Before you start to think about Selling your property in Mexico please consider the following:
Capital Gains Tax
A foreigner who sells property in Mexico is liable under special rules, much like the United States, for the payment of I.S.R. tax (Impuesto Sobre la Renta) which is the Mexican equivalent of the Capital Gains tax. Liability is either 20% of the declared value of the transaction or 28% to 30% of the net gain, less the improvements made, commissions paid, and other allowable expenses. The formula is complicated and the tax should be figured both ways and confirmed by the Notary Public who will be preparing the final deed and tax declarations.
Understanding Mexican tax law is an integral part of the purchasing process. What you do today dictates your tax liabilities tomorrow.
The following is an overview of the capital gains tax regulations currently in place for individuals. Note that the information is intended for individuals, not corporations. Over time these regulations may change, therefore it is important to make sure that the process outlined here is still in effect by contacting a certified accountant or a Mexican Notario.
Capital gains tax law in Mexico states that tax is owed on the profit you receive when you sell your home or property. By law, you have two options when it comes to capital gains and you can use whichever is the better of the two options for you: 1. You pay 28% to 30%* of the net profit. (There are a variety of deductions included in this option.) 2. You pay 25%* of the gross sales amount with no deductions. Although a 28% to 30% 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 and potentially lowering your capital gains. The key is understanding these laws before you buy, not when you decide to sell.
*Percentages reflect the 2013 Tax Code. Check with an Accountant or Notary for any changes in these percentages.
Manifesting is simply recording the amount of money spent on a home’s construction or remodel, in order to add it to the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax. Proper documentation and manifesting your construction are vital when building your new home.
When you sell your home, the manifested cost plus the cost of your lot stated in your trust (title), will be used to determine the basis for capital gains tax. If you have not manifested your construction, Mexican tax law will not recognize your construction costs and you will not be able to use them as deductible expenses. All of your receipts, cancelled checks and bank statements will not help unless you have completed your manifestation after construction.
Termination of Works
When construction is finished and you are ready to manifest your construction, you will need to take your building permit to the Departamento de Obras Publicas (Public Works) with a letter stating the total amount you spent on your construction and confirmation that construction is finished. You or your contractor can write the letter. With this letter, you will request an official statement of completion called an “Aviso de Terminación de Obra,” which is a “Letter of Termination of Works.” This letter will state the amount you spent on your construction, which should be in accordance with the amount stated on the building permit.
Social Security for employees is a very serious issue in Mexico. Your home can actually have a lien filed against it or sold to force payment if taxes are not paid. Beware, this can happen even years after you finish your construction. If the amount of Social Security taxes paid corresponds to the amount of your construction, you will receive a letter from Social Security called the “Carta de Razonabilidad de Pago,” which means “Letter of Reasonability of Payment.” This letter is very important, as it is your protection to prevent any future claims for non-payment of Social Security taxes. Before you can receive your Letter of Termination of Works, you will be required to have this letter from Social Security
Once you have your Letter of Termination of Works and your letter from Social Security, you simply take them to the tax office (Oficina de Catastro). There, the value will be recorded and added to the cost reflected on your trust document. Once completed, you have successfully manifested your construction and established an accurate tax basis for your property.