read our brochure, “Manifesting Your Construction,” to make certain all your expenses are added to your cost basis. If you are considering a real estate purchase in Baja, make certain everything is done right. Allow Engel & Volkers Snell Real Estate to put our knowledge and experience to work for you. We are an independent brokerage, assuring our only interest is representing you in a safe, solid and secure real estate transaction.
Helpful Hint: Your purchase price will be recorded in USD and the exchange rate of the day in pesos. If you closed and the exchange was not recorded a historical chart can provide the exchange on the day your trust was registered.
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