Capital Gains in Mexico – Selling Your Property
Navigating the Sale of Your Puerto Vallarta Real Estate
Mexican Capital Gains Tax mirrors similar structures in countries like the U.S., making foreigners liable for payment upon the sale of property in Mexico. The I.S.R. tax, equivalent to the Capital Gains tax, charges either 20% of the transaction’s stated value or between 28% to 30% of net profit after deductions for improvements, commission, and other permissible expenses. It’s a complex calculation requiring confirmation by the Notary Public handling the final deed and tax declarations.
Understanding Mexico’s tax law is crucial when purchasing property, as it directly impacts your future tax liabilities. It’s important to consult a certified accountant or a Mexican Notario to verify the applicability of the current regulations. The Capital gains tax law requires tax payment on the profit earned from selling your home or property. Two options are available: either pay 28%-30% of the net profit with deductions or pay 25% of the gross sales amount with no deductions.
Manifesting refers to recording the expenditure on a home’s construction or remodeling, contributing to the owner’s cost basis. This process is essential to reducing capital gains tax. When selling your home, the manifested cost and the cost of your lot reflected in your title will determine the basis for capital gains tax.
Social Security is taken very seriously in Mexico, and failure to pay taxes can lead to liens filed against your property or forced sale of your property. Once Social Security taxes are paid corresponding to your construction cost, you will receive a letter of reasonability of payment which protects against future claims of non-payment of Social Security taxes.
HOW TO MINIMIZE CAPITAL GAINS TAX IN MEXICO
Returns on Investment (ROIs) on Mexican properties, especially in areas like the Riviera Maya, are quite attractive currently. While capital gains tax can impact your profit, there are strategies to reduce or even eliminate it.
- Reside in your property: Living in your property as your primary residence with resident status in Mexico can waive capital gains tax.
- Choose your fideicomiso and notary smartly: Some bank trusts and notaries interpret the law such that foreign property owners can qualify for capital gain tax exemptions without having Mexican residency.
- Don’t register a lower selling price for the seller: Although a lower selling price might lower the seller’s gains tax and your transfer tax, it increases your capital gains tax later as it inflates the profit appearance.
- Understand your deductibles: Deductions like the 2% acquisition tax paid at purchase, government-provided inflationary credit for every ownership year, and costs of major improvements made to your property can reduce your capital gains tax.