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.
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**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) ….
* * * * * * *
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
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***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…
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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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Please Continue to Make Comments and Replies to Help Keep This Information Current!
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 . . .
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Has anyone info on signing up for the Registro Federal Contribuyentes (RFC)? I have been living in San Cristobal, Chiapas, for over five years, have my FM2 and the CFE bills, predial receipts, etc. to prove it is my primary (full time) residence. I’m thinking of selling a small part of the land I own and wish to avoid paying the 25-28% capital gains tax. Yesterday, a local notario suggested I sign up for the RFC to further bolster my argument that I be a five-percenter. Is there a down side to registering? Help….
Hi
I went back to the Mexican notary that I used when I purchased my condo in 2000 at a price of US$43,000 now that I’m ready to sell this condo at a price of US$43,000 with the new appraisal of US$45,000. The notary tells me that I will have to pay 28% capital gains taxes since it was a second home. But what I cannot figure out is that he saying that my capital gains tax will be over US$13,000 plus US$1400 to handle the transaction. He has used a lot of calculations like what the peso rate was when I bought it and what the peso rate is now and other things that I don’t understand all I know is that the current value of the condo is US$45,000 and I’m selling it for US$43,000 so my capital gains should only be US$2000 times 28% should equal $280 please advise
Hi Boyd,
Based on the superficial details – on the face of things: You would take the current sale value of the home in pesos and subtract off the original sale price of the home (adjusted for inflation) in pesos – to get a first estimate of the total gain.
Specifically, the notary should take the original OFFICIAL REGISTERED sale price** in pesos and add 3% per year for an inflation adjustment to get the current basis (as long as the Notario had you pay a 2% Acquisition Tax when you bought the property). Then rake that inflation adjusted current basis and subtract it from the current sale price to get the taxable gain. Then multiply that gain by the 28% tax rate. The US dollar values play no role in determining the capital gains taxes. As pointed out in the text of this article, most Notarios do NOT know tax laws well, so, it often takes both an experienced tax attorney or tax accountant (abogado o contador de impuestos) AND the Notario to get the sale and the taxes right.
Here’s where the bugs creep in. Many, many, many property sales in Mexico do NOT register the actual sale price, and instead, they list a falsely low sale price to save the seller capital gains taxes. If your notario listed/registered a falsely low value on your previous deal (to sweeten the previous purchase to get the deal to go through), then you are on the hook for your taxes and the previous seller’s taxes. Some notarios do not pay the 2% Acquisition Tax, so the homeowner also loses the 3% per year inflation adjustment.
e.g. For a correctly listed sale price
$43,000 USD estimated at 9.4 : 1 to $404,200 (http://www.tradingeconomics.com/mexico/currency)
Let’s now guess that your Notario does not know about the 3% per year inflation adjustment, and let’s guess that your notario falsely (commonly) reported an original sale price of just $100,000 pesos (to benefit the prior seller),
then at today’s 13.1 : 1 peso rate, current sale price would be $572,000 pesos. Subtracting the guess (INCORRECT $100,000 peso) basis would give a taxable gain of $472,000 pesos = $35,500 USD of gain.
By making these two common errors, we get a capital gains tax owed of 28% of $35,500 USD of gain = $9,950 USD of incorrectly determined taxes…
So, our best guess is that either:
~ you misunderstood your Notario or
~ your Notario is calculating the taxes based on $46,000 USD of gains… or
~ your Notario listed a way-too-low original purchase price and
~ your Notario does not know to take the 3% per year inflation adjustment and / or
~ your Notario made some serious math errors.
Hope this helps you ask the right questions, because it appears that your Notario may have listed your purchase price at 10% of the actual sale price – and we are not attorneys, nor tax accountants – so, we offer these guesses for informational, educational, and entertainment purposes only.
