An important piece of advice I give all of my clients is do your homework before selling your property in Mexico.
For example, as a seller, you should know if you have an exemption or deductions to use against capital gains when you offer your property for sale.
When an offer comes in, it should state that both buyer and seller agree to their usual closing costs. Capital gains tax is an expense and part of your closing costs. You want to make sure your listing agent has helped you determine the ISR tax and any applicable strategy before your property is promoted.
If you have purchased property in Mexico since 2014, you need to show your CDFI official factura from the notary. CFFI is an encrypted file, but you also receive a readable pdf document. If you do not have this file, your purchase price will not be allowed as your basis when capital gain is computed. In other words, you will be in a pickle.
The question of exemption from tax, by the way, is frequently misunderstood, as illustrated by these familiar responses we hear often: “I shouldn’t have any tax because I am selling the villa for less than I paid for it.” “My friend said a certain notary will work with me, and I will have no tax.”
You should also know that your purchase price is converted from U.S. or Canadian dollars into pesos in your escritura (deed). If the U.S. dollar was 10 pesos when you purchased and it is now 12, you have a gain. Your tax is based on your gain in Mexican pesos.
Make sure you know about any deductions you are entitled to or how you can legally lessen paying tax when you sell.
Here are the deductions you can use:
1. Real estate commissions are deductible if the iVA (excise tax) is paid. You don’t want to assume you have receipts for expenses and wait until closing to find out what is deductible. For example, a client recently paid for insulated windows and doors for his condo. His facturas have been reviewed by the notary and are acceptable.
2. This client paid excise tax on the windows and doors, but has saved himself some money at closing. You need to evaluate if paying the IVA of 16 percent is worth claiming a deduction, versus how much you save in capital gains.
3. If you have a permanent visa, you can investigate getting an RFC, or tax number, and applying for a Constancia as a fiscal resident. In this case, the notary will want to see major utility bills, such as CFE (electric) and telephone, with the RFC data on the bill. A Constancia can qualify you for a partial exemption of capital gains when selling.
4. Are there strategies to lessen tax if you made permanent improvements to your property? Find out if an appraisal by the notary will allow the property basis to be raised. Yes, the appraisal will cost money. And the notary may withhold funds for a reserve, in case the case is audited and not approved.
Be aware the notary is not going to allow multiple strategies or multiple exemptions, so you will need to choose the best one for you.
If you are not exempted and pay a tax in Mexico, can you use the deduction in another country? Tax treaties between counties are different. You need a good accountant in the other country to tell you if you can deduct the expense. If you are selling Mexican real estate, you owe taxes here first. If you pay taxes in the U.S. or Canada, you still owe Mexican taxes first.
To keep in perspective why taxes are collected by the notary upon the sale of real estate, one has to understand the culture and the history of the collecting country.
A well-informed attorney told me years ago that Mexico appreciates the fact that foreigners buy and sell here, and often times make a profit. The government takes the position that the country where the sale occurs is entitled to a portion of the proceeds of the sale. This is no different from long-term capital gains taxes due for a gain or profit in other countries
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.