Capital Gains Taxes on Mexican Properties

Mexico’s tax code on property taxes just changed dramatically in February 2010, nullifying most internet advice given before February.   This article addresses some of the current tax requirements and rules,  and it also addresses the some of the possible tax differences between FMT/FMM & FM3 or FM2.

The key Mexican statute addressing these issues is Article 109. XV. of La Ley del Impuesto Sobre la Renta (ISR).

Much advice on the internet implies that  if you get an FM3 or FM2,  then you can automatically save on a future Capital Gains taxes   when   you sell your property.    This advice may have worked before Feb. 2010, but the rules have changed:   dramatically raising the bar of requirements for foreigners to qualify for the new 5 year Primary Residency requirement for an exemption to Capital Gains taxes.

First, the advice to get an FM3 may apply broadly only to properties handled by very liberal Notarios*.

The tax calculation & tax status-determination of property sales by foreigners is a murky and dense area in Mexican tax law.   It is reported that many/most notarios across Mexico believe that foreigners with FM3′s do not qualify for the Mexican Residents Primary Residence home-owners capital gains tax exemption**.   Sidelight: Foreign sellers typically pay about 25%** capital gains taxes on the gain vs. 5% for Mexican sellers.

*Since each Notario is financially liable for choices they make for each client,  many Mexican Notarios are not willing to approve foreigners with FM3′s and some FM2′s for the Primary Residence 5 year home-owners exemption.
=====================================================================
**Addressing the property sale capital gains tax (ISR) thing:
ISR Tax Law has 3 major options on property gains taxes:

1. No tax owed on sales of primary residence sold after 5 years by residents of Mexico (Primary residence exemption). or
2. 25% of the Gross Sales amount. or
3. 28% capital gains tax on the net profit reduced by various reductions***.

Item 1 (exempt from Capital Gains taxes) Notes:
To qualify for the 5 year Primary Residence exemption, you have to meet some other requirements:
- * – Mexico has to be your “fiscal residence” & the “main center of your professional activities”, etc. for 5 years.
- * – In attempting to qualify as a Resident for tax purposes, you must have 5 years of CFE or JAPAY bills in your name.
- * – The property cannot be used for income generating purposes within the 5 year residency period.
- * – Some Notarios are accepting foreigners who have FM2′s and many are requiring that the foreigner have applied to become naturalized citizens of Mexico (because Notarios stick-out-their-necks, they can add requirements that are not spelled-out in the law/regs).
- * – It is best to be sure your Notario agrees that you meet the requirements, and that he is willing to approve your application for the primary residency exemption, before you plan to try this.

Item 3 Notes:
***Capital gains reductions include a 3% per year inflationary credit that reduces the property’s basis every year (10 years of ownership = 30% reduction, but I understand that there is a 5% floor of minimum taxes or minimum 20% Basis of the original listed sale price).

Basis Calculation for 28% on net profits capital gain calculation:
Income/Selling Price – Cost – Deductions = Capital Gain
=====================================================================
***Here are a few of the Mexican tax laws arcane factors in determining the amounts of Capital Gains taxes under Item 3:

* Raw land is taxed differently than improved properties;
* The tax exemption is only on the buildings and the land covered by the buildings;
* Corporations are treated differently than private owners;
* Properties valued under roughly $500,000 USD are treated differently than properties over $500,000 USD (actually using a $1,500,000 peso “UDI”) – sort of a luxury tax;
* There is a 3% per year inflation adjustment on the basis, but you only qualify if you paid the 2% Acquisition Tax at the time of sale (this can give a net 30% tax savings at the time of the sale);
* The 2% Acquisition Tax is an allowed deduction;
* The construction’s costs (building’s basis values) depreciate 3% a year and can not exceed 20% of the initial cost, while the resulting cost (basis) will be adjusted up for inflation;
* The improvements that imply deductible investments will be subject to the same depreciation treatment, and must be count with its respective documental support (Facturas in seller’s name) – no wonder businesses give you the option for Facturas…
* Maintenance is not a deductible expense;

* If the expat has held an FM-2 for the past five years, they can apply for Mexican nationality, and then ask their bank to convert the FTD contract to an “escritura”, thus acquiring Real Rights on the property which will enable them to claim the Primary Residency’s capital gain exemption at the time of the sale.
* Yada, yada, yada…

=====================================================================
Because Mexican tax law is so dense and arcane and parts of it change roughly every 2 years, when buying or selling property in Mexico, it really is best to consult with a good tax lawyer and a Notario to find out how things work in your state or locality under current laws.

Tax law is a specialty area within the law, an area where Notarios are not the experts, so, taxes on property sales is one spot where you likely need both a Notario and a separate tax lawyer (abogado).

Finally, it is also worth noting that the tax is actually not a capital gains tax, but just a tax, and the taxable value is based on the purchase price shown on the bill of sale:  When many Mexican sellers list a low price on the bill of sale – with cash payments on the side to make up the balance – they have shifted future capital gains taxes to the new owner.

Clear as mud???

* * * *
Please Continue to Make Comments and Replies to Help Keep This Information Current!
Disclaimer: This information is not meant as legal advice. It is for educational and informational purposes only. Government policies vary between States and offices, and Mexican Government officials have broad discretion in how they individually enforce policies, so, your personal experiences may vary. See a professional for advice on important issues.

*                 *                 *                *
Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry

Read-on MacDuff . . .