Osprey
Ultra Nomad
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Location: Baja Ca. Sur
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Real Estate Taxes
On this board I learned from an article about Real Estate that gringos who own homes here, want to sell, can apply for exemption from the capital
gains tax if they qualify: Live in the house, the house is their primary residence, live as Mexican residents, have the proper FM2 or 3 etc.
Realtors in my area have little knowledge because there have been very few gringo to gringo resales here (after all, it is heaven). Has any Nomad
gringo bought and sold a house on a lot in Baja, qualified as a resident taxpayer (not a dual citizen) to avoid, curtail the Gana to Hacienda? This
question is not aimed at Capt. George, Skeeter or any other persons who use/used corporations to buy/sell real estate. Don't need to know any presta
nombre tricks, just what happened at the notary, did you successfully apply not be taxed, how much tax did you avoid, how much did you have to pay the
Avoid Tax Notario (not the realty one). Thanks
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bajabound2005
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Mood: words cannot describe...
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oh Osprey! This is a good topic. Hope other Nomads have info to offer!
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Bruce R Leech
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Mood: A lot cooler than Mulege
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been there Done that, It works if you have all your ducks lined up and know what you are doing .if the Realtors in your area have little knowledge of
this then they are incompetent and you need to find another. try Miguel Esquardo. in La Paz for good info.
sorry I cant spell his name right but every one knows who he is
Bruce R Leech
Ensenada
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oxxo
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It is my understanding that should you avoid the Mexican capital gains tax you are then liable for Capital Gains Tax in the state (also federal) of
your offical residence. In California, the combined State and Federal rate is around 25%. It is my understanding that the U.S. does not recognize an
exclusion for a principle residence in foreign country. The exclusion only applies to primary residences in the U.S.
Would someone care to comment on this?
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Dave
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It is REALLY tough to get resident taxpayer status. Mexico no longer allows the 2yr residency qualification. You actually have to prove* taxpayer
status, not with the notario, but with Hacienda.
Your best bet is to minimize your exposure. That is: Appraised value/sales price = 0.
* If you want, I can give you the basic requirements but realize that the determination is made on a case-by-case basis.
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longlegsinlapaz
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Location: La Paz
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Osprey, I’ve done this twice! My explanation will, by necessity, be in low-level non-technical terms!
When you buy property with an existing structure on it, or you buy bare land & build, the property taxes are based on a ridiculously land value.
When you apply for permits to build, the valuation placed on the construction is, by default, based on minimum wage labor & it’s assumed that the
construction will be bare bones, typical local standards, with typical local amenities (very few, by our standards!). My realtor informed me of the
capital gains tax I was liable for….when I regained consciousness….put me in touch with an Architect here in La Paz who is knowledgeable about this
process, he came to my casa & measured my square footage, toured the property, documented what is really there, i.e., appliances….refrigerator,
stove, oven, microwave, garbage disposal, washer, dryer, water pressure holding tanks, hot water heater, A/C (make, age, original price), my records
of actual labor & materials costs for const.….everything that adds value to the property, like the pool & all associated pool equipment,
stationary LP tank, size of cistern, size of septic system; being on city water is added value, as is electricity & telephone service; fireplaces
add value, custom wood cabinetry, fans, electric garage door opener, electronic car gate equipment, window screens, large amounts of cement patio
areas (tiled areas higher value that just cement), like around the pool, landscaping, all the finishing detail that may not be found in typical local
construction & all those amenities qualify the property as “Tourista Construction”, which is a totally different category & rate structure or
valuation table from the default category that Obras Publico uses. On my paperwork, it’s actually designated as a remodel, despite the fact I’m the
original builder (not really, but I contracted the original const!); it takes into account all the actual finish detail & amenities & I guess
in essence, it’s simply a re-valuation of what’s really there versus the low-ball construction rates used at initial permit time & takes those
same total square meters of construction & applies them against a higher rated “Tourista Construction” rate table. It also re-values the land
based on current value or actual sales price. Waterfront property has a higher value than non. On the land piece of this process, they actually
change the land value from the low-ball tax value to the actual purchase price you paid for it, then it gets appreciated to current value.
