Disclaimer: I am neither an attorney nor an accountant, so please verify the information below as it reflects my personal opinion.

Understanding Capital Gains Tax (ISR) on Property Sales in Mexico

In Mexico, sellers are liable for Impuesto Sobre la Renta (ISR) on profits realized from real estate sales. This functions as the Mexican equivalent of capital gains tax. Because tax laws are subject to change, it is essential to work with a Notario Público (Notary Public) to calculate the exact liability, as they are legally responsible for withholding these taxes during the closing process.

1. Calculation Methods

The ISR is generally determined using the lesser of two distinct calculation methods:

• Gross Sales Price Method: 25% of the total declared sales price (with no deductions).

• Net Gain Method: Up to 35% of the net profit. This takes into account the “cost basis,” including the original purchase price, qualifying improvements, real estate commissions, and other allowable expenses.

Note: All calculations are performed in Mexican Pesos (MXN). Because purchase and sale prices are converted to pesos based on the official exchange rate at the time of each transaction, currency fluctuations can significantly impact your tax liability.

2. Primary Residence Exemption

Individual sellers may qualify for an exemption on the sale of their primary residence. As of 2025, the law allows an exemption on gains up to 700,000 UDIs (Unidades de Inversión), which currently fluctuates around $5,700,000 MXN (approx. $285,000 – $300,000 USD depending on the exchange rate).

To qualify for this exemption, the seller must:

• Be a tax resident in Mexico (holding a Permanent Resident visa and a valid RFC with CURP).

• Provide utility bills (CFDI-compliant) or bank statements in the seller’s name and RFC for the last few months.

• Not have claimed this exemption within the previous three years.

• Note: This exemption applies only to individuals, not to corporations or LLCs.

3. The Importance of “Manifestation”

To reduce your tax burden via the Net Gain method, you must establish a high cost basis. This is done through a process called Manifestation, which legally records the value of construction or improvements.

• The Process: You must submit your building permit and a letter of completion (Aviso de Terminación de Obra) to the Public Works department and the Catastro (Tax Office).

• The Requirement: To deduct remodeling or construction costs, you must have Facturas (electronic tax receipts) issued in the name of the title holder, including the property address and the seller’s RFC.

• The Risk: Without a formal Manifestation or proper Facturas, the tax authorities only recognize the value of the land. You cannot use simple bank statements or canceled checks as proof of investment.

4. Acquisitions at Under-Market Value

Be cautious of “reverse” capital gains. If you purchase a property for less than 10% of its official appraised value, the Mexican government considers the difference as a “gain in acquisition.”

• Non-Residents: May be taxed at 25% on the difference.

• Residents: May be taxed at 20% on the difference.

5. Strategy and Compliance

Tax planning should begin at the time of purchase, not at the time of sale. Ensuring your deed (Escritura) reflects the true purchase price and properly manifesting all improvements are the most effective ways to minimize future ISR.

Disclaimer: This information is based on the Mexican Tax Code and current practices as of 2024/2025. Tax percentages and UDI values are subject to change. Always consult with a certified Mexican accountant or a Notario Público for a formal tax estimate prior to closing.