Mexicos Capital Gains Tax Law states that tax is owed on the profit you receive when you sell your home or property. By Mexican Law, you have two options when it comes to Capital Gains and you can use whichever is the lesser of the two options.
Option 1: 28% of the net profit. (There are a variety of deductions included in this option.)
Option 2: 25% of the gross sales amount with no deductions.
A 28% Capital Gains Tax may seem high, Mexico does have several laws and procedures that will assist you in maximizing your cost basis, thereby reducing your net profit, this will lower your Capital Gains. The key is to understand these laws before you buy, not when you decide to sell.
THERE ARE INSTANCES WHERE YOU TAKE ON THE SELLER’S CAPITAL GAINS LIABILITY?
The first thing in calculating your Capital Gains is to subtract the value you have recorded in your Trust (Fideicomiso), from the sales price of your property. Before some real estate companies recorded values lower than the actual purchase price in an effort to “save” tax for their client. Their thinking was to save money on the 2% acquisition tax. This was a big mistake. Never record a lower value than what you actually paid for the property. Doing this simply establishes a lower cost basis for the property, which increases your Capital Gains Tax liability.
Heres an example: You purchase a lot for $1,000,000.00, but record a value of $500,000.00. In the eyes of Mexican Tax Law, your cost basis is now $500,000.00. If you sell the lot for $1,200,000.00, you see a profit of $200,000.00, however, according your recorded cost basis, Mexico sees a profit of $700,000.00. Your Capital Gains Tax for Mexico will be 28% of $700,000.00 ($196,000.00.) You just lost money instead of making a profit.
Always record the full value of your purchase.
Owning in Mexico, specifically the Trust process, has been established to protect you and provide you with the legal means to protect your investment. Recording your real purchase price and proper documentation is the way to maximize your potential profits. The bottom line is to always get a Trust over your property as quickly as possible for the real value of your purchase.
Dont allow anyone to convince you to record a lower value than what you have actually paid for your property, or YOU will take on or assume the seller’s Capital Gains Tax liability. Recording a lower value today can cost you lots should you decide to sell in the coming years.
The Capital Gains Tax is the responsibility of the Seller.
1) It isn’t yours until you have the title in your name.
2) If you don’t record the accurate value of your purchase, you’re are going to take on someone else’s capital gains liability.
True: Recording the real value benefits you and establishes your cost basis in the eyes of Mexico.
True: The amount you pay for a property has no impact on your yearly property taxes.
True: Capital Gains Taxes you pay in Mexico can be applied to your U.S. Taxes.
HOW DO I KNOW IF MY VALUE IS RECORDED CORRECTLY?
I will personally help you and guide you through out this process I can review the documents with you and, to make certain everything is correct, and can be present when you sign your Trust.
You can verify the value yourself by examining the first page of the Trust Document and noting the amount written out in text, which is always in Pesos. Simply divide the current exchange rate into the Peso amount and make sure the result reflects the actual dollar amount you have paid. If you want to check an old Trust, simply determine the peso rate for the day and year the Trust was executed. We can give you the exchange rate, or the bank and the Internet are also helpful.
When you sign your new Trust, have the Notary jot down the exchange rate on the document itself. This will come in handy years later.
WHAT IS AN INFLATIONARY CREDIT?
When you pay your 2% Acquisition Tax to receive your Trust, you are eligible to receive an inflationary credit from the Mexican Government for every year you own the property. This credit is added to your cost basis when you decide to sell your property.
The credit is based on Consumer Index Adjustments (inflation) and can be quite significant. We have seen credits in excess of 15% per year applied to a cost basis. On a million dollar property, this can be as much as $150,000.00 U.S. per year added to your cost basis, significantly reducing your capital gains tax should you decide to sell in the coming years.
True: You are not eligible to receive the inflationary credit unless you have paid your 2% Acquisition Tax.
Information about the Primary Resident Capital Gains Exclusion.
Mexico and the United States, provides its residents a Capital Gains Tax Incentive for their primary home. The Tax Incentive in Mexico says that if you sell your “primary residence” after two years, you pay no Capital Gains. This law is in place for “Residents” (Mexicans Nationals or Foreigners) of Mexico only, and there are several items required to establish residency status. In order to claim your home as your primary residence in Mexico, you must be able to prove that it really is your Primary Residence. At the closing, you will be required to give the Notary with a residence visa or working permit (FM3 or FM2), as well as a bank account, water, phone and electric bills, paid tax receipts and your Trust, all in your name, all with the address of the home and all in place for over 2 years.
True: You cannot have two primary residences at the same time, so if you claim the home in Mexico as your primary residence, you give up your primary residency status in the U.S.
True: The Capital Gains Tax Exclusion is intended for residents of Mexico, not for persons owning second homes or vacation homes.
There are no short-cuts and no legal ways around taxes here in Mexico, just like there isnt in the United States or Canada. Your home is a large investment, and following proper legal steps will ensure a safe and enjoyable experience in Mexico.
If you plan on building a home or doing a major remodel to an existing home, please read our Informational Brochure called Manifesting Your Construction to make certain all your expenses are added to your cost basis.