Expats and Capital Gains Tax on Mexican Real Estate

Who is Considered a Taxable Resident?

When we talk about taxes in Mexico, it is important to know if you fall under the category “Taxable Resident,” According to the Mexican Tax Code a foreigner is considered a Mexican Tax resident if:

You have established a place of residence in Mexico;

If you also own a home in Mexico and another country, you will be considered a tax resident of Mexico if your center of vital interests are in Mexico; or more than 50 percent of your total income is derived from Mexican sources; and your primary professional activities are carried out in Mexico.

Business travelers may avoid being categorized as Taxable Residents unless they have established a home in Mexico and generate most of their income in Mexico.

What Taxable Residence Should Know About Capital Gains

Considerations when purchasing Mexican real estate, think ahead about capital gains tax, If you are buying your property through a Fideicomiso Trust, research the bank’s capital gains policies before choosing your Trust company. The Bank Trustee and their Notario may have a policy that does not accept deductions and automatically charges 25% tax on the full sale price before releasing the title to the new buyer.

Historically the property’s appraised value listed on the deed is far below its actual resale value; this is done in an effort to save on property taxes and transfer taxes at the time of purchase. This low listed value benefits the seller allowing them to avoid paying capital gains on the sale. The problem comes when you sell this property, as the value is listed low causing a large gap between the deed price and the sale price, resulting in you paying more Capital Gains tax.

The government is now taking a closer look at the reported values of property in order to increase their property tax revenue. We recommend you make sure that the value declared on the deed is equal to the transaction price.

Avoiding Capital Gains

Generally, the profits from selling your property in Mexico are taxable, with the exception of any gains from a resident taxpayer’s principal residence. There are restrictions regarding the price and gain from the property, discuss these details with a Tax Attorney as qualifications and procedures may change.

The Main Qualification to Avoid Tax

Provide proof that the property was your principal residence.

Taxable Gains

If the sale is deemed taxable, you may pay 25% tax or 35% on the net profit after deductions. The gain should be divided by the number of years the seller owned the home, limited to 20 years. Consult a tax attorney to calculate your capital gains tax both ways to determine the lesser tax.

If you have done significant renovations on the home, and your expenses, exceed 20% of the purchase price you will need a new assessment from the property tax authority. The increase in value will reduce your capital gains in the future.

Keep all fraturas of expenses of renovations and improvements. Manifesting your property refers to officially registering documents and receipts of funds spent on a home’s construction or renovation, which will be used as a deduction when the house is sold.

If the Principal Residence was sold at a loss, this amount may be divided by the number of years the home was held, ten years maximum. This loss may be used to offset other taxable income on gains from other property sales, but not used to reduce business or employment income tax.

Non-residents are obligated to pay Mexican taxes on property located in Mexico. The tax will be calculated by applying a 25% to the total gross income or 35% of the net gain minus expenses for improvements, commissions, and other allowable deductibles.

Good to Know About Capital Gains Tax

• Mexican tax law is a specialty; Notarios are not the experts in this area, and the real estate laws change every couple of years. It is best to speak with a Tax Attorney to determine the lowest tax you will need to pay.
• Inherited property is exempt from capital gains tax.
• You may be exempt if you the property is a donation, consult a tax attorney for stipulations.
• Corporations have a different tax system than private real estate.
• The 2% Acquisition Tax you paid during purchase may be used as a deduction.
• Maintenance costs are an accepted deduction.
• Raw land is taxed differently than developed properties.

To legally avoid or reduce Capital Gains Tax consult the Mexican Accounting experts for expats at our partner firm MexTax.