Taxes are usually paid in cash and all people are obligated, as provided by law, to pay them to the Mexican government. The Constitution establishes the rights and obligations of all citizens and one of these obligations is precisely the payment of taxes.
Taxes are one of the principal ways by which the government earns revenue to cover the needs of society, such as providing a judicial system, public safety, education, infrastructure (hospitals, streets, roads, public buildings, etc.) and welfare.
In recent years, Mexico has reformed its tax laws due to globalization and international trade, however real estate tax has not undergone major changes because these assets are not subject to international trade and can not be transported from one place to another, in light of this, the tax burden for buying and selling real estate remains basically the same as it has been for many years.
The Mexican Government consists of three levels; federal, state and municipal, people must pay taxes on all three levels when buying and selling real estate. Having briefly explained why we pay taxes, we will now detail each of the taxes that are due when purchasing real estate.
TAXES ON THE PURCHASE OF PROPERTY
In Mexico, the formalization of the sale of any piece of real estate will cause federal, state and municipal taxes, which must be paid by the seller or buyer depending on the tax we are talking about.
At the moment we buy property, we are obligated to pay various taxes:
– Income Tax for acquisition of property. It is generated by the increase to a persons wealth and it is caused when we purchase an asset at a lower price than an official appraisal sets for that asset, provided that the difference is greater than 10%, in this case we have to pay income tax on a rate of 20% calculated on the difference.
– Value Added Tax, VAT. A so called indirect tax due to the fact that it is not the government that collects it but rather the person selling the piece of real property. It is only caused in non housing property and has a rate of 15% of said constructions. Constructions and land on housing properties are exempt of this tax.
– Rights. Rights are taxes that are caused in the 3 levels of government already mentioned. They must be paid in exchange for the services provided by every level of government. For example:
- Federal – The license granted by the Foreign Secretary for an alien to acquire property in Mexican soil.
- State – Registration of title.
- Municipal – Issuing a certificate of good standing.
State (State of Jalisco):
– Business and Legal Instruments Tax. This tax is regulated by the Law of Finance of the State of Jalisco and the Revenue Act of the State of Jalisco, stipulating a charge in 2008 for the transfer of property for the amount of $ 100.00 (one hundred pesos).
It is worth mentioning that this tax is caused by a variety of acts and contracts, noting a percentage according to the type of act or contract of no less than 0.5% and no higher than 1.0% of the value recorded in the act or contract.
Asset transfer Tax. (ITP) (also known as Acquisition of Buildings Tax, ISAI), is caused by the transfer of ownership of property, that is, the buyer of a property must pay this tax when changing the record of ownership before the municipality. This tax is regulated by the Municipal Finance Law of the State of Jalisco as well as by the Municipal Income Law in which the property is located, this calculation is carried out according to a rate applied to the value of the appraised property, said appraisal must be approved by the municipal council, the highest rate in each municipality of Jalisco is currently 2.5%.
TAXES ON THE SALE OF PROPERTY
Having stated the taxes caused when acquiring a piece of real property, we will now mention those caused when selling.
The only tax a seller is subject to is income tax. This tax is caused in view of an increase in wealth of the seller when the home was sold at a greater price than it was purchased expressed in Mexican pesos, inflation rates are applied to all amounts in order to be coherent. To said profit, the rate established by law will be applied. The following deductions are authorized
• The updated original cost of acquisition of the property.
• The updated amount of investment in construction, improvements and extensions.
• Notary fees, taxes and rights paid in the acquisition and sale.
• Payments for appraisals.
• Commissions and mediations paid by the seller in connection with the sale.
However, there are cases where the person who has sold his residence lives abroad, meaning that person has no permanent residence in Mexico. This creates different scenarios, for example:
• Income deriving from the sale of real estate found in Mexico is considered income to have originated in Mexico regardless of the place of residence.
• A rate of 25% is applied with no possible deductions.
• When selling real estate through a proxy in Mexico, the seller can apply a maximum rate of 28% if and when the sale is documented through a public instrument.
• The gain will be determined by subtracting from the total income of the sale applying the same deductions mentioned above.
• For this purpose, the representative shall inform the Notary of any corresponding deductions.
• In this case the Notary must calculate the corresponding tax and report it to the authorities.
Exceptions to income tax: Under the federal income tax law, individuals who sell their place of residence are exempt from paying this tax; such exemption applies only if the purchase price is not higher than 1,500,000 UDIS (investment units), which currently is equivalent to approximately 6,260,000 Mexican pesos. If the purchase price is higher, seller must pay income tax on the excess, with certain deductions. If the seller is a foreigner, in certain cases this exemption applies. This must be consulted with a tax expert and discussed with the Notary Public involved.
Finally we would like to point out that you need not worry over tax burdens concerning real estate transactions. Notary Public’s are legal experts with broad knowledge of both the law and tax issues. They will advise you on what taxes must be paid and it will be the Notary who actually reports the tax to the authorities; however, as expressed above, in certain cases an independent tax consultant should involved.
Robles, Lazo y Gallardo – Law Firm