Photo by Frank Shepard.
Real estate investors always have a lot of questions about income tax on capital gains. Instead of writing an article giving a full explanation of how this tax is calculated, deducted, exempted and paid, I prefer to share with you the most frequently asked questions made by property owners and tax payers.
What is the percentage of income tax on capital gains in Mexico?
For 2010: 30%, 2011: 30%, 2012: 30%, 2013: 29%.
Which expenses can be deducted from the income tax on capital gains?
- Updated fiscal value of the property
- Construction and improvements
- Notary fees and expenses at the moment of acquiring the property
- Real estate transfer tax (2%) at the moment of acquiring the property
- Cost of the appraisal used to acquire the property
- Commissions
What do I need to do to deduct these expenses?
You need to obtain official invoices for services such as construction or remodeling (improvements), materials, plus the notary public invoice that you used to buy the property or by getting an invoice from the Realtor that you used to sell the property. The key words here are “official invoices”, or facturas. Please be aware that to get an official invoice you need to pay a 16% value added tax.
What if I did not get any official invoice for deductions?
The income tax law regulation allows you to obtain a referred appraisal to the date that you built or improved the property. For that reason, it is important to get the construction and remodeling licenses and the termination and occupation licenses so the appraisal can be referred to such date.
Can I deduct other expenses different than the ones mentioned before?
No, the tax law has a principle of strict application, which means that you can only deduct the expenses provided by the applicable tax law.
Is there any tax exemption for selling your dwelling?
Yes, and it is necessary to prove that the property to be transferred is your home by showing an elector badge, telephone or electric bill, bank statement showing the name of the owner, his/her spouse and the corresponding address.
Is the exemption for selling applicable to foreigners?
This question unfortunately cannot be answered with a simple yes or no. It is very important to highlight the fact that you have to set aside the concept of foreigner since tax laws in Mexico provide for taxation based on the concept of tax residents or non-residents. As a tax resident having a home or a principal business center in Mexico, i.e., receiving more than 50% of your income from activities developed in Mexico, you are considered a tax resident (regardless of your nationality) in accordance to the Fiscal Code that adopts this concept from international taxation treaties designed to avoid tax evasion and/ or double taxation. Therefore, tax residents, regardless of nationality are entitled to a tax exemption when selling their home.
Do I need any type of visa to prove my residency?
Tax laws do not provide for any type of visa, and it is also important to bear in mind that the tax laws are of strict application, requirements not provided in the law cannot be demanded of a tax payer. A visa is not required but if you have one, it will help the notary show the type of activity you are performing in Mexico and what is your home address. Please be aware that one criterion of the tax authorities may be that the document required proving your residency is the notice of tax residency given to tax authorities; however, there is no such requirement provided in the tax laws.
Is there any timetable of residence in order to be tax exempted?
A) In case of the transfer of a property valued under 1,500,000 Investment Units (UDIS, for its acronyms in Spanish), there is no specific provision in the Income Tax Law or the fiscal code providing a term of residency to consider your property as your home; however, the local civil code of Guerrero, which is a supplementary law, provides that your home is the place where you have lived for 6 months as a minimum.
B) In a case of a transfer of property valued at 1,500,000 UDIS or over, the Fiscal Code provides that you need to prove that you have inhabited such property for 5 years. The way to do so is by showing telephone or electricity bill for such years. The fiscal miscellaneous provides one (1) bill for each year.
What does UDIS mean?
UDIS are defined as Investment Units. They were created to refinance bank loans for the 1995 crisis in Mexico, and the Central Bank (Banco de Mexico) establishes the value of an UDI on a daily basis.
Is there any restriction about the size of the property for a tax exemption?
Yes. The land on the property that you sell shall not exceed three times the size of the construction; otherwise, the exceeding part of the property will be taxed under a normal basis without the benefit of the exemption.
What if I donate my property to my spouse or children?
Donations to spouses or children are exempted from income taxes.
Upon my death, will my heirs or secondary beneficiaries have to pay income taxes?
Secondary beneficiaries that are recognized as main beneficiaries upon the death of the main beneficiary do not need to pay income taxes.
Is it better to acquire and sell my property through a Mexican corporation?
No. If you create a corporation to own residential property you will definitively cancel the chance of being tax exempted. Corporations also pay the income tax at a 30% rate.
Is it better to put the property in the name of a Mexican so he/she can be tax exempted?
This is illegal since we are talking about tax evasion. Please consider that there are a lot of variables here… such as, what if this person dies without leaving a testament or if he/she was married under a system of common property and he/she is getting divorced, or this person just disappears? Please consider these factors carefully; even if you save some money, this is not only illegal, but also totally risky.
If I transfer the trust rights of my property, do I still pay income tax?
Yes. It does not matter whether you transfer the property itself by canceling your trust or you transfer its trust rights. You still pay income taxes.
Assuming I have to pay income taxes on capital gain, who is liable for paying such taxes?
In Mexico, the notary public is liable to withhold and pay these taxes; however, it is very important to get the record of payment of these taxes because the tax law provides that if the taxes are not paid, the taxpayer (seller) is bound to pay for the principal and the notary public for the accessories, i.e., interests, surcharges and penalties.
Who calculates the taxes?
The notary public is responsible for calculating taxes. Please be aware that there are tax formulas to estimate taxes so you can always ask for another opinion from another notary, a tax accountant or tax lawyer.
The seller wants me to declare a lower than actual purchase price to lower their capital gains, should I do it?
This is illegal because is tax evasion. Additionally, it is a short term ‘’remedy’’ that only benefits the seller because in the long run, if you sell your property, you will end up paying these taxes.
How can I legally reduce the tax impact of income tax on capital gain?
By getting the real price reflected in your value, getting official invoices for construction, remodeling and materials, official invoices for commissions, obtaining construction, termination and occupation licenses so you can get a referred appraisal if it becomes necessary.
Please bear in mind that tax calculations have a legal basis. There is no magic or mystery about it. Feel free to check with the attorney or accountant of your choice for any calculations and law benefits to see how you can legally reduce or even be exempt from taxes.
