Real Estate Tax
When purchasing a property you will pay a 2% transfer tax based on the property value (see declared value below). This tax is included in the closing costs. Of more interest is the tax on the gains when you sell a property. This comes under the heading of Capital Gains but it is significant enough to warrant its own section.
The capital gain on the sale of a property is determined as the difference between the “declared value” on the deed (Escritura) when you bought the property and the “declared value” of the sale to be put on the new deed. This may appear obvious but, this is Mexico and there are often “wrinkles” that you should be aware of.
Historically, the “declared value” was significantly below the "market value". This was done to pay less transfer taxes and is still a common practice, although perhaps not entirely legal.
However, the Mexican authorities are paying more attention to this practice as they realize they have been losing revenue. Also, Notarios are being more careful with the “declared values” they are willing to accept for the deed.
If you are thinking about accepting a lower declared value on the deed than the purchase price, just remember that when you sell, the gain is the difference in declared values so you could end up with a higher gain and a bigger tax liability.
Unless you are exempt(explained below), the Notary will calculate the capital gains due based on the original "declared" value when purchased, adjusted for depreciation and inflation, plus commissions, sales expenses and IVA and the selling price. The deductions that can be offset can substantially decrease the gain and therefore the taxes you are required to pay.
Capital Gains will be calculated as follows and the lower of the two calculations will be charged to the seller:
1. 40% of the difference between the buying and selling "declared" values on the deed or
2. 20% of the selling "declared" value
Oversimplified: (does not take deductions for depreciation and inflation, commissions, sales expenses or IVA into consideration)
|For clarification let’s use 2 examples
|| Example 1
|| Example 2
|Purchase value (declared)
|Sale value (declared)
|40% of difference
|20% of sale price (declared)
As you can see, in the first example, the lowest value would be the 40% of the difference whereas in the second example, the lowest value would be the 20% of the sale price. The lower values would be used for the capital gains charged.
Previously, to qualify for exemption from capital gains on the sale of your primary residence, you needed to be a resident of Mexico (Residente Temporal or Residente Permanente) and have lived in the property for two years. In 2002, the law was amended to dispense with the two-year requirement and to be eligible for the exemption, you only needed to prove that you are a resident with a valid Residente Temporal or Residente Permanente and the property you are selling is your primary residence. This was one of the major benefits to obtaining your residency status (Residente Temporal or Residente Permanente). Then when the recent new law came in, this changed again. Now you can be exempt from capital gains on one Principal Residence every five years. The new law implied this applied only to permanent residents of Mexico. In some States/Towns the local notarios got together and collectively agreed you had to have the Residente Permanente to be considered a permanent resident. In other States/Towns, they ruled that either a Temporal or Permanente would qualify you for capital gains exemption. We are fortunate in the Chapala area that our notarios chose the latter ruling.
The previous information relates to properties registered by Direct Deed (Escritura). Currently, there appears to be some question as to the applicability to properties owned via a Trust (Fideicomiso). For foreigners, this applies to the restricted zone i.e. 50 km from the ocean and 100 km from the International borders, which included the major resort areas – Mazatlan, Puerto Vallarta, Cancun, etc (Note: Currently they are passing a bill to allow properties on the coast to be owned by Direct Deed. It is just waiting approval. They had hoped it would be done by the end of 2013, however a number of other more important bills came on the table at the same time, so this could take a while longer. But it is heading in that direction.)
In an Article written by Prof. German Estrada and published in the PV Mirror (10 Jan 2004) it appears that the exemption does not apply to properties owned in a trust.
“As the Bank, the title-holder is the ‘owner’ of the property - the title is in its name, as it is also at the Public Registry, as well as in the receipts of the property tax payments, and such Fiduciary Bank, as a corporation, is deemed to be a ‘moral’ person, therefore the exemption of capital gains tax cannot be applied to the seller. The term ‘physical’ applies to individuals while ‘moral’ applies to corporations.
"Note: The important concept with regard to this ‘exemption’ is that of ‘taxpayer,' and the Secretaria de Hacienda (SAT) in Mexico city has confirmed that it can only be applied to ‘physical persons.’”
Note: Focus contacted Prof German Estrada in March, 2006 and he confirmed that to the best of his knowledge the information is the same and there has been no change.
After contacting our Legal Expert (Lawyer) in Lake Chapala regarding the comments above, we received the following response, which is in direct opposition to Prof Estrada's article. Clearly this is an area where there are differences of opinion. We will make sure that when you attend the Focus seminar, you will have the most up-to-date and complete information available.
I checked your site and I do not agree with the opinion of the person mentioned in the capital gains part.
For fiscal effect the "fideicomisarios" are considered as the sellers and they are individuals that can apply for the exemption. Even the Capital Gain Tax law specifically recognizes the cases when a transaction in a bank trust can be considered as a "sale" for fiscal effects and it mentions the "fideicomisarios," not the bank as the tax payer.
On the other hand, if we follow the opinion given to you, then the Notaries would not have to collect any capital gains tax since the seller is a corporation (the Bank) and always when the seller is a corporation the Notaries do not retain or collect the capital gains tax, since the corporations are obliged to make the monthly payment of said tax.
I will need to prepare a more detailed analysis on this matter but in my opinion he is wrong.
Jorge Luis Ramos Uriarte"