Mexico’s tax code on property taxes changed dramatically in February 2010, nullifying most internet advice given before February, and making much current internet advice suspect. This article addresses some of the current tax requirements and rules, and it also addresses the tax differences between Visitante, Residente Temporal, and Residente Permanente INM Residency Card options.
The key Mexican statute addressing these issues is Article 109. XV. of La Ley del Impuesto Sobre la Renta (ISR).
Much advice on the internet implied that if you got an FM3 or FM2, or a Residente Permanente, then you could automatically save on a future Capital Gains taxes when you sell your property. This was not true in the past, and is especially not true now with the new Visitante, Residente Temporal, and Residente Permanente INM Residency Card options. Advice that worked before Feb. 2010, or before Nov. 9, 2012, no longer works since the rules have changed dramatically raising the bar of requirements for foreigners to qualify for the current 5 year Primary Residency requirement for an exemption to Capital Gains taxes.
First, the advice to get an FM2 or Residente Permanente may apply broadly only to properties handled by very liberal Notarios*.
Second, The tax calculation & tax status-determination of property sales by foreigners is a murky and dense area in Mexican tax law. It is reported that many/most Notarios across Mexico believe that foreigners with FM3′s (equivalent to the new Residente Temporal) definitely do not qualify for the Mexican Residents Primary Residence home-owners capital gains tax exemption**. Sidelight: Foreign sellers typically pay about 25%** capital gains taxes on the gain vs. 5% for Mexican sellers. This fact alone may push some expats to consider getting the INM’s Residente Permanente residency card, as a solid path to Naturalized Citizenship in Mexico.
*Since each Notario is personally financially liable for choices they make for each client, many Mexican Notarios are not willing to approve foreigners with FM3′s (Residente Temporal) who can meet the 5 year Primary Residence requirement, and individual Notaries can and do reject even Residente Permanentes when choosing to grant the Primary Residence 5 year home-owners exemption.
**Property Sale Capital Gains Tax (ISR) Exemption Requirements: **
ISR Tax Law has 3 major options for determining property sales taxes on the gains:
1. No taxes are owed on sales of the owners primary residence, when sold after 5 years by qualifying residents of Mexico (Primary Residence exemption). or
2. 25% of the Gross Sales amount. or
3. 28% capital gains tax on the net profit reduced by various reductions***.
Item 1: Fully Exempt from Capital Gains Taxes:
To qualify for the 5 year Primary Residence exemption, you have to meet a number of requirements:
~ * ~ Mexico has to be your “fiscal residence” & the “main center of your professional activities”, etc. for 5 years.
~ * ~ In attempting to qualify as a Mexican Resident for tax purposes, you must have 5 years of CFE or JAPAY bills in your name.
~ * ~ The property cannot be used for income generating purposes within the 5 year residency period.
~ * ~ Some Notarios were accepting property sales tax exemptions for only a few foreigners who had FM2′s. Many Notarios have required that the foreigner must have applied to become naturalized citizens of Mexico to qualify for the exemption. Because Notarios stick-out-their-necks financially, they can add their own personal requirements that are not spelled-out in the law/regs.
This means that getting a Residente Permanente does not ensure that your Notario (or any Notario) will approve your claim for the 5 year Primary Residence exemption.
Many Notarios would not approve even the old Inmigrado INM permit holders for the tax exemption. Since the new Residente Permanente is even easier to get than an Inmigrado, then many/most Notarios will likely not approve Residente Permanentes for the 5 year Primary Residence exemption (especially because it only takes ZERO to 4 years to get the Residente Permanente INM permit).
If you really want to be exempt from 25% taxes on the FULL SALE PRICE of future property sales: Expats buying Mexican properties and owning properties really must find and hire a Notario who agrees, in advance, to support their hoped-for claim of the 5 year Primary Residence exemption.
~ * ~ It is best to be sure your Notario agrees that you meet the requirements, and that he is willing to approve your application for the primary residency exemption, before you plan to try this.
~ * ~ If you own a property using a Fideicomiso, you may be trapped into whatever policy your Bank’s Notario chooses. e.g. In the worst case: The Bank as Fideicomiso trustee, and their Notario, can refuse to accept your proposed sale of your property, unless you pay 25% of the full sales price.
…. This works out to be $178,000 USD in taxes on a $9 million peso property sale in one Yucalandia reader’s experience. (with NO deduction of even the original sale price) ….
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Item 3 Notes:
***Capital gains reductions include a 3% per year inflationary credit that reduces the property’s basis every year (10 years of ownership = 30% reduction, but I understand that there is a 5% floor of minimum taxes or minimum 20% Basis of the original listed sale price).
Basis Calculation for 28% on net profits capital gain calculation:
Income/Selling Price – Cost – Deductions = Capital Gain
***Here are a few of the Mexican tax laws arcane factors in determining the amounts of Capital Gains taxes under Item 3:
* Raw land is taxed differently than improved properties;
* The tax exemption is only on the buildings and the land covered by the buildings;
* Corporations are treated differently than private owners;
* Properties valued under roughly $500,000 USD are treated differently than properties over $500,000 USD (actually using a $1,500,000 peso “UDI”) – sort of a luxury tax;
* There is a 3% per year inflation adjustment on the basis, but you only qualify if you paid the 2% Acquisition Tax at the time of sale (this can give a net 30% tax savings at the time of the sale);
* The 2% Acquisition Tax is an allowed deduction;
* The construction’s costs (building’s basis values) depreciate 3% a year and can not exceed 20% of the initial cost, while the resulting cost (basis) will be adjusted up for inflation;
* The improvements that imply deductible investments will be subject to the same depreciation treatment, and must be count with its respective documental support (Facturas in seller’s name) – no wonder businesses give you the option for Facturas…
* Maintenance costs are not deductible expenses;
* If the expat has held an FM-2 or Residente Permanente for the past five years, they can apply for Mexican nationality, and then ask their bank to convert the FTD contract to an “escritura”, thus acquiring Real Rights on the property which will enable them to claim the Primary Residency’s capital gain exemption at the time of the sale.
* Yada, yada, yada…
Because Mexican tax law is so dense and arcane and parts of it change roughly every 2 years, when buying or selling property in Mexico, it really is best to consult with a good tax lawyer and a Notario to find out how things work in your state or locality under current laws. If your property is held in a Fideicomiso trust, then, definitely find out in advance what your Bank’s Notario allows.
Mexican tax law is a specialty area within the law, an area where Notarios are not the experts, so, taxes on property sales is one spot where you may likely need both a Notario and a separate tax lawyer (abogado) to accurately determine and pay the lowest legal taxes.
Finally, it is also worth noting that the tax is actually not a capital gains tax, but just a tax, and the taxable value is based on the purchase price shown on the bill of sale: When many Mexican sellers list a low price on the bill of sale – with cash payments on the side to make up the balance – they have shifted future capital gains taxes to the new owner.
Clear as mud???
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Disclaimer: This information is not meant as legal advice. It is for educational and informational purposes only. Government policies vary between States and offices, and Mexican Government officials have broad discretion in how they individually enforce policies, so, your personal experiences may vary. See a professional for advice on important issues.
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Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry
Read-on MacDuff . . .