Today, I’d like to answer this question: Should you buy and sell Mexican real estate in U.S. dollars or Mexican pesos?
You can, of course, agree in a sales contract to buy and sell at a price in Mexican pesos. The sale will be recorded in Mexican pesos, not as a conversion with U.S. dollars.
The surprise happens later if the transaction is done in U.S. dollars, or perhaps Canadian dollars or the currency of your home country. You may not realize that the entire transaction recording the sale in your escritura is in pesos. You sold the U.S. dollars and receive pesos to declare your purchase. You sold at the rate of exchange of the day.
The U.S. dollar is very strong today, so you may receive 18 pesos for every U.S. dollar paid. Your U.S. dollar goes further in purchasing power and you now have more pesos recorded for your purchase. Let´s say the purchase price is US$100,000 or $1,800,000 Mexican pesos.
Three years from now you may want to sell. If you bought in pesos, and will sell in pesos, there is no currency conversion rate.
If you are buying and selling in U.S. dollars, you will be working with two conversion rate dates: when you bought and when you sell.
For the capital gains tax, you will have to find out, after adjustments for currency differences, if you owe tax or not. Do you have a gain or loss?
Market conditions, such as a sellers’ market with prices up, or a buyers’ market when there can be bargains, are not the overriding force of how much you may make or lose in the sale. The currency conversion rate will affect you.
Let’s say that in 2020 you sell in a sellers’ market and gross US$120,000 for your condo. Let’s also assume that the price of oil has gone up and Mexico is making more money so the peso is stronger and a U.S. dollar is worth 12 pesos. Your sale will be recorded at the Mexican peso price of $1,440,000. This is less than the recorded price you paid in 2017 of 1,800,000 Mexican pesos.
Another example: 2020 is a buyers’ market and you take US$85,000 for your condo. The peso is still at 12 because, overall, Mexico´s economy is strong and not tied to the expat or tourist real estate market. Your sale will be recorded at $1,020,000 Mexican pesos. You still do not have a gain.
If the U.S. dollar is 25 pesos and your saIe is still US$85,000, it is now $2,125,000 Mexican pesos. You do have a gain based on the weakness of the peso compared to the U.S. dollar.
If you buy in U.S. dollars or your home country currency that is stronger than the peso at the time of purchase or sale, your stronger currency will result in more pesos. This “benefit” is recorded in the deed, but may not be a benefit when you sell.
Should we use the currency of Mexico, the peso, instead of the U.S. dollar, Canadian dollar or the currency of your home country? Always try to think this through with your real estate broker or agent to see which is most advantageous for you.
I recommend that each potential buyer or seller conduct his/her own due diligence and review.