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Currency Exchange Affects Real Estate in Mexico

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Currency exchange affects real estate in Mexico and almost everything else. Currently, the weaker peso is attracting more visitors to the Puerto Vallarta-area who enjoy our tropical weather and lower prices for food and lodging.

Importantly, a weaker peso against the dollar also has a major impact on the local real estate market, for buyers and sellers, and also for renters.

For example, although more condos are being built in Zona Romantica, the concern about demand is still on the table. So far, the pre-construction sales reported are encouraging. If the peso continues to be at its current rate compared to the U.S. dollar, we could experience more rental demand. These condos, in many cases, will be an added supply of rental inventory in the Romantic Zone. Versalles also is very popular, as well the Hotel Zone for new condo construction. These locations are very popular for rentals, as well.

Both wealthy Mexicans and foreigners like the idea of buying and selling real estate here in U.S. dollars. They see the dollar price for real estate as a way to park their money in an asset instead of a bank or investment fund. The U.S. dollar is more stable than the peso at the moment. Two basic facts you need to think about when buying in U.S. dollars is understanding the tax structure in Mexico for capital gains and not over-paying for a property.

You should also know that, as in the majority of foreign countries, property purchases and sale prices are recorded in the currency of the country where the property resides.

For example, in tourist areas of Mexico, if a purchase price of US$100,000 is recorded at 20 pesos and the peso continues to be weaker, when the owner sells, he/she can face a capital gain because the value of the property is more pesos, not less. If he/she sells when the peso is 25 to the U.S. dollar, this is a gain. The ISR, or capital gains tax, will be computed with these numbers even though the purchase price can be sold and paid in U.S. dollars.

If the peso becomes stronger against the dollar and the exchange is 15 pesos to the U.S. dollar, the property purchased for 20 pesos a dollar will have a loss when the property is sold. This will lessen the ISR, or Mexican capital gains tax. The sales price again may be paid in U.S. dollars, but it will be recorded in pesos.

It should be obvious to all of us by now, that rental income and equity in sales transactions are affected by the tax income structure for the country where the property exists. In the U.S. tax code currently, an American citizen can take advantage of receiving a credit of some type for the taxes paid to Mexico. Check with your U.S. accountant.

A few final thoughts: First, it has become more difficult to exchange currency at some Mexican banks, which now require you to have an account to exchange money. And second, be aware of the exchange rate when you want to pay for goods and services with U.S. dollars. The exchange rate may be much lower than a bank or commercial exchange.

This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.

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