Capital Gains Taxes in Mexico
By: Baja Insider
Capital Gains Taxes applies to all property transactions in Mexico, much as they do in the United States and many other countries. Knowing the law and your responsibilities for beneficial use of property rights or the transfer of the rights is crucial to understanding your obligations and the manner in which you may receive the various exemptions and deductions allowed under the law.
The Capital Gains tax is calculated by the Notario handling the transfer documentation, and is a fairly complicated subject when deductions or exemptions are considered. No one else is qualified per the law to do these calculations. Estimates may be made by others, but it is the Notario whose charge it is to be sure it is correct, placing their office and reputation on line with those calculations. For an accurate calculation, you must submit all of your documentation to the Notario doing the transfer for his/her evaluation. However, the capital gains are calculated basically by taking the difference between what you paid for the property versus what you sold it for minus any allowed deductions. Currently Capital Gains are 35% of the calculated difference on residential property.
Many people, both foreign and national do not realize the allowed deductions nor do they plan for them or receive the proper documentation that will assist them when selling throughout the period that they own the property. So, here are a few you can easily plan for:
Did you know that your Homeowners Association dues are deductible if you have a factura* for each payment? Most people don’t and never ask for one. Without a factura those expenses, or a portion of those expenses, are not deductible.
A factura is a legal official receipt for tax purposes in Mexico. It is different from a cash register receipt. It is presently printed by registered printers, has a cedula a tax insignia or symbol in a corner, is numbered sequentially and those numbers are monitored by the Mexican IRS (SAT) or “Hacienda” as it is commonly called; it shows the name of the person or entity issuing the official receipt, all of their data and their tax ID number. It also has a space for a description of the goods and services provided. For the purposes of a tax deduction on your property, also make sure they include the address of your property is on the factura, so it can be clearly identified with the property. To receive a factura you will need a personal tax ID number. Currently, you can receive factures handwritten or generated on a company’s computer, but in 2011, most facturas will become electronic. Ask your Mexican accountant to obtain these items for you. Remember, when you sell a property at a profit, you are generating income here in Mexico, therefore, you are required by law to have a tax ID number, so, may as well apply for one and repeat the benefit of collecting the deductions before you sell. Keep all originals of all documents. Copies are not accepted, the only originals.
Improving your property? ALWAYS get a factura for all materials and labor.
If the workers you are using are day laborers who do not have facturas, hire them through a pay company known as a “pagador”. The pagador will hire the workers as employees of their corporation and give you a factura for the payments you make. The workers will need to give the pay company all of their identification documents to be hired through the pay company and work on your project. The pay company will ask you for IVA (sales tax) of 11% (through 2013 here in Baja California, 16% on the mainland) plus their management fees which is an additional 10-14%, but they are then responsible for all of the taxes, and requirements under the law for employees. If your project is long term, they may also ask you to pay a fee to IMSS, which will either be on top of the basic wage agreed, or considered part of the basic wage and deducted out of the pay the worker receives. (It is always a good idea to pay for IMSS on any construction project on your property, because if a worker gets hurt, even a day worker, you can be sued and substantially fined by the government for not providing for their medical insurance benefits. You will be held responsible for their medical bills, their loss of income and potentially for their family’s welfare in case of death or serious injury. Not worth it!) Weather the cost of IMSS is included in their wage about ($0.33 for every $1.00 paid) is determined by the negotiation you have with the worker(s) and the pagador’s contract with the workers. (Make sure you receive weekly IMSS reports from the Pagador for each worker, if this is the case.) **When improving your property, also be advised to follow all building codes and laws, including receiving appropriate building permits and registering the termination of the work; manifesting any new square meters added with Catastro or the Assessor’s office. You will not be able to sell your property without it being completely manifested with the new sizes, and paying a large fine if you did not do it as part of your construction process initially. So do it right to begin with and save all the official receipts for building permits and manifestations too. If you have a fideicomiso, remember, part of your commitment to the bank holding your trust is to inform them of any change to the property, so if you need to manifest construction you made without permits, they will need to issue an approval to Catastro before Catastro will register your manifestation. It just gets really complicated and time consuming, if you do not follow the law to begin with!
Legal fees and closing costs. Any legal fees regarding your property are deductible if you can present factura for those services. The closing costs you paid for when you purchased your property are deductible as well. Most title transfer documents now, have those costs listed in the document itself, however, some older title documents do not. Make sure to check your title transfer documents for the correct inclusion of those costs when you purchase a property. Always ask for a factura from the service provider for anything you pay against your property as well.
Studies and evaluations: Any survey, soils test, architectural study or set of plans, etc. regarding the specific property is deductible, if you can present a factura for the service rendered and paid for.
Sales commissions. Any sales commission paid to realtors should be accompanied by a factura from the realtor. These are also deductible.
Mexican nationals who live in their residences for 5 years or more are capital gains tax exempt. They need to prove that the residence is their primary residence and need to provide proof of utility bill payments, property tax payments in order to qualify for this exemption. Foreigners too can qualify for a tax exemption as well, but it is a bit more difficult and complicated. A foreigner too needs to prove that the residence is their primary residence, that they have been out of the country no more than 183 days of the past 365 days, show evidence of being a taxpayer in Mexico, provide proof of utility bills paid in their name and the address in question for a minimum of three months prior to the sale (some Notarios required require longer proof), bank account statements here in Mexico and in the case of a fideicomiso, depending on Notario, additional items may be required due to the property being held in a trust with beneficial rights of use, as opposed to the rights of real property. Always check with the Notario who closes your real estate transaction or another other Notario of your choosing and keep informed periodically of any changes in the law regarding obtaining any capital gains exemptions available on your property. Some Notarios will only accept an FM2 for consideration of capital gains exemptions. There are also some controversies regarding a fideicomiso and its ability to meet the letter of the law to qualify for capital gains exemptions. Do tax planning, just like you would if you were in the United States or Canada.
Although it is not currently the law that foreigners owning land in Mexico are REQUIRED to have an immigration Visa, it is more than a good idea. And some trust banks make this a requirement. In reality, your property purchase and any additional investment you make in that property is an investment that may place you in an income making position here in Mexico, by value increases, and potential gains over your initial investment. The same can be said for obtaining a tax ID number. Consult a reputable Mexican accountant and a Notario and obtain the best tax advice from both, as well as when is the best time for you to apply for any tax registration here in Mexico.
Remember too, that any investment in a fideicomiso or a fee simple property investment and gain here in Mexico is required to also be reported to the United States IRS as well. In the case of a fideicomiso, a report annually is required of all held in Mexico, and in the case of income earned as well. Consult your U.S. accountant. Fines for not reporting to the IRS are substantial, some with a $10,000 USD price tag per absent reporting!
For more information check: http://www.bajainsider.com/baja-business/changescapital-gains-mexico.htm and http://www.realdelmarvallarta.com/agencias/Owning/capitalgains.pdf
(Please note that the amounts of the tax has change since these articles were published, and the tax structure on the mainland differs from Baja California Sur but the general information contained therein is useful.)