steve
My “purchase” of a beachfront home was a private sale, with only a informal bill of sale from seller (American also) to me The seller just gets cash, from one American bank to another. My application for a fideicomismo does not ask for a purchase price. Not sure where I go from here vis-a-vis future capital gains
Hi Scott,
The law is simple and clear on your circumstances: You pay a flat 25% of the selling price in taxes to Hacienda when you sell the home. Your Notary withholds the 25% tax from the funds you receive from the seller. Maybe, maybe, maybe you can find a Notary who will stick out their neck (to possibly be chopped-off) to consider granting you the homeowners exemption… ??? Also under 2010 IRS rules, you are required to file TD F 90-22.1 annual filings (since TY 2011), and possibly also FATCA filings, depending on your situation. If the IRS finds that you have not filed, they can assess $10,000 to $25,000 annual penalties for not filing. Further, if they find you have dealt with them in bad faith, they can attach your US assets for up to 40% of the value of the Mexican property. Alternately, you can file for an IRS exemption to filing on your fideicomiso, but in the meantime, you are required to make informational filings… (no taxes owed, just give them information)
Considering your US bank to US bank transfers: If you choose not to file, the Treasury Dept & IRS notes that they can also:
` “Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information. ”
http://www.treasury.gov/press-center/press-releases/Pages/tg1825.aspx
Readers who want more details can also read: Fideicomisos and FATCA: US – Mexico Agreement on FATCA Reporting Requirements
steve
Thanks Steve
The notary did not registered a falsely low value it was $43,000.00 and the new appraisal was $45,000.00 and if I sell it for $43,000.00 what should my tax be by law. When he registered it was N$390,540.00 pesos becuase the pesos rate was 9.4561 to the dollar on 19 dec 2000
Good Morning Boyd,
The answer is in the previous reply:
For educational and entertainment purposes: Using a conservative approach, apply the 3% per year inflation, based on how many Tax Years have elapsed, and the property sells before Dec 19, 2012, then you have 11 years of 3% per year of an inflation adjustment, compounding to a 38% increase in basis between Dec 19, 2000 and Dec. 19, 2011. This inflation adjustment works out to:
$390,540 x 0.3842 = $128,878 Mxn pesos of Inflation between 2000-2011
$128,878 + $390,540 = $540,599 Current 2012 basis without deducting the Acquisition Tax.
Adjusting the Basis for the 2% Acquisition Tax: $390,540 x 0.02 = $7,811 peso adjustment for Acquisition Tax paid in 2000.
$540,599 + $7811 = $548,409 pesos of current basis in 2012, including the Acquisition Tax adjustment.
Your current 2012 sale price in pesos: $43,000 USD x 13.1 = $563,300 MXN Pesos
2012 Taxable Gain = 2012 Sale Price – Net Current Basis in 2012:
$563,300 – $548,409 = $14,891 of net taxable gains on the property for a 2012 sale.
Taxes on the Gain:
$14,891 MXN pesos x 0.28 (tax rate) = $4,169 pesos of Tax = $318 USD of taxes with Acquisition Tax Paid.
(using current exchange rates)
This analysis assumes that your Notario had you pay the 2% Acquisition Tax when you bought the property.
If he made the error of not paying the 2% tax, then you do NOT get the 3% per year inflation adjustment,
which would result in [($563,300 - $390,540) x 0.28]/13.3 = $3,637 USD of Taxes owed with no Acquisition Tax.
So, a good Notario would save the expat homeowner $3,319 USD of taxes by paying the Acquisition tax on a $43,000 property in this example.
Did your Notario pay the 2% Acquisition Tax back in 2000?
(a 2% tax which is recovered if you hold the property for just 3 years of a 3% inflation adjustment)
Hope this hypothetical, educational math exercise helps you,
steve
Steve
Where can I get a copy of the new law for the capital gains to show to the notary
Thanks
Boyd
_____
Hi Boyd,
It was issued in the DOF in February of 2010, as updates to the ISR. You could start checking there, since I don’t have a web-link,
steve
Yucalandia
Where and what would I look for in my papers to see if the 2% Acquisition Tax was paid.
It looks like the max tax I should have to pay is around $3,700.00 USD if the tax was not paid, not $13,000.00 USD .Guess I need to find another Notario and talk to a tax attorney. Can the 2% Acquisition Tax be paid before the sell are only at the time I bought the property
Thanks
Boyd
Hi Boyd,
You need to ask your Notario if the tax were paid at the time of your purchase.
The $13,000 estimate of tax implies that your Notario did not even subtract out the initial purchase cost.
Tax attorney or Tax accountant seems like a good choice to work with the Notario handling the sale of the property.
