The Mexican tax system has been subject to comprehensive tax reform legislation enacted principally in 1986 and 1988. Although this tax law is subject to change we have supplied this information to better help our customers understand the basic tax laws with the emphasis on your real estate purchases and sales.
Taxes are always to be considered in your real estate transactions and this is even truer when as a foreigner it is possible that two countries may claim tax jurisdiction over you and your property.
Various taxes and procedures with regards to your transactions are calculated somewhat differently here in Mexico, with the key points being; can you be claimed as a tax resident? When is a property subject to tax? And knowing exactly what taxes you can be subject too.
As always Diamante Realtors feels it is very important to always consult with a local tax consultant or Notario for up to date information on taxes in Mexico.
Understanding the tax laws of Mexico is an extremely important part of real estate ownership here in Mexico. What you do today will greatly affect your tax liabilities of tomorrow.
The acquisition tax in Mexico is a relatively low rate of 2% of the purchasing price. It could be said that the most important thing that we can stress is to always properly record your purchase price at full value and pay this tax.
Never is it a good suggestion to try and save a little by recording a lower purchasing price, this can often be heard as a suggestion but never should it be considered.
If a lower sales price is registered, basically the seller will avoid some of their 30% capital gains tax and in the future when it comes time for you to sell, you will be forced to pay a higher amount of capital gains tax that isn’t necessary. Pay the 2% tax and avoid the 30% tax.
Facts About Purchasing
Never record a lower purchase price, this purchase price will NOT affect your property taxes.
Always check your Fideicomiso( bank trust) to make sure the purchase price is correct (write down exchange rate for future reference).
Pay your 2% tax as soon as possible to begin receiving your inflationary credit.
As soon as you have paid your 2% acquisitions tax you are now eligible to receive an inflationary credit for every year you own your property. This credit will be added to your base purchase price when you sell your home, and can be very substantial in some cases.
Capital Gains Tax
Mexico tax law states that that tax is owed on any profit received when you sell your home or property. By law you have two options to calculate this tax and can use whichever is the lesser of the two options:
- Aproximately 25% of the gross sales amount with no deductions.
- Aproximately 30% of the net profit (with deductions).
The key to understanding these tax laws is to understand how to maximize your cost basis before you buy and not when you decide to sell.
Also make sure that all expenses paid on your original closing and expenses for improving and holding the property are properly accounted for, meaning a oficial factura is issued in your name with address of property detailing expenses and 10% iva sales tax paid.
Capital Gains Tax Exemption
Mexico provides its residents with a tax incentive for residents that sell their personal residences.
This law states that after 2 years of ownership you may sell your personal home and be capital gains exempt. This tax exemption is for Mexican Nationals but also applies to some foreigners with their primary residence here in Mexico.
As of January 1st. 2007 foreigners requiring capital gains exemption require the following qualifications from most Baja California Sur notaries:
- A current FM3 immigration status.
- Utility bills( electricity, telephone) in your name and the properties address for the last 2 years.
- A signed sworn statement declaring that you don’t own another home outside of Mexico.
- A local tax number showing you are a tax paying resident.
* New tax laws for 2007 have a limit of approximately 500,000 USD as a sales value that is exempt from taxes when you have lived in premise less than 5 years. If you have lived there longer than 5 years any sales value is exempt , but if you have only lived 2 years you will have to pay some taxes on profits over this 500,000 limit, with the initial 500,000 being exempt.
While no one really wants to pay taxes this is often a fact of live, we at Diamante Associates pay our taxes and in turn we support our local economy of Mexico to improve the city and country where we work and live. We encourage our customers to pay their taxes as well, particularly if they are not tax paying residents and living full time in Mexico.
Always check with US/Mexican tax law specialists , normally it is required by US tax law to report your property investments abroad and fines could be applied if you do not report your Mexican properties.
Due to the tax treaties between the US and Mexico, normally when you pay your capital gains in Mexico you will not owe additional taxes in the US. You will not be taxed twice on the same income, only on income achieved by a lower tax rate than the US tax rate and normally the rates paid in Mexico are higher than the US eliminating any taxes due.
We had provided a quick review of some tax laws that a person is likely to encounter during their purchase or sale of a property here in Mexico. It is important to note that if you are a resident of the U.S and Mexico you may be subject to some tax laws for both countries and it is recommended that you always consult a qualified tax consultant on these applicable laws.