New Capital Gain Tax regulations In Mexico

by Eduardo Rosales, Real Estate Attorney at Law

New Capital Gain Tax regulations In Mexico

ISR (Impuesto Sobre la Renta), in general terms applies to income, not necessarily gain. Nevertheless, in real estate transactions, usually is applied to profit and in some cases to gross income. Both Mexican Nationals and non-Mexicans are subject to this tax. For non-residents, the law has provided the 25% from gross income (with no right for deductions) or 29% from profit (with right to deductions). For residents in Mexico, nationals or foreigners the highest rate for this year is 30%, from the gain.

Now, what tax benefits can a resident in Mexico file? On one hand, we have tax deductions; on the other hand, tax exemptions might be applicable. In order to have deductions there are several conditions according to law might be used to reduce the tax base and pay lower taxes. Tax deductions is another subject, so for now, we will address the capital gains tax exemption only.

With respect to the capital gains tax exemption, last year, the ISR (capital gains tax) law provided that any legal resident in Mexico (including foreigners under certain conditions) could exempt capital gains tax respecting the sale of their residential property, by providing certain utility bills showing residence for at least 6 months; Before that, there was a 2 year residency requirement. Now in 2010, in order to exempt capital gain tax, still have to be the residential property under the name of Seller, and the new requirement is that seller must declare under oath, if another residential property was sold within the term of 5 years prior to this sale, in which seller received the benefit of the exemption. Being this the case, the exemption will not be granted. Otherwise, exemption can apply with six months of proven residency.

Last year, Sellers could exempt capital gain on the sale of their homes, as long as the transaction amount did not exceed $500,000 USD approximately, (1.5 million UDIS, investment units) which is an amount result from applying a certain formula of calculation that the law provides {investment units} that the Mexican government uses to measure the value of Mexican currency according to the national index and that every day have small variations. For the exceeding amount, capital gains had to be paid. Among other requirements, Seller (non-Mexican) had to prove residency for 6 months at least, and have in place the corresponding FM3. Seller had the benefit of one exemption per year, now this exemption benefit is only once every five years.

Now, for 2010, sellers are only allowed to exempt capital gain taxes once for a period of 5 years. Among other things, now Notarios and Hacienda will review more in detail the immigration aspect of the seller. In other words, a tourist visa or even an FM3 with a category different than residential purposes, could not suffice for this purpose. Therefore, before someone engages in a real estate transaction, make sure to meet all requirements, or otherwise, seller might pay capital gains tax.

The amended law provides that if the transaction amount exceeds from $500, 000 USD (1.5 million UDIS), the profit will be determined and the tax will be calculated for the exceeding amount. As long as seller did not sell any other residential home within the past 5 years, and it must declare before the Notario such fact. The law also provides that there is no limit in the amount of the transaction, as long as seller probes residency for 5 years. In other words, if seller has not get the benefit of the exemption within the last 5 years prior to the sale of its residential home and can probe residency for 5 years with the proper documents, it does not matter the amount of the transaction, it can be 1,2 or 10 million dollars and not pay any capital gains.

Notarios shall consult the site of Hacienda (Mexican IRS) to see if the Seller has sold a property within the past 5 years. It will also, inform Hacienda about the amount of the transaction and if it is applicable, the corresponding tax payment.

Capital gains taxes are paid to federal government but are usually collected by Notarios whom at the close of escrow receive the corresponding money from Seller and pays the Federal Government during the recording process. The Law is the same for everyone and has a general application, nevertheless, minor rulings can vary from one Notario to another Notario. Before assuring to a seller that an exemption will take place, consult your expert.

If the exemption does not apply in certain transactions, deductions might be applicable. People should be well advised in order to get the maximum benefits of the law.

This article was written by Eduardo Rosales, Real Estate Attorney at Law, with 12 years of experience in Baja Civil Law and Real Estate Transactions coordination. President of “E4” Escrow-Closing, Estate Planning & Escrituras Experts.
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