All the best,
steve
Steve
I found this document in my papers, I think this shows that the tax was paid (PAGO SEGÚN ARTICULO 4TO. LEY DE INGRESOS MUNICIPALIMPUESTO A PAGAR $) A.- PRECIO PACTADO, VALOR FISCAL O AVALUÓ
390,540.00
E.- IMPUESTO (2 % de C )
$ 7,534.13
B.- REDUCCIÓN LEGAL O 13,833.50
BASE SEGÚN ART. 75 BIS B FRACC. III
F.- RECARGOS POR EXTEMPORANE1DAD
MESES % $
C.- BASE GRAVABLE
376,706.50
G- TOTAL A PAGAR
$
7,534.13
D.- BASE GRAVABLE AL APLICAR FACTOR DE AJUSTE
SE DECLARA BAJO PRTESTA DE DECIR VERDAD QUE LOS DATOS QUE SE
ASIENTAN EN EL PRESENTE DOCUMENTO SE APEGAN A LA REALIDAD
FIRMA DEL NOTARIO,
NOMBRE Y FIRMA DEL CAUSANTE O
Looks like good news for your bank account.
steve
This discussion is helpful but doesn’t seem to cover construction of a new house and casitas, after purchasing the land. I have saved all my receipts but it seems my contractor may not have given me valid facturas. Any help is appreciated.
Elaine,
Yes, keep the facturas for the construction costs. Facturas should include the RFC number.
If you live here, and might want to keep 5 years of your comprabantes in your name, in case you want to try to qualify for the tax exempt status.
All the best,
steve
where can I get a copy of the new tax law on Capital Gains Taxes on Mexican Properties
It is not quite a “new tax law”: It came into force back in Feb. 2010. Maybe search the Mexican “federal register” in that month (or earlier) for the new rules. Maybe see http://dof.gob.mx/ but not everything is listed on the web. The print version of the Diario Official de la Federacion should have it. As posted in the article above, look for Article 109. XV. de La Ley del Impuesto Sobre la Renta (ISR) .
Pay special attention to Articulo 109 Fracción XV inciso a) de Ley del Impuesto Sobre la Renta, artículos 129 y 130 del Reglamento de la Ley del Impuesto Sobre la Renta, Regla I.3.10.7. y articulo Séptimo Transitorio de la Resolución Miscelánea Fiscal for 2012.
steve
Thank you for some very comprehensive information regarding capital gains, we’ve been trying to get the straight goods for years.
Is it your understanding that having FM2 status in and of itself is not an exemption from capital gains?
Is it true that you must prove that your Mexican residence has been your primary residence for 5 years in order to qualify for reduced capital gains, regardless of what type of immigration status you hold?
What is generally required as proof of primary residence and how stringent or scrutinized are these requirements?
Thanks for any help
Dan
Hi Dan,
Is it your understanding that having FM2 status in and of itself is not an exemption from capital gains?
Correct, unless you can find a Notario who will sign off on the waiver in the future.
Is it true that you must prove that your Mexican residence has been your primary residence for 5 years in order to qualify for reduced capital gains, regardless of what type of immigration status you hold?
Correct.
What is generally required as proof of primary residence and how stringent or scrutinized are these requirements?
Here’s a partial list, as noted in the article above:
~ 5 years of continuous copies of CFE and water bills, all in your name.
~ Proof that it really is your primary home, that you have not been away from your home much during that time. e.g. a total of 18 months cumulative of travel away from your home over the 5 years can be used as a legal test for saying that you have not been a resident.
~ You must prove that Mexico and the town your are in is you fiscal home and the main center of your professional activities.
~ The property cannot be used for income generating purposes within the 5 year residency period.
~ Possibly other stipulations, ordered by your Notary.
These are specific requirements of the law, but if you can find a Notario who will sign-off on approving the waiver without meeting these requirements, then their written sign-off gives you the deduction. As with all important legal things, get it in writing.
steve
Could someone please clarify the capital gains tax in more detail with respect to holding and FM 3 vs FM 2? My husband and I have lived in a home in Mexico for almost 5 years (it will be 5 years in early 2013). It is our primary residence, our only residence and we have been out of Mexico for perhaps 4 weeks maximum. We both hold working FM3s. It seems that we should meet all the requirements perfectly to avoid paying any capital gains tax. And it does not make sense that one needs an FM2 to avoid the tax when one cannot obtain an FM2 until you have lived here for 5 years with and FM3.
We are planning to return to Canada next year and have listed our home for sale. If in fact an FM2 is required than when we renew this year we will apply for an FM2, but it really does not make sense that one needs an FM2…
Thank you.
Hi Christy,
You are asking if you qualify for the exemption given to legal fulltime residents. If you translate “No Inmigrante” (a.k.a. FM3), it means you have chosen a visa status that is literally “not an immigrant” or not a resident – which means you registered as a temporary guest.