The process involves total re-submittal of revised paperwork to Obras Publico & Catastrol & all the other agencies that the original permit
involved, each department/agency has their own rate schedule to re-file adjusted value paperwork; each department/agency has their own checks built in
to verify that the date being submitted is valid, versus bogus. There IS a limit to how much of an increase they’ll authorize & they review the
justification of why you’re going through this process. The first time I did it, was on the sale of my first casa, which I didn’t discover until I
sold it that the Architect has filed a sq meter const rate of $9.10 pesos (NO!! That is NOT a typo…roughly .91 cents USD equivalent!) So the
documented valuation on a home I sold for $275K USD was under $2,000 equivalent USD!!!! The land value was based on the tax valuation of $15,000
pesos. I’m not going to dig that paperwork out, but it cost me approximately $5,000 USD eq. to save 30% capital gains taxes on roughly a $270K USD
sale (ballpark $81K USD eq.)!
I just recently went through the process a second time & it cost me $6-7K USD eq. to save $970K pesos (roughly $90K USD) in capital gains taxes!!!
This process is totally legal & like I said, each agency has built-in checks & verifications to weed out & deny what they feel to be bogus
or inflated requests. This is where you start thanking your lucky stars for having been a paper monger & having held on to all those receipts!!
If Bruce says Miguel Izquierdo does this, then he must, but I went with the person I did because he came highly recommended & is honest &
won’t submit unless you can prove purchase amounts of things. It is a costly process, but I’d say that $6-7K to save $90K is a damn good investment!
It does increase the cost of closing on the sale, because the buyer pays 2% acquisition tax on the true value, but it also helps the buyer avoid huge
30% capital gains if/when they become the seller in the future. So it’s a matter of 2% now or 30% later from the buyer’s perspective & $6-7K now
versus 30% capital gains now from the seller’s perspective. In my opinion, this is what comes of allowing sellers to talk us into using tax value
rather than sales price on the fideicomiso, so that the seller can avoid capital gains….IF it’s ever discussed at all!!! I understand why understated
values on closings have been an accepted way to do things to a certain degree, because typically Mexican’s hold land in the family for generations
& this systems keeps their annual taxes low, but I feel strongly that when we buy, we should insist that true purchase price be listed in the
fideicomiso, which filters back to the tax valuation. But it’s a minefield, because all the land I’ve bought has been, by default, automatically
listed at tax value by the Notario. And most sellers refuse to pay capital gains, so frequently it can mean the difference between getting the land
you want or having to pay the seller’s capital gains taxes!
I know this is long, but hopefully, it’s also got enough low-level explanation in it to make sense to everyone!
I’m not sure of the specifics on qualification requirements, but I obviously qualified. I’ve been a full-time resident on an FM3 for 7+ years. The
first casa was re-valued at around the 4-year mark. The second casa was re-valued at around the 7-year mark. And both were my full-time residence.
edited for typos!
[Edited on 11-26-2006 by longlegsinlapaz]
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jerry
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longlegs
not that is some great detailed information worth considering thank you
jerry and judi
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Osprey
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Longlegs.
Thanks so much. My wife and I have been on continueing FM3s for the 11 years we have owned a home here. We didn't see a need to change to FM2, pay
the extra $1200 dollars (for the last 6 years) yet there are some that say your exercise requires an FM2. Glad to hear they were wrong. Many
realtors will have the seller sign a listing, a sales agreement while totally avoiding the big question the seller asks "How much do I get to keep?"
If I were approached by 2 realtors, one of whom says "I have no idea." and the other says "I'll go through the formula, the process with you and help
you understand the maximum and minimum costs; we can come pretty close when I know what you have as proof, what you are willing to do to work with the
authorities" then I would certainly choose the one who is trying to meet due diligence in the face of a most imperfect system ---- "how much is mine"
is the most important consideration of the agreement so if the realtor says "it's none of our business, we don't know, it varies, go see a notario"
that's one agreement I would never sign.
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longlegsinlapaz
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| Quote: | Originally posted by jerry
longlegs
not that is some great detailed information worth considering thank you |
Jerry: it's not??? or now? LOL.....I gotcha! Thanks!
