Mexico applies a capital gains tax on residential property of 25% on the gross sales value of the transaction without any deductions OR between 1.92% and 35% on the value of the gain (purchase costs less allowable exemptions and deductions).
A one-off exemption is available under Article 92, Fraction XIX a) of Mexican Income Tax Law that reduces the tax liability for many family homes, although you and the property must meet certain criteria to qualify for the exemption:
- You must be resident in Mexico with a Mexican tax ID number known as a RFC, or Registro Federal de Contribuyentes. This tax identification type can be applied to companies and to people. An RFC number for a company is 12 characters, while an RFC number for a person is 13 characters. The first four letters are taken from the person’s name, followed by their date of birth (YYMMDD), then three letters are chosen at random. An example would be Monique Maldonado Lemarque, MALM620202GQ1. Anyone who is thinking of listing a property for sale should as soon as possible obtain an RFC and have it on TelMex and CFE bills. CFE is normally billed every 2 months. TelMex is billed monthly. Once obtained and reported to the utility company an RFC may appear on the next bill or one after depending on timing.
- The property you’re selling must be your primary residence; and
- The land subject to the sale must not exceed three times the size of the construction on that land (measured in square meters); and
- You can only claim this exemption once every three years.
The flat-rate exemption is the peso equivalent of 700,000 UDIs. At the time of writing, 700,000 UDIs equates to approximately $4.37 million Mexican pesos, and you can deduct this amount from the sales price if you qualify.
If the same home is properly co-titled with your spouse or other family member and they are resident in Mexico with a Mexican tax ID, and the house is their primary residence too, you can deduct an additional 700,000 UDIs in their name.
The exemption is not automatic: you must qualify, and you must prove the qualification. Talk to your notario about how to arrange this and what you need to do to present the necessary records for proof.
Mexican income tax law does not expressly state whether the foreign person selling a property must have temporary or permanent residency status to avail themselves of capital gain tax exemptions; it does, however, expressly state that the seller must be selling his/her primary residence in order to qualify for tax exemptions on capital gains. The Notary Public dealing with the matter will interpret the law; some will apply the capital gains exemptions only if the seller has residente permanente status; some Notary Public offices may apply the exemptions to foreign residents with residente temporal status. If your notario does not apply the tax savings because you are a temporary resident look for another one.
Deductions for Capital Improvements: You may deduct the costs of any capital improvements (e.g. building extensions, new flooring, swimming pools, new rooms) while you owned the property, as well as some closing costs commonly incurred when purchasing a home. You need official receipts. In Mexico, these are known as ‘facturas’, for all services and building work to claim these allowances when you sell, so be sure to take advice from your notario on how to account for these and follow it. Any capital improvements made using a firm or builders who didn’t issue you with facturas for the work cannot be deducted. Maintenance and home improvements, like remodelled kitchens or new bathrooms, do not count as capital improvements.
The Exchange Rate Effect (aka the Currency Game): In most towns and cities across Mexico, home prices are quoted in Mexican pesos when they are offered for sale. However, in a few places and most notably in Los Cabos, Puerto Vallarta, San Miguel de Allende, Ajijic/Chapala, and Cancun/Riviera Maya, home prices are often seen quoted in US dollars. Even though the transaction may be quoted in dollars, the deed will show the amount in Mexican pesos at the exchange rate prevalent on the date of the closing. Your tax liabilities when you come to sell are calculated in pesos, not dollars.
This is not just of importance when calculating capital gains, but if you are repatriating your funds after the sale (ie, taking your money and going home). This doesn’t apply if you are an American and buying and selling in $US—things stay in your own currency. If you are buying in pesos however, or if you are Canadian and buying in pesos or $US—you are putting a lot of money into a foreign exchange gambit.
All home sales in Mexico, regardless of the currency of the sale and purchase, will be recorded in Mexican pesos. I am going to take you back in time a bit, but bear with me.
Suppose you bought a house for US$400,000 in San Miguel de Allende in 2008. At the time, the US dollar rate was MX$10 to one US$1. The house is recorded as having been purchased at MX$4 million.
Now, years later, you sell the house, for US$600,000. But the record will show that you purchases for MX$4 million and sold for MX$12 million (as the rate is now MX$20 per US$1).
So, you have a capital gain on paper of MX$8 million—which is US$400,000 in capital gains to be taxed. But you only actually have US$200,000 profit. Not fun.
Then, if you’re Canadian, British or European, add one more currency fluctuation to the risk and mix. You’ll have to first purchase US dollars to play this game if the sale is in US dollars. And hope that the currency rate is your friend when you convert back to the currency of your country. A 5% fluctuation in currency rates, which may not feel like as much when you are exchanging vacation cash, amounts to 5% of the value of your house. You need to keep this in mind. And it does work in your favor sometimes. But it’s a crap shoot.
If you are not a resident in Mexico and/or you don’t have a Mexican tax ID, you cannot claim the one-off exemption explained above, although you can claim qualifying deductions, so long as you have the official receipts (facturas) to prove the expenditures which can be deducted.
Your Notario is Key
The Notario Publico is the most important professional person you will deal with when you buy and sell property in Mexico. Don’t rely on hear-say and instead get the Notary Public to assess your individual situation and the taxes that will likely apply to it. When you’re buying property, talk with the Notary about what you need to do to plan your estate efficiently, how to structure your arrangements, and how to keep the proper records you need to ensure that when you come to sell your property you (or your heirs) are prepared. Every property transaction has its own quirks and unique characteristics; cultivating a good relationship with your Notary Public is a crucial aspect of successful property investment in Mexico.
- Inherited property is exempt from capital gains tax.
- You may be exempt if the property is a donation, consult a tax attorney for stipulations.
- Corporations have a different tax system than private real estate.
- The 2% acquisition tax
- Expenses and fees of the notary paid for the purchase and sale.
- Local tax on sale of property, paid by the seller.
- Payments made on the appraisal of the property.
- Commissions paid on the purchase or sale of the property.
- Maintenance costs are an accepted deduction.
- Raw land is taxed differently than developed properties.
There are some other rules that apply to determine the cost of construction and I recommend that you check with a consultant on which may apply to your case.