Temporary guests do not have the same rights or responsibilities as permanent residents or citizens. If you had chosen the INM path to permanent residency, then maybe a notary would agree that you qualify. FM3s are a temporary residency visa. e.g. Working FM3′s allow you to have a Temporarily Imported car, without nationalizing or permanently importing it, because the legal status you chose means you agreed to take the car out of the country when you leave Mexico at the end of your temporary stay.
On a positive note: If you paid the Acquisition tax when you bought the property, then you can deduct the annual depreciation. also If you kept facturas for any improvements, they also reduce any gains taxes owed if you sell the house.
Hope that helps you understand,
steve
Thank you Steve. Yes, your explanation is clear and provides a clear understanding .
Yes, we paid the acquisition tax, so helpful advice. With the FM3 we thought we might change to an FM2 after the five year period, but have changed our minds… So although I understand I don’t agree with the definition/law as applied to Capital Gains tax because we were and still are full time residents… but that’s life.
If we change to an FM2 this year will that make a difference?
Christy,
As we described in the article, you must have a Notario approve the homeowner’s exemption. In our experience, Notarios have not been approving the exemption to either FM2 or FM3 holders, but an FM2 puts you on the track for Permanent Residency (Inmigrado) status, which Notarios do sometimes approve for the exemption.
steve
Thank you for confirming.
Hi Steve,
What are the capital gains if you have Inmigrado status, and want to sell your commercial business? How are the capital gains figured out. The property was bought as a residence, then changed to a commercial interest, then part of it was changed back to a residential interest. Do I have to prove that the residential part was changed 5 years prior to selling, even if it was for many years commercial. (We converted the restaurant part of the property to our house, and have since lived in it for 4 years.) The rest of the property is commercial… So how do you break it up?
Thanks,
Janet
Hi Janet,
Base rates were about 28%, on your current basis. The basis is determined by your Notario, by deducting your recorded purchase price from your sale price, minus various possible additional adjustments – e.g. Do you qualify for this property as your principal residence and your fiscal home (to claim the homeowners exemption)? Did you pay the 2% Aquisition Tax? Did you keep facturas for improvements? etc etc – all of which affect your effective rate of taxes on any gains.
Since any exemptions from taxes would have to be approved by your Notario, and because your Notario is fiscally liable for his choices for you, then you really must talk with your Notario. He knows the details of your circumstances, and clearly we do not have enough information to answer. Also, since Feb. 2010 many Notario’s only approved the homeowner’s exemption for expats who are either naturalized citizens, or who have an active application pending with SRE for citizenship, so your Notario may choose to not allow any exemptions.
All the best,
steve
Hi. Writing for a friend who is internet minded. She bought a house in Merida in 1997 for $5000.00. She spent about US$15,000 to 20,000 to fix this ruin up, does not have her receipts.. She used to have a FM2, however, the last two or three years only had a 180 day tourist visa. She would ;like to sell her modest home, worth about US$75,000. Will she have to pay 28% on the amount for $70,000?. She is in a panic!!
Thank you for any input.
Meant she is NOT internet minded…sorry
Hi katrina,
First, she should seek professional advice from a good attorney or Notario. If she paid the 2% Acquisition tax when she bought the house, she could take the 3% per year depreciation allowance. Otherwise, since she did not become a legal resident of Mexico, then she owes taxes on the net gain. Talk with an attorney-Notario.
steve
Thank you for quick reply. My friend knows nothing about this 2% tax…..she will contact her notary. She is really worried about this 28%.
We purchased a home for 593,000 pesos, made some improvements (did not keep receipts), paid utilities and yearly real estate taxes. We are now trying to sell the home for 700,000 pesos and are being told that we have to pay 25% on the entire 700,000 pesos and not on the capital gain of 100,000 at 28%. We have consulted with a tax attorney and notario, and they say we have to pay the 25% on the entire 700,000 pesos because it was not our primary residence and we are foreigners (US citizens). This is very complicated.
Michele,
What was the purchase price listed on your deed?
