August 12, 2014:
Mexican Lawyer Lic. Spencer McMullen has been busy again, offering yet more good insights into how real estate law, property law, and tax laws work in Mexico. Here is his latest report on key issues that affect most of us foreigners living and visiting Mexico:
Real Estate Appraisals in Mexico.
Here in Mexico we have three types of real estate appraisals: Tax (Catastral), Bank (Bancaria) and Commercial (Comercial). When choosing an appraiser, remember that all appraisers must be licensed. Most are engineers or architects who have postgraduate courses and state licenses and are also “peritos” or experts in real estate.
TAX (CATASTRAL) APPRAISALS
The Tax / Catastral appraisal is used to calculate transfer real estate taxes and fees, as well as notary fees. In years past Notarios used this value as the sales price listed on the deed, instead of the real sales price that the buyer paid to the seller.
This approach had certain consequences when the listed value was low, allowing the buyer to pay smaller closing costs and less in ongoing property taxes. After the Feb. 2010 ISR tax law changes, people could only exempt capital gains once every 5 years. Notarios also became stricter in approving people for the homeowner’s exemption, requiring foreigners to have an FM2 or inmigrado (permanent resident) immigration document and later a residente permanente (while now one can have either a temporary resident or permanent resident to qualify for the capital gains exemption as of 8/2014). Under those “new” 2010 rules, many sellers could not qualify for the exemption. This meant paying gains taxes on an artificially high reported net gain. These sellers did not actually have a real gain but had “phantom” gains, due to upon sale, as Notarios used the lowball catastral tax appraisal value combined with the current sale price for the new real value. In many cases people actually had a real loss, i.e. paid $2,500,000 pesos for a home in 2006 and in 2014 sold that same home for $2,000,000 pesos, while the original deed shows they paid only $800,000 pesos (as the amount of the prior catastro tax appraisal). While technically selling at a loss, they would have a paper gain of $1,200,000 pesos and pay tax on that gain amount of 20-30%.
The catastral appraisal is based upon tax tables published by the municipality where each city block is assigned a value per square meter for the land. The municipal tax tables value the square meters of construction depending on age of the property, style and condition.
THE BANK APPRAISAL (AVALUO BANCARIO)
The bank appraisal (avalo bancario) is used when someone buys a piece of property using a bank loan. It is similar to US appraisals, being determined using comparable sales, and is used as a justification for establishing the sales price.
THE COMMERCIAL APPRAISAL (AVALUO COMERCIAL)
The commercial appraisal or avaluo comercial is not widely known, even among Notarios and lawyers, but it has many tax advantages when used properly. One objective of this type of appraisal (Avaluo Comercial I.V.A) is to attack and modify the value of commercial construction on a property to save on the IVA sales tax.
One type of Avaluo Comercial appraisals (Avaluo Comercial I.S.R. Adquisicion) are used to justify/prove that the property has a lower market value than the corresponding catastral (tax) appraisal. This is usually necessary for properties being sold at prices less that the catastral value listed with the municipality. If someone purchases a property for more than 10% under its official listed value, then the purchaser pays the I.S.R. income tax, as they are receiving a benefit. This is the one exception to the general rule that the seller always pays the taxes in a sales transaction, since the buyer pays this income tax. Typical cases where this may arise are foreclosed properties, fire sales, vandalized properties or properties under construction that are not yet finished, where some tax offices consider a property with a roof to be “finished” while there are no walls or anything else inside.
Here the appraiser tries to justify a lower value showing that the value really is lower due to the aforementioned circumstances, thereby reducing or eliminating the I.S.R. income tax that a buyer would have to paid without the Avaluo Comercial I.S.R. Adquisicion.
The last type of commercial appraisal is the Avaluo Comercial, con Mejoras I.S.R. Enajenacion. This appraisal is underutilized and can be a great way to lower your capital gains liability. Many people have done remodels to their properties but do not have official tax facturas to document the work and justify a gains tax reduction. This type of appraisal can be used to justify improvements on the property, raising the tax basis of the property, and hence lowering or eliminating your I.S.R. tax liabilities. You only get tax benefits from remodeling and improvement costs done on your property, not from simple repairs when something broke. I.S.R. (capital gains) tax liabilities use 80% of the value of the improvements for purposes of calculating the taxes.
Items your appraisal will need
1) Copies of your property deed with registration receipt
2) Copy of most recent property tax bill / receipt
3) Copy of most recent water bill / receipt
The original text of Lic. McMullen’s report can be read at: http://www.mexconnect.com/cgi-bin/forums/gforum.cgi?post=201154;sb=post_latest_reply;so=ASC;forum_view=forum_view_collapsed;page=last;#last
Again, we thank Lawyer Spencer McMullen for his ongoing fine work at supporting expats in Mexico. Lic. McMullen is a Mexican licensed attorney (Cédula #7928026) and official court translator (Perito Traductor). Contact him at http://www.chapalalaw.com/inicio-2-2/ or Mx 376-765-7553
* * * *
Interested in more on Real Estate, Property, and Gains Taxes in Mexico? See our main article at: Capital Gains Taxes on Mexican Properties
* * * *
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. See a qualified professional for advice on important issues.
* * * *
Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan. © Steven M. Fry
Read-on MacDuff . . .