BajaNomad

Mexican capital gains tax on real estate woes

oladulce - 3-4-2006 at 02:46 PM

There is another thread discussing the costs in Mexican real estate, but it's sort of evolved in to a US tax topic. I have some recent Mexican capital gains tax experience to share and thought I'd start a separate thread.

There are 2 Options when calculating the Mexican capital gains tax you will owe when you sell property in Baja. You can pay:
1. 25% of the sales price of the property OR
2. 35% of the gain (your profit).

You can apply ?deductions? to reduce the amount of your tax liability, but only if you choose option #2 (35% of the gain).

Factors effecting the tax you?ll owe when you sell:
1. What you paid when you bought it.
2. What you sell it for.
3. Construction and other property improvements.
4. Fees you paid for real estate, Notario, and some bank services
5. How many years you?ve owned the property. The longer you own, the more you can deduct from the tax.
The Notario will use a formula which takes the Mexican inflation rate for each year you owned the property and deducts it from your profit on the sale.

I?m not an expert, but here?s what we learned during the process of selling some Baja property (which should be final this week). Hopefully others can learn from our mistakes.

1. We trusted that the Notario, in 1992 and 2000, had put the prices we paid for the 2 properties in our fideicomisos. Instead he put the avalou prices (local property tax assessed values). Since we had paid him the 2% Transfer tax based on the actual prices we paid, and had instructed him to be sure to record our actual purchase prices in the fideicomisos, it never occurred to us to check his work. So instead of the $50,000 dollars we paid for the lots, we discovered last year when it came time to sell, it looks like we only paid $8000. This adds $42,000 dollars to the ?profit? that we?ll pay tax on that isn?t really there.

2. During the 14 years we owned the properties, Mexico had some very high inflation rates
(one year was up to 30% during the peso devaluation era). Although this would have knocked
A big chunk off our taxable profit, it couldn?t put a dent in our tax amount due to reason #1.

3. You must have official facturas for all construction, supplies and property improvements.
You cannot use receipts for items you smuggle in from the US. You can use receipts when you declare items with Aduana and pay importation tax.

4. To get credit for construction on your property, you must go through a process called
?Manifesting? your construction. This is done at your local municipio office and starts at the time that you apply for your building permits. When your project is finished, you let them know and your property will be reassessed (for local taxes) which will include the cost of your construction. Your property tax will go up, but you get to claim all the bucks you put in to building and improvements when you go to sell. We had obtained building permits and paid the workers social security during construction projects but did not ?Manifest? and never had the property reassessed and could not claim any of the $60,000 dollars we had put in to the properties over the years.

5. Inform real estate agents, Notarios and the bank that you would like facturas (receipts) for the service fees you pay them- they will generally not offer to provide them otherwise.
(I?m guessing because they would have to claim this money as ?income? on their taxes). It is very difficult, and in our case impossible, to get them to send you facturas years later.

In our case, it's more beneficial for us to use Option #1 (25% of the sales price) when calculating our Mexican capital gains tax. We will be paying about $30,000 dollars in capital gain tax that we could have put to good use ourselves !

I wish we would have had some guidance about this tax stuff over the years. I hope it can help some of you.

Here's a good article about manifesting your construction
http://www.experienceloscabos.com/construct.html



[Edited on 3-5-2006 by oladulce]

Bruce R Leech - 3-4-2006 at 03:30 PM

WOW oladulce finley some one that knows what they are talking about. the peace you wrote above is the single most informative and accurate on the Mexican capital gains tax. I will be referring people to this thread for years to come.

the one thing that really messes most people up is your #3 even a Mexican receipt or invoice dose not work for this. to receive a Factura you must be registered with the hacienda and have a RFC number. that is the equivalent of the IRS tax I.D.number in the US of A

3. You must have official facturas for all construction, supplies and property improvements.
You cannot use receipts for items you smuggle in from the US. You can use receipts when you declare items with Aduana and pay importation tax.

bajajudy - 3-4-2006 at 03:39 PM

Sadly, many people got caught in the "let's say it cost less so our taxes will be less" game. I was never able to figure out the advantage to saving a couple of bucks(sometimes literally) by putting a deflated price on the property you are buying. It benefits the seller for sure.

One quick question...I take it you did not live in the property full-time?

comitan - 3-4-2006 at 04:04 PM

Judy

Still not would be exempt if they had a home in the USA no matter how long they lived here. T be exempt from Mexican Capital gains you have to have lived in your Mexican home 2 year and prove it and also prove that it is your primary residence, prove not having a home in the USA.

Skeet/Loreto - 3-4-2006 at 04:04 PM

I will strongly suggest to anyone buying Property in Baja Sur to look into the forming of your own Mexican Corp.
I would also suggest that if you are married that you and your wife make a Mexican Will-which is normally signed by both Husband and Wife.

The MexicanBGovt. is very protective for the heirs of anyone who passes away in Baja sur.. One of the properties I bought and sold took 2 years to be completed properly. This was a fido-comiso when Joane Fontaine Husband passed away in Loreto. It was necessary for each of their Grown Children to view the Death Certificate, then give a Depositition that they had no interest in the Baja property.