Since your notario is financially liable for anything he signs-off, then your tax liability is in the Notario’s hands. Did you discuss his personal opinions on taxes when you bought the property? Your current Notario is taking a non-standard approach. Continuing: If your Notario did not have you pay the 2% Acquisition Tax, then you are liable for gains taxes on the difference between your official selling price minus the official purchase price listed on your deed, while if you did pay the Tax, then you can adjust the basis of the value of your home by deducting the Tax, and also deduct 3% per year due to depreciation (if you paid the Tax). These 2 additional basis adjustments are on top of subtracting out the original listed purchase price. These adjusted basis calculations have nothing to do with whether the home qualifies as your primary residence. If you home qualified as your primary residence, and you qualified as a resident of Mexico, then you would pay nothing…. Time for a new Notario and a new Tax accountant? (Find ones who know the laws.)
steve
We feel like we are at the mercy here. We have the deed with the purchase price of 593,900 pesos, and we did pay the 2% acquisition tax. How do I go about finding a reputable attorney/notario? The two that we spoke with claim to be “experts.” Would you do a calculation of what you describe above with the 3% per year due to depreciation. When does the 700,000 sales price come in?
Michelle.
Adjusted Basis:
700,000
-593,900 Purchase price
-11,878 from the 2% Aquisition Tax
94,222 is your adjusted basis.
Some notarios depreciate whole value of the property 3% per year, while others depreciate only the value of the buildings (excluding the land).
After subtracting the 3% per year depreciation from the 94,222 adjusted basis, you would then calculate the tax owed on that final figure.
Re good Notarios, ask a talented neighbor or maybe ask your physician ? – talking with someone in your local professional community, since professionals typically know who is good and reliable?
Since you know the rules, you could judge which Notario is good based on their knowledge of the rules.
steve
Steve, Thank you SO MUCH for your guidance. I will be meeting with a Notario later this morning to discuss the above.
Steve, After speaking with two notarios and being told that the 25% did not have to apply, I have been told by the bank’s notario (mortgage company for the buyer) that I have no option but to pay 25% of taxes on the sales price. I am paying taxes on my own money. In addition, I have been told that there will be no deductions allowed. So it will be an easy calculation for the notario … 700,000 less 175,000 for 25% taxes plus realtor commission. BTW, because the purchase is through a bank, I have no right to select a notario. I have to go with the bank’s pre-selected notario. It all goes back to I’m an extranjero (foreigner) so the laws are different for us. This is absolutely ridiculous – why would anyone buy in Mexico?
Michele,
So sorry that it is working that way. As the 2 Notarios told you, according to the law, you really should not be paying, but it is your Bank and your Bank’s Notario that is causing the problem. This is why we advise potential buyers to ASK their Notario, BEFORE the sale:
HOW WILL YOU HANDLE THE TAXES if we sell the property in the future?
So, this appears to not be so much a “Mexico” problem, as you have a problem of having a bank and Notario who choose not to follow the Mexican Laws. Is it worth paying a lawyer to fight the payment of excess taxes? This is like having a bad tax accountant or bad tax attorney in the United States, getting bad advice, paying too much, and then wising-up and changing to a good accountant, but with your bank, you are forced to use their guy.
What bank do you use? (so others can avoid them)
It is really crummy that your bank forces you to use their seemingly incompetent Notario.
*sigh*
steve
I had the same problem here in Tijuana so I refuse to sell with the banks notary and told the buyer that if he still wanted the property he would have to go with a notary that honored the new tax code. If we give in to the bank’s request and the notary’s that do not understand the new tax law it will hurt all of us. I had to do some owner financing to get my property sold but I did not pay any capital gains tax at all because of the 3% inflation clause in the new tax law.
_____
Well Done !
Is the 3% inflation clause, linked with the acquisition tax that you paid when you bought the property? What document will show whether or not you paid the acquisition tax?
Dan,
Yes, by “linked”, I think you mean to say that you can claim the 3% per year depreciation only if you paid the 2% Aquisition tax when you purchased the property, plus the Aquisition tax is also deductible. Your payment of the tax should be shown on either your sale document you received from your Notario, or it should be shown on the statement that your Notario gave you. These things vary by State to State and even by office to office (por Catastral?), so we can’t tell you exactly whether you paid the tax nor where to look.
Was there a mysterious 2% increase in what you paid vs. the Sale Price + Notario’s Fees?
steve
Heaven help us if we have to sell the casa we’ve just built before we’re eligible for Mexican citizenship. We’ve just sunk a fortune in to our main casa construction and will be hit with hefty capital gains if we have to sell for some reason. We’re out in the boonies with a dirt road and no street names or address or mail, and no utility services or water bills to prove that this has been our full time residence for 3 years and will continue to be. We’ve found ways around the no-address or utilities issue in the past: To open a Mex bank account we had to spend the night in “town” and used a hotel bill and the hotel became our “residence” address. For FM2′s and 3′s I’ve use our lot number and geographical location to make up an address. I doubt that a notario will be so flexible when it comes time to show proof of primary residency and we’ll get reamed with tax! There must be others who live in remote areas of Mexico and have the same issue.
