Capital
Gains in Mexico
In a classic western
movie called "The Searchers", starring John Wayne, an
Indian spoke in his native tongue, and a Cowboy asked what he said.
John Wayne replied, "It's not so hard to understand if you
speak Niyuki Comanche." Well, the same goes for understanding
the Capital Gains Laws in Mexico.
Understanding the Tax
Laws in Mexico is an extremely important part of the Purchase Process.
What you do today dictates your tax liabilities tomorrow.
The information provided
here is to help you "understand" the tax system in Mexico
and the important issues related to them. We highly recommend you
meet with a tax professional prior to completing your purchase to
confirm if any of the laws have changed since this document was
published in 2003.
CAPITAL
GAINS TAX
Capital Gains Tax Law
in Mexico states that tax is owed on the profit you receive when
you sell your home or property. By Law, you have two options when
it comes to Capital Gains and you can use whichever is the lesser
of the two options.
Option 1: 34% of the
net profit. (There are a variety of deductions included in this
option.)
Option 2: 25% of the gross sales amount with no deductions.
(These percentages reflect the 2003 Tax Code)
Although a 35% Capital
Gains Tax may seem high, Mexico does have several laws and procedures
that will assist you in maximizing your cost basis, thereby reducing
your net profit, thus lowering your Capital Gains. The key is to
understand these laws before you buy, not when you decide to sell.
WHY
SHOULD YOU TAKE ON THE SELLER'S CAPITAL GAINS LIABILITY?
The first step in calculating
your Capital Gains is to subtract the value you have recorded in
your Trust (Fideicomiso), from the sales price of your property.
In the past, some real estate companies recorded values lower than
the actual purchase price in an effort to "save" tax for
their client. Their thinking was to save money on the 2% acquisition
tax. This is