In all of my expierence with buying and selling property i included all of the Property in the corp.

Skeet/Loreto

oladulce - 3-4-2006 at 04:12 PM

Quote:
Originally posted by bajajudy

One quick question...I take it you did not live in the property full-time?


That's correct Judy- we're still working in California. We have started building our retirement home about a mile away from the property in the story, and are working towards an early retirement in 3 years.

We will get fm3's when we're closer to retiring. We'll spend half the year in Baja Sur and the other half in Central America and because of this, I don't think we'll ever be able to meet the critieria of a "Full-time Mexico resident" which would allow us to eliminate the capital gains tax when (if) we ever decide to sell.

We have learned the hard way and are trying to do everything right this time because we'll be investing a lot more on this retirement home than on the previous property so our capital gains tax liability could be huge someday if we don't accumulate deductions as we go.

JZ - 3-4-2006 at 04:22 PM

oladulce: great post. Thanks for that. We need more clear, factual, and to the point posts like that on this board.

Skeet: please eloborate on the benefits of putting property into a MX corp. Can the corp be 100% foriengn owned? It was my understanding that most MX corps. had to be 51% MX owned. Is there something different for real estate.

Bob and Susan - 3-4-2006 at 04:36 PM

Mexican Corps can be 100% Foreign owned.

You need three officers...all can be foreigners

The corp owns the property and you own the corp....

Problem is you MUST conduct business and file monthly tax reports and a yearly big tax report.

You cannot own a primary residence with a corp.

You need an accountant and you need to pay him also.

JZ - 3-4-2006 at 04:42 PM

Ok, got it so far. I assume the conduct business requirement could be satisfied by using it as a rental.

And what is the tax (or other) benefit Skeet is referring to.

Bob and Susan - 3-4-2006 at 05:11 PM

as i understand it you need at least three rentals on the property to be legal...but that was in the past...things change

the corp holds the deed...easier to sell...no bank to "hold up" the sale.
sometimes the bank has troble completing transfer documentation during a sale.

i really don't know of any tax benifit...I just pay and pay

except that with a corp you are an officer and can easily get the right added to your fm3 to work in mexico on things your corp is doing...you need to add everything you can thik of and put in in your corp papers FIRST.

also if you get a corp...you can pay $2500 for the corp and then another $2500 for the deed...you double the cost on a real estate transaction the first time.

Skeet/Loreto - 3-4-2006 at 06:42 PM

And you do not have to pay CAPITAL GAINS, that is the other thing I was talking about unless it has changed in the last 3 months.

Sandy had a corporation and had only 2 units, she paid about $100 every three months.

Another Friend had his Primary Residence listed as a Cafe. No employees but he and his Wife.-

The ownership of Mexican Corp. by foriegns was the very last Change in the NAFTA Treaty. United Fruit Co. had a lot of Pull as well as a Farmer named Boswell . A rumor had it that Dole Corp. would do no more business un=less changes were made..

Anyway I would go to La Paz if you are really want the latest Laws and talk to a good Notoria, If you would like his name send me u2u.

Skeet

JZ - 3-4-2006 at 06:50 PM

Does this 100% foriegn ownership apply to all corps., or just certain types.

I inquired with a MX attorney about a charter business about a year ago, and was told there had to be 51% MX ownership. Was this incorrect info.


[Edited on 3-5-2006 by JZ]

Bruce R Leech - 3-4-2006 at 08:02 PM

One big benefit of having a corp. is when you sell you can just sell all the stock in the corp. to the new owner. takes about an hour at the notary.:lol:

great post oladulce

JG - 3-4-2006 at 09:28 PM

appreciate your candor and detail, your loss has been an education to the folks on this board and you are willing to try again!! Good Man! Refering to my previous thread re: cost to buy/sell you have given me da goods on selling....beware of ALL "Professionals" guilding you through the buy/sell dance.Seems the overall costs to buy/sell as a non resident will be about 40-50%. I love Mx...been goin south all my 54 years (shoppin with Mom @ 3 to a wasted life of surf and fishing ever since),however the ante seems steep. Guess I'm gona educate myself and find a way to pass days in baja in my own place that does not beat me financially and enjoy a place that I truly feel at home.

Bruce R Leech - 3-5-2006 at 06:42 PM

Quote:
Originally posted by morgaine7
Oladuce, many thanks for the very informative post. Nothing beats first-hand experience, and I just quadruple-checked my papers to make sure the actual purchase price was stated. The manifestation info is also extremely helpful.

Comitan, how does someone go about proving non-ownership of a home in the US (or anywhere)?

Kate


it is very difficult if in fact you do own one in the US. but if you don't you just say you don't and let them try to prove you wrong:lol:

tim40 - 3-5-2006 at 09:11 PM

According to much reading we did this evening on Mexican real estate law. The basics for claiming exemption on Capital Gains is living in Mexico (not all at that residence) for "at least 182 days/year" and having a FM3 status. Must have tele, power, or gas bill and it is suggested a bank account...but not required. Yes, you can own a home in the states, but need to show that you are self sufficent in Mexico. As another in this chain indicated, the Notario would be hard pressed to determine if you did own a home in the states.