Hi Cindy,
You certainly do have a unique situation. Have you talked with a good Notario about this? I would talk with several to find out what options they might consider to grant you the gains waiver, since one of them might agree to approve your claim for the waiver. On the other issue, 5 years of proof of official Residency is one step in the requirements to become Naturalized Citizens, so, the same issue may pop up there, when you go to prove residency to SRE? Maybe 5 years of rarely leaving Mexico, as shown by the stamps on your passports might be enough, or maybe a letter from your Notario, certifying your continuing residency might be sufficient (like how renters get a letter from their landlord). It might also be worth a trip to a good immigration attorney with a good track record of getting Naturalized Citizenship applications approved to get their advice on your peculiar situation.
All the best,
steve
The update on my situation is that the Notario has given me only one option – pay the 25% tax on the entire purchase price not on the capital gains. This is ridiculous and unfair. I am paying taxes on my own money. The advice is to find a good Notario, but how do you find one? It’s a small community of Notarios, and each one interprets the law differently or is not willing to change their stance. Because they are responsible for any impuestos that are not paid, they don’t want to take the risk. My lesson learned is to never buy another property in Mexico.
Can you cancel your sale that is forcing you to use the bank and their bad Notario? (giving back any earnest monies?)
Then sell directly to the buyer, using a Notario who knows the law? I would talk with a talented attorney to find out your options.
steve
HI Steve, i’m Maurizio from Italy and i have a question i thought to be very simple..but i was not able to have an answer! I’m going to buy an apartment in mexico city. As i’m foreigner citizen may i rent it? Thank you and sorry for my bad english!!
Hi Maurizio,
Here are your legal options. Legally, you would need to handle it one of 2 ways:
1. Set up a Mexican Corporation and have the corporation buy the apartment, and then you can legally rent it. or
2. Get an INM residency permit that allows you to earn income in Mexico, like “Residente Temporal Lucrativo” or “Residente Permanente“.
steve
Thanks for your quick and clear answer. I forgot to tell you i’m married with a mexican woman. Perhaps this could open a better option?
Maurizio,
Either put the property in her name, or make her a partner in your corporation. Every Mex. Corporation needs 2 stockholders.
steve
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Thank you for this in depth article. A question to follow up on Maurizio’s regarding buying property through a corporation. What are the capital gain rates for someone selling a property owned by a Mexican corporation? In other words, are there any capital gains advantages at the time of sale if the property is initially purchased through a Mexican corporation?
Corporation owes the taxes.
You really have not given enough supporting information to answer your question. e.g. Of the three categories of real estate property: commercial, rustic (no buildings), residential (with a home), which one is yours?
If yours is a commercial property (e.g. a home on which you have collected any rents), then taxes are imposed proportionally with the profit made when calculating the price paid at purchase and the amount paid by the buyer when it is sold. The controlling Article 109. XV. of the Ley del Impuesto Sobre la Renta (ISR) has the rules for capital gains tax on property sales… and has only 28 chapters on exemptions, adjustments, and how the tax is determined.
Since we really are not prepared to address these issues – you should contact a licensed Mexican tax expert, like a good tax attorney or better still, a tax accountant.
steve
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I don’t have a reply but a question. I am about to buy a house in Merida that is sold MX200,000.00 below the valuo catastral. Is this difference of MX200.000 the basis on which the buyer has to pay 20%, in other words pay the seller’s capital gains tax of 5% (he is Mexican) plus the difference of 15%? Since I also want to pay the 2% adquisicion impuesto for tax purposes later when selling, what should I do? Pay up front but have the seller reimburse me the 20% on a separate check or in cash when closing. Thank you for your answer. Viktoria
Good Morning Viktoria,
Only the seller pays gains taxes. You pay the seller his asking price, and you arrange with your Notario to pay the additional 2% aquisition tax.
