Are you planning selling your Mexican property? Don’t forget to consider your capital gains tax
Whether you are a Mexican national, a Mexican resident or a foreigner, if you are selling your property in Mexico, you may be liable to pay a capital gains tax.There are ways to reduce or claim exemption from capital gains. Before you complete the sale of your property, you should seek the advice of an accountant in Mexico. The assessment of capital gains tax in Mexico can be complicated and changes over the years.
Deductions vs. No Deductions
The rate of capital gains tax varies greatly and must be reviewed by an accountant to ensure you receive the largest deduction possible. For example, with no deductions, the tax may be assessed at 25% of the gross sale of the property. Or, it could range from 1.92% – 35% of the profit.
Pesos not Dollars!
All real estate transactions are recorded in Mexican pesos, regardless of whether you negotiated the purchase price and paid for your property in USD or CAD. You must consider the official exchange rates when calculating a gain. Let’s say you bought your property on January 1, 2010 for $100,000 USD and you sold it on January 1, 2023 for $100,000 USD. In USD, it appears there is no gain. However, you must use the exchange rate provided daily by the The Diario Oficial de la Federación to convert the purchase and sale prices into MXN.
- Exchange rate 1/1/2010: $13.0437 x $100,000 USD = $1,304,370 MXN
- Exchange rate 1/1/2023: $19.3615 x $100,000 USD = $1,936,150 MXN
- Capital Gain = $631,780 MXN or $32,630.73 USD
Mexican Resident vs. Non-Resident
There are significant benefits to having permanent or temporary residency in Mexico when it comes to reducing or being exempt from capital gains tax. A non-resident without an RFC or CURP will be liable for 35% capital gains tax. As a property owner, you should consider obtaining Mexican residency in order to reduce or even eliminate your tax liability should you decide to sell your property.
As a foreigner with Mexican residency, you receive the same consideration and benefits as a Mexican national which means you may be eligible for a complete exemption of capital gains. If you are able to prove that you are selling your primary residence and that you have resided in the home for a minimum of three years, you may be eligible for the exemption from capital
gains. Additionally, you must have an RFC (Mexican tax ID number) and CURP, and the property cannot exceed three times the size of the home.
As a Mexican resident, if you do not meet the above criteria for complete exemption from capital gains, you are able to still reduce your tax liability by applying deductions from improvements made on the property. You will be required to provide all official invoices (facturas) for property improvements and other related expenses such as broker fees, legal fees, and taxes paid. If you do not have an official invoice issued by the service provider and registered with SAT, the improvements and fees will not be eligible for a deduction.
Additionally, if you are a co-owner with your spouse, both you and your spouse can claim the property as your main residence and both can claim the deduction for a further reduction in capital gains.
The Role of Notaries
Notaries are responsible and liable for calculating and collecting the tax on residential transactions. Notaries may also interpret and apply tax laws differently. It is important to understand how the notary considers, for example, eligibility of deductions or residency status of the seller.
Sales of commercial properties are not handled by notaries and business owners should consult an accountant to assess deductions and tax obligations.
How a Mexican Tax Expert Can Help
Navigating the intricacies of the capital gains tax in Mexico is best handled by a professional. Our professional and experienced team of tax experts can review all of the requirements for deductions and exemptions to be sure you qualify and provide you with expert advice on steps to take if you don’t qualify for an exemption or reduction. Please contact our team today.