Do your homework when you sell your property in Mexico. Sellers, for example, need to know when they offer property for sale if they have an exemption or whether they will pay capital gains tax.
When an offer comes in, it will usually say that both buyer and seller agree to the usual closing costs. For the seller, capital gains tax is an expense and the question of exemption from tax is frequently misunderstood. Sellers often say, “I shouldn’t have any tax because I am selling the villa for less than I paid for it” or “My friend said a certain notary will work with me, and I will have no tax.”
You are not taking care of your business if you don’t do your homework before offering your property for sale. Your assumptions are not valid until they are checked out. Comments by another person who is not qualified to answer the question, is not acceptable. When you sell your property, you become obligated to paying taxes and fulfilling your part of the contract, so don’t procrastinate.
Do you have a partial exemption? Learn if there are any deductions you are not taking advantage of or how you can legally lessen your taxes.
What are your deductions? Real estate commissions are deductible if Mexico’s IVA (16 percent excise tax) is paid. The cost of permanent improvements also can be deducted if you pay the IVA tax on them and receive a properly-written facture, the invoice or bill you receive for materials or work. You must first ask the notary if he/she accepts the receipt and type of expense. You don’t want to assume it is an allowable deduction and find out at closing it is not.
A client recently paid for insulated windows and doors for his condo. His facturas have been reviewed by the notary and are acceptable. This client paid excise tax on the windows and doors and saved himself some money at closing.
Are there any other options to lessen taxes other than a proper visa or deductible expenses? There are cases where over time the property has been improved, but there is not a paper trail. What do you do? Find out if an appraisal by the tax authority will allow the property basis to be raised. Yes, the appraisal will cost money.
Do you think you shouldn’t pay capital gains tax if you are selling for less than you purchased? If your purchase price was converted from U.S. dollars into pesos in your escritura (deed) and the U.S. dollar was 10 pesos and it is now 12 pesos, you have a gain.
If you are not partially 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 your home 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 them in Mexico.
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 several 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 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.