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longlegsinlapaz
Super Nomad
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Osprey: Da nada! Glad to help by documenting my actual experience....despite how many characters I had to type! 
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jerry
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Location: loreto
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sorry longlegs yup its a now nada not just a slip of the finger thanks again
jerry and judi
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longlegsinlapaz
Super Nomad
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Osprey:
PS My first sale was listed with a realtor, my second casa I created a web site & sold the casa direct. Saving myself a bundle in commission.
It is possible!! Plus, I sold it myself in less than 6 months...first place took a year to sell. It only takes 1 buyer to make a sale!  ((((and 423 looky-loos!))))
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aldosalato
Nomad
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Registered: 10-20-2002
Location: La Paz
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This tax avoidance system is currently accepted by the Notarios.
Problem is that too many people are using it in order to reduce their capital gain taxes.
I doubt it will be allowed for many more years since the Federal and State Government are after getting more taxes (as all governments do).
In coming years proper checks from authorities and FACTURAS will probably be put in place in order to reduce the abuse of the system.
Welcome to modern Mexico with new modern taxes..........
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oladulce
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Osprey, was your question about ones immigration status and capital gains tax liability? I can't tell, but it sounds like longlegs is describing the
process of "manifesting" ones construction to better reflect it's value on your avalou before you sell.
We get FMT's because we're not retired yet and don't meet the FM3 requirements and we were able to update a property's value by manifesting the
construction we'd done using this process last year before we sold. It's not the preferred (or real/legal way) because we should have been paying
property taxes on this increased value all along, instead of increasing the assessed value right before we sold. But our immigration status had no
bearing on the outcome.
We found an ingeniero who works at the local catastro to do this belated "manifestation" for us as a side-job and he was then able to update the
propert's assesed value. The notario does not handle this part. The Ingeniero presented the updated avalou to our notario, who happened to be Lic.
Izquierdo, who used it to calculate our capital gains tax.
This property was 2 lots and only had a garage, palapa, bathroom and bodegas along with landscaping but the location had increased the value over the
12 years we owned it. We were able to reduce our capital gain tax from $30,000 to about $10,000 by getting credit for the building and improvements
we'd made. Add another $5000 in fees and services for manifesting, and we paid about half of the original tax when we sold.
Even when we retire in 2 years we plan to spend about 8 months/year in the Baja Sur home we're building so even with an FM3 we will probably never
qualify to be totally exempt from the capital gains tax.
With our future retirement home, we had the architect Manifest our project when he applied for the building permits, which means he recorded the
actual (estimated) cost of our project in Constitucion. When we finish, he'll notify them of the real, total cost of the construction by doing a
"completion of works". We'll be reassessed for property taxes, but we'll get credit for the actual amount we invested and won't have to deal with it
later on , if we ever sell.
This may be the article you were talking about that discusses the Fm2 /Fm3 capital gains tax exemption controversy, and you're right , I'm still not
clear on the answer but it looks like you have a much better chance of being completely exempt from the tax with an FM2. Otherwise, FM3s and we lowly
FMT's have the same options.
http://www.bajainsider.com/baja-business/taxes-mexico-real-e...
[Edited on 11-26-2006 by oladulce]
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Dave
Elite Nomad
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Registered: 11-5-2002
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| Quote: | Originally posted by oladulce
it looks like you have a much better chance of being completely exempt from the tax with an FM2. Otherwise, FM3s and we lowly FMT's have the same
options.
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RESIDENT TAXPAYER STATUS:
Although you need a FM3 as a minimum, FM3 or 2 doesn't matter. What matters is residency and income. If you can prove that you live here as a
full time resident and derive more than 50% of your income here, you just might qualify...Maybe.
An FM3/2 with a work permit is a minimum standard. And you had better have your other assets well hidden. 
Longlegs has described the proper procedure to 'gross up' your equity, and Aldo is correct. Eventually this loophole will be closed. My advice to
first time (Gringo) buyers is to insist on recording full purchase price. The increased transfer tax is a pittance compared to capital gains. Sellers
are proud of their appreciation but no one wants to pay the cap gains. MAKE THEM. If they don't, eventually, YOU WILL.
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