Foreigners who sell property in Mexico are liable under special rules, much like the United States, for the payment of I.S.R. tax (Impuesto Sobre la Renta) which is the Mexican equivalent of the Capital Gains Tax. Liability is either 25% of the declared value of the transaction or up to to 35% of the net gain, less the improvements made, commissions paid, and other allowable expenses accompanied with a fractura. The formula is complicated and the tax should be figured both ways and confirmed by the Notary Public who will be preparing the final deed and tax declarations.
Understanding Mexican tax law is an integral part of the purchasing process. What you do today dictates your tax liabilities tomorrow.
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 a Mexican Notario.
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 two options when it comes to capital gains and you can use whichever is the better of the two options for you:
1. You pay 25%* of the gross sales amount with no deductions
2. You pay up to 35%* of the net profit. (There are a variety of deductions included in this option.)
Although the up to 35% in 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 potentially lowering your capital gains. The key is to understand these laws before you buy, not when you decide to sell.
*Check with an Accountant or Notary for any changes in these percentages
It is therefore important to MANIFEST all home improvement costs. Manifesting is simply recording the amount of money spent on home construction or remodelling, in order to add to the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax. Proper documentation and manifesting your construction are vital when building your new home.
When you sell your home, the manifested cost plus the cost of your lot stated in your trust (title), will be used to determine the basis for capital gains tax. If you have not manifested your construction, Mexican tax law will not recognize your construction costs and you will not be able to use them as deductible expenses. All of your receipts, cancelled checks and bank statements will not help unless you have completed your manifestation after construction.
Another element to take into consideration is when homes are marketed in US Dollars. Even though the sales transaction may be marketed (and agreed between the parties) in US dollars, the amount of the purchase will be calculated in Mexican pesos and the title deed will show that amount at the exchange rate set on the date of closing.
When you sell the property, any capital gains are calculated only in Mexican pesos and therefore shifts in the exchange rate can influence your tax liability. Even though the value of the property “may not” go up in US Dollars, but the Mexican pesos does, any capital gains are calculated only in Mexican pesos and therefore shifts in the exchange rate can influence your tax liability.