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 Mexican Notario.

CAPITAL GAINS TAX

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 three options when it comes to capital gains and you can use whichever is the better of the three options for you:

1. You pay 28 percent* of the net profit. (There are a variety of deductions included in this option.)

2. You pay 25 percent* of the gross sales amount with no deductions. Although a 28 percent 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 lowering your capital gains. The key is understanding these laws before you buy, not when you decide to sell.  *Percentages reflect the 2007 Tax Code.

3. WHAT ABOUT THE PRIMARY RESIDENCE CAPITAL GAINS EXCLUSION?   Mexico, as well as the U.S., provides its residents a capital gains tax incentive for their primary home. The tax incentive in Mexico states that if you sell your “primary residence,” you pay no capital gains. This law is in place for “residents” (Mexican 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 was your primary residence for a period of SIX MONTHS. At closing, you will be required to provide the Notary with a residence visa (FM3) or working permit (FM2), as well as  water 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 more than six months. In some circumstances, a tax ID number may be necessary. Please keep in mind that this is just a guideline of the requirements. It is necessary to communicate with the Notary prior to closing your transaction in order to know if you are eligible for exemption. *Based on the 2007 Tax Code.

WHY SHOULD YOU TAKE ON THE SELLER’S CAPITAL GAINS LIABILITY?

The first step in calculating your capital gains is to subtract the value you have recorded in your trust, or Fideicomiso (fee-day-coe-me-so), from the sale price of your property. In the past, some real estate companies have recorded values lower than the actual purchase price in an effort to “save” taxes for their client; they thought they could save money on the two percent acquisition tax. This is a major error. Never record a lower value than what you actually paid for the property. Doing so simply establishes a lower cost basis for the property, which increases your capital gains tax liability.

An oversimplified example is: You wisely purchase a home site (lot) for $1 million, but unwisely record a value of $500,000. In the eyes of Mexican tax law, your cost basis is now $500,000. If you sell the lot for $1.2 million, you see a profit of $200,000. However, according to your recorded cost basis, Mexico sees a profit of $700,000 and your capital gains tax for Mexico will be 28 percent of $700,000 ($196,000) — a difference of $140,000 in profit. RE/MAX Mazatlan approach to ownership in Mexico, specifically the trust process, has been established to protect you and provide you with the legal means to safeguard your investment. Recording your authentic purchase price with proper documentation is the only way to maximize your potential profits. The bottom line is to always secure your property trust for the true value of your purchase as quickly as possible.

Never allow anyone to convince you to record a lower value than what you have actually paid for your property, or you will assume the Seller’s capital gains tax liability. Recording a lower value today can cost you, should you decide to sell in the coming years. If a Seller can convince a Purchaser to record a lower value, the tax liability is simply passed along, and eventually someone will have to pay. Don’t let anyone tell you, “That’s how we do it here.” Mexico is like everywhere else — the capital gains tax is the responsibility of the Seller.

Simply, a property is not yours until you have the title in your name. Also, if you don’t record the accurate value of your purchase, you’re most likely taking on someone else’s capital gains liability.

Fact: Recording a property’s true value benefits you and establishes your cost basis in the eyes of Mexico.

Fact: The amount you pay for a property has no impact on your yearly property taxes.

Fact: Capital gains taxes you pay in Mexico can be applied to your U.S. taxes.

OF YOUR PURCHASE.

HOW DO I KNOW IF MY VALUE IS RECORDED CORRECTLY?

As your real estate agent, I will oversee the creation and completion of your trust. We will review the documents with you to make certain everything is in order, and we are present when you sign your trust. You can verify the value yourself by examining your trust and noting the amount written in text, which is indicated in U.S. dollars or Mexican pesos and includes the exchange rate of that day. 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 would like to review an old trust, simply determine the peso rate for the day and year the trust was executed. We can assist you in finding the exchange rate, as can the bank and the Internet.

WHAT IS INFLATIONARY CREDIT?

As soon as you pay your two percent acquisition tax to receive your trust, you are eligible to receive an inflationary credit from the Mexican government for each 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. In the past when inflation was higher, we have seen credits in excess of 15 percent per year applied to a cost basis when you acquired your property some years ago. On a million-dollar property, this can be as much as $150,000 USD per year added to your cost basis, significantly reducing your capital gains tax should you decide to sell in the coming years.

Fact: You are not eligible to receive the inflationary credit unless you have paid your two percent acquisition tax.

DON’T FORGET ABOUT THIS…

WHAT ABOUT THE PRIMARY RESIDENCE CAPITAL GAINS EXCLUSION?

Mexico, as well as the U.S., provides its residents a capital gains tax incentive for their primary home. The tax incentive in Mexico states that if you sell your “primary residence,” you pay no capital gains. This law is in place for “residents” (Mexican 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 was your primary residence for a period of SIX MONTHS. At closing, you will be required to provide the Notary with a residence visa (FM3) or working permit (FM2), as well as  water 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 more than six months. In some circumstances, a tax ID number may be necessary. Please keep in mind that this is just a guideline of the requirements. It is necessary to communicate with the Notary prior to closing your transaction in order to know if you are eligible for exemption.

*Based on the 2007 Tax Code.