The question of paying some separate check “up front” and being reimbursed later does not make sense to me.
steve
Thank you , Steve. If it only were this easy. I might not have accurately presented this deal. Unfortunately, in this case where the sales price is lower than the valuo catastral price, the buyer pays 20% on the difference. The seller sells his property for MX600.000 but the valuo catastral is more, it is 800.000 MX. I am being told by my notaria that the buyer pays 20% on the difference between the sales price and the valuo catastral which is 200.000MX. In other words, I would have to add MX40.000 (20%) to the sales price. The Mexican seller obviously is aware of this, therefore sells under price to avoid paying his capital gains tax. Since I am not wiling to pay this 20% on the difference between the sales price and the avaluo catastral price, I was thinking of negotiating with the seller that I pay this amount upfront for it to be part of the escritura and have the seller reimburse me the 20%. Or do you know of another way to solve this problem? tMurky I know.
Hi Viktoria,
Since many past Mexican real estate sellers have intentionally reported artificially low sales prices to not pay gains tax, this appears to be your state’s way of addressing the problem of artificially low reported sales prices. Before this approach, the buyer would ask for $1 million pesos for the house, but he would want $300,000 pesos in cash under the table, and he would report only a $700,000 final sales price (cheating the government out of about $100,000 in taxes).
By forcing the seller to make up part of the difference of an artificially low purchase price, it allows the govt. to effectively nearly recover the missing 28% gains tax owed… This appears to be yet another area where the cheating by a few people cause the honest folks to suffer later – as the government tries to close the loopholes used by the cheaters… bummer.
Could you ask your Notario if this is a nationwide policy?
You could check with another Notario to find out if there are any other options.
steve
If you purchased a home prior to the de-evaluation of the Mexican peso, what buying price do you use to figure you captial gains (the amount you bought if for or adjusted amount due to the de-evaluation of the peso)?
KSW,
I don’t know. It makes sense to use a valuation based on the value corrected for the devaluation (the higher value), but this really should be answered by a tax lawyer or tax accountant.
stev
Hi Steve,
We will be closing on our house in the Lake Chapala area and will be purchasing another home in the same area in a month. We have only lived in Mexico for a year and both my husband and I have the permanent visas. If we decide to sell our second home in a few years, we would not have met the 5 year of residency, however if we sell our house for less than the purchase price would we be subject to a capital gains tax?
Hi Zan,
In theory, no, you would not be subject to a tax on gains, because there would be no gains. Still, the Notary who brokers the deal must agree to this accounting procedure (subtracting the earlier purchase price from the final selling price). Did your original purchase include reporting the entire purchase price to the govt? or did your previous Notary log an artificially low purchase price with the catastral office?
If your Notary for the upcoming sale agrees to subtract out your purchase price, and your previous Notary recorded your full purchase price with the govt., then it should all be fine.
Note that in some markets the buyer selects the Notary, so be sure that your buyer uses a Notary who makes the purchase price deduction, because a few Notaries do (inappropriately) assess the 28.5% gains tax on the whole sale price.
steve
Thanks Steve,
We will make sure the Notary records the full purchase price on the house we are in the process of purchasing.
Hi Zan,
Good feedback. You might run into an unexpected tussle on this one. In many Mexican real estate markets, the Notarios have recorded falsely low sale prices, for decades, to give the previous owners a break on their gains taxes, (showing a low price in the recorded records, with under-the-table cash payments to the sellers to make up the differences). Unfortunately, this rolls forward onto future buyers who may wind up carrying extra gains that were not reported by the previous buyers’ Notarios. In the world of “go-along / get-along”, many Notarios do not want to upset the system by reporting the actual sale prices – because it reveals their and their brethren’s other transactions as suspiciously low???
steve
Hi Steve,
So my next question is….if we sell our house before the 5 years is up, do we pay tax on the gross sale of the house?
Hi Zan,
Again, in legal theory, you deduct the purchase price and the Acquisition Tax and depreciation (3% per year on the buildings – if you paid the 2% Acquisition Tax when you bought it), and any other allowed deductions from the sale price.
It can take a tax-specialist Atty or tax-specialist Accountant to get all these things right, since these are not part of a Notario’s typical training.
After 5 years, the Notario for the sale may qualify you for the homeowners exemption – but it can be difficult to qualify for.
steve
I have been issued the “Residencia Temporal” visa in the local consulate, and I will exchange the visa for the Temporary resident card in the INM office when I in mexico. When in Mexico, I want to buy a home to live myself but also want to rent out some of the rooms. However, when I read the messages above, I notice in order to rent out the rooms legally. I must:
“you would need to handle it one of 2 ways:
1. Set up a Mexican Corporation and have the corporation buy the apartment, and then you can legally rent it. or
2. Get an INM residency permit that allows you to earn income in Mexico, like “Residente Temporal Lucrativo” or “Residente Permanente“.” or “Residente Permanente“.
