Disclaimer: I am neither an attorney nor an accountant, so please verify the information below as it reflects my personal opinion.
In Mexico, sellers are required to pay tax on profits from the sale of property. Similar to the U.S. and Canada, property owners are liable for the I.S.R. tax (Impuesto Sobre la Renta), which functions as the Mexican equivalent of capital gains tax.
According to the law, the tax owed is calculated based on one of two methods:
- 25% of the declared gross sales price; or
- 35% of the net gain, which takes into account qualifying improvements, commissions, and other allowable expenses.
To determine the correct tax amount, both calculations should be performed and confirmed by the Notary Public (Notario Publico) involved in the closing process. The lesser of the two amounts will be the applicable tax. While we can provide preliminary estimates, please note that these should only be used as guidelines.
Tax calculations are based on your investments in the property, including land acquisition and construction costs, all expressed in Mexican pesos. The purchase price is converted to pesos for tax purposes using the official exchange rate on the date of closing. For construction or remodeling investments paid in U.S. dollars, the conversion occurs either when official receipts (facturas) are issued or at the time of the project’s completion (terminación de obras) and manifestation of construction. The sales price will also be converted to pesos at the closing date. Exchange rate fluctuations can significantly impact taxation.
An important exception exists for those who reside in the property as their primary residence. In this case, there may be an exemption of up to $5,000,000 MX pesos (approximately USD $250,000). To qualify as a non-tax resident for this exemption, you must hold permanent resident status, possess an RFC (Mexican Tax ID number), and have a CURP (personal ID code). Additionally, you’ll need to provide at least two utility receipts (for services like bank statements, telephone, or electricity) in your name, reflecting your RFC code. This exemption applies only to individuals, not foreign entities like LLCs or corporations.
Mexico has various laws and procedures that can help maximize your cost basis, thus reducing net profit and potentially lowering capital gains tax. Understanding these laws before purchasing is essential, rather than waiting until you decide to sell. Our team, along with our preferred real estate attorney and closing officer, can assist you with this process.
Manifestation refers to the documented amount spent on construction. Properly accounting for improvements is crucial for accurately calculating capital gains tax. Ensure you obtain a construction license and properly manifest any construction. When remodeling, collect facturas from contractors and suppliers; these must be issued in the name of the title holder(s) and reference the property to qualify as a deduction.
When selling a property, the manifested costs, combined with the lot cost as stated in the trust (title) in pesos, determine the basis for capital gains tax. If you have not manifested your construction, you cannot include improvement costs in the lot value. In such cases, you may need to explore alternatives like a referred appraisal. Receipts, canceled checks, or bank statements cannot be used unless the manifestation process is complete.
To manifest improvements, submit your building permit to the Departamento de Obras Públicas (Public Works) along with a letter detailing the total amount spent on construction and confirming its completion. This letter, which can be drafted by you or your contractor, requests an official completion statement called an “Aviso de Terminación de Obra” (Letter of Termination of Works). This letter will indicate the construction costs in accordance with the building permit amount. A reputable builder or contractor will typically handle this process as part of their agreement. Once obtained, submit this letter to the Catastro office for manifestation. When listing your property for sale, your real estate agent will require the termination letter and the manifestation as part of the listing file.
Be aware of a potential “reverse” capital gain scenario: if you purchase a property for less than 10% of its tax appraised value, you may be subject to a 25% capital gains tax on the difference as a non-tax resident. Tax residents, including Mexican nationals and foreigners, may also be liable, but at a lower rate of 20%. The appraised value is determined by a government-appointed appraiser at the time of sale.
This capital gains information pertains to properties held by individuals or foreign entities and does not apply to Mexican companies. Given that regulations may change, it’s important to consult a certified accountant or Mexican notary to confirm the current procedures.
Source: 2018 Mexican Tax Code. For any updates on percentages or regulations, please check with an accountant or notary. All information was verified as of January 2020.