Recording the Cost of Your New Construction
Manifesting is simply
recording the amount you spent on your construction, or remodel,
in order to add this to your cost basis. Adding to your cost basis
is the key to reducing your Capital Gains Tax. Proper documentation
and Manifesting Your Construction is a vital part of building your
DO I NEED TO MANIFEST MY CONSRTUCTION?
When you sell your home,
the Manifested cost plus the cost of your lot stated in your Trust
(Title), will be used to determine the basis for Capital Gains tax.
If you have not Manifested
Your Construction, Mexican Tax Law will not recognize your construction
costs and you will not be able to use them as a deductible expense.
All your receipts, cancelled checks and bank statements will not
help, unless you have completed your Manifestation.
Your Begin Construction...
Decide how to structure
your financial arrangements with your contractor. The two main choices
are Cost Plus and a Fixed Bid.
With Cost Plus, you pay
the contractor for the cost of materials, plus a fee of 12% to 20%.
Using this method, you will need to keep excellent records in order
to prove all your expenses. With Cost Plus, you are responsible
for paying the Social Security tax for every person working on your
home... your contractor is not.
Each time you pay the
contractor, he must provide you with a legal Mexican Invoice called
a Factura. Each Factura must be in your name and will include a
10% sales tax call IVA Tax. Without the Facturas, nothing you spend
is deductible as an expense in Mexico.
With a fixed-bid contract,
the contractor quotes you a flat fee to build your home. A fixed
bid will include all labor, materials, Social Security, etc. It
is all-inclusive. When using the Fixed Bid process, you put the
burden of record keeping on the contractor and you do not have to
pay the 10% Mexican IVA Tax each time you make a payment. You will
still need to receive a Mexican Invoice, Factura, from the contractor
for each payment; however, the Factura should reflect the amount
of the payment due with no 10% sales tax (IVA Tax).
IVA Tax is basically
a sales tax and Mexican Tax Law states there is no IVA Tax for the
construction of a personal residence, provided the contractor is
providing an all-inclusive bid. Again, the fixed bid process is
much less labor-intensive for you and puts the majority of the record
keeping on the contractor.
TIP:When using Fixed
Bid, make certain the contractor is in agreement to provide you
with a Factura for each payment with no 10% sales tax added. Have
this in writing in your construction contract.
A BUILDING PERMIT
The building permit is
the first step to Manifesting Your Property correctly. You will
need the permit both to start construction AND to finish the construction.
The permit is pulled from the government office called Obras Publicas,
meaning Public Works. Normally, the contractor will pull this permit
and there are two things you need to watch for.
1. Make sure the Building
Permit is pulled in the same name as the Beneficiary named in your
2. Make sure the Building
Permit represents the approximate amount of the construction the
contractor has proposed to do the work.
The fee for the Building
Permit is based on the estimated value of your construction. In
and effort to reduce this fee, some contractors will report a lower
construction amount when pulling the permit. This is a huge mistake!
You will want your construction costs recorded accurately, so your
cost basis will be accurate for capital gains. Never report a lower
construction value to save some money on the permit fee, because
it will cost you much more in the long run!
OF TERMINATION OF WORKS
When construction is
finished, and you are ready to Manifest Your Construction, you will
need to take your Building Permit to the Obras Publicas office with
a letter stating the amount you spent and that you have finished
your construction. You or your contractor can write the letter.
With this letter, you will request an official statement of completion
called an "Adviso de Terminacion de Obra", which means
a "Letter of Termination of Works".
This letter will state
the amount you spent on your construction, which should be in accordance
with the amount stated on the Building Permit. THIS LETTER IS THE
DOCUMENT THAT ACTUALLY ESTABLISHES YOUR CONSTRUCTION COST BASIS
FOR THE TAX OFFICE.
Social Security is very
serious issue in Mexico and your home can actually be liened or
sold to force payment if these taxes are not paid. This can even
happen years after you finish your construction.
When you receive your
"Letter of Termination of Works", Obras Publicas will
send a copy to the Social Security office. They will compare this
amount with what you or your contractor has paid to Social Security
during construction. (If you are using Cost Plus, you are responsible
for paying the taxes and if you are using Fixed Bid, the contractor
If the amount of Social
Security Taxes paid corresponds to the amount of your construction,
you will receive a letter from Social Security called a "Carta
de Razonabilidad de Pago", meaning a "Letter of Reasonability
of Payment". This letter is very important, as it is your protection
to prevent any future claims for non-payment of Social Security
Once you have your "Letter
of Termination of Works" and your letter from Social Security,
you simply take them to the Tax Office, called the Catastro Office.
They will record the value and add it to the cost reflected on your
Trust document. Once completed, you have successfully Manifested
Your Construction and established an accurate tax basis for your
If you do not have a
Trust, you should not begin construction. Without the Trust document,
you cannot pull a building permit in your name and you run the risk
of not being allowed to deduct your land cost or construction cost
when you sell.
Remember: Annual property
taxes are relatively low in Mexico...capital gains taxes are not.
Registering an artificially low number will cost you much, much
more in the long run!
La Punta Realty will
work with you to make certain all your documents are in order and
your actual costs are recorded properly. There are no short-cuts
and no legal ways around taxes here, any more than there are in
the United States or Canada. Your home is a large investment, and
following proper legal steps will ensure a safe and enjoyable experience
in Mexico. If someone says, "This is Mexico and that's the
way we do it here" , they have just thrown up a red flag and
you should seek another contractor.
Always get your Trust.
Always record the real value of your purchase. Always purchase U.S.
Title Insurance. Always manifest your construction.
La Punta Realty - LPR Luxury International is the
recognized real estate leader in North Bay Puerto Vallarta. We use
U.S. Title Policies and U.S. third party escrows in Mexico for all
our transactions. We understand the local laws regarding ownership
of real estate in Mexico by foreign investors, and we will put this
knowledge to work for you to make certain your investment protected.
If you are considering
a real estate purchase in North Bay Puerto Vallarta, make sure everything
is done right by allowing La Punta Realty to work for you. We are
an independent brokerage, assuring you that our only interest is
representing you in a real estate transaction that is safe, solid
is in our commitment to safeguarding the interests of our clients.
We will offer no properties that cannot secure a U.S. Title policy
with Stewart Title Guaranty. No other real estate firm in North
Bay Puerto Vallarta is more dedicated to protecting your interests
and ensuring a safe, clean transaction for both buyer and seller.
article is taken from Snell Real Estate in Cabo San Lucas