Because I also live in the house, so the first 1 set up a mexican corporation is not an option. I don’t have an employment offer, so my status is only Residente Temporal, not Residente Temporal Lucrativo. Can I apply for Residente Temporal Lucrativo even I don’t have an employment offer, If I am Residente Temporal non- Lucrativo, Can I still rent out some of the rooms in my house? I have no problem to pay rental income though.
Hi justin,
Your desire to to the right thing is admirable. Because the Mexican ISR (tax code) is so dense, even the sharpest Mexicans hire accountants for these things – or take in renters under the table. This points to hiring a good accountant to advise you, and this accountant likely knows a good lawyer who can advise you on the subtleties of the law. This pair may point to some work-around in the law that allows you to set up the corporation, even with your living plans. If you don’t like their proposals, you can change your residency estancia to allow you to ear income – or possibly go to a Residente Permanente (if you have a cumulative, consecutive 5 years of prior residency in Mexico – or if you have sufficient savings or sufficient monthly deposits).
Can you rent out rooms? Sure, as long as you can find paying tenants. Is it legal? Likely not. How should you do it? That answer’s beyond my pay-grade.
I would talk with a good accountant.
Why pay taxes?
If you like Mexico, and want her to continue to grow and prosper – effective collection of taxes is one key area that distinguishes countries with a solid future vs. those that are just getting-by.
steve
Hi Steve
Thanks for the answer. The visa from my Consulate does not indicate whether Residente Temporal Lucrativo or Residente non-Lucrative. I assume it is non-Lucrative because I don’t have a job offer. When I bring my visa to INM, is it possible or how easy to change from Residente Temporal non-Lucrativo to Lucrativo if I don’t have a job offer? Although My financial saving and income is much more than the requirement of Residente Permanente, I did not apply for that in the consulate because the consulate officer told me that the Residente Permanente visa is for retiree who receive regular pension only. I am not a retiree and do not receive pension. If I bring the Residente Tamporal visa to INM and show them the financial documents, would that be possible to change the Residente Tamporal to Residente Tamporal ? (I will be in Mexico in August)
Hi Justin,
Yes you can change to a working Residente Temporal while inside Mexico.
Yes, you can change from Residente Temporal to Permanente while inside Mexico. Some INM offices were accepting bank statements and financial/investment account statements in the recent past to qualify for Residente Permanente. In the meantime our Merida INM office personnel have been instructed by INM DF that they must only accept pension income documentation to meet the requisito for personal fiscal solvency. I can’t say what your local INM offices policies will be this August. The changes have trended toward accepting only pension/retirement account disbursements.
steve
sorry, my last sentence is that would that be possible to change the Residente Tamporal to Residente Permanente
OK I am more and more confused with this. I have no Residente Tamporal to Residente Permanente status – just a tourist. If I purchase condo of some $200,000 USD my capital tax gain payable to Mexican gov (after sale) could be as high as $70,000????? Is that possible?
Hi Aaron,
Only if the Notario that handles the sale is an idiot and does not know the law.
This does happen, which means you must only agree to use a Notario who knows to deduct your official purchase price (as listed with your catastral office) from your selling price.
You pay 28.5% taxes only on difference between your selling price minus the expense and deduction adjusted basis => you owe tax only on the NET PROFIT.
If you become a permanent resident or a citizen, then you might qualify for the homeowners exemption from taxes.
steve
Thank you Steve, however I understood the following:
~ * ~ 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….”
as said: 25% of FULL SALES PRICE …not 25% of capital gains amount …..(if any)…?
I am missing something in this tax story? Thanks
Hi Aaron,
Yes, I think you are missing that it is the buyer who frequently chooses the notario. Banks generally have no say in which Notario is used, unless the Buyer gets a mortgage from a bank (unusual – since most real estate deals are cash deals).
So, when you are approaching an agreement with your potential buyer, as the seller you may want to insist that the buyer use a Notario who knows and agrees to deduct your prior purchase price, plus deducting any allowed depreciation (up to 3% per year) and allowed expenses.
If you are the Buyer, and you choose to use a Fideicomiso, then only choose a bank that has a Notario who follows the law and approves adjustments to the basis.
This really is one of those areas where knowledge is power,
steve
Indeed …will add the above to my list of risks….long, long, list…..Thanks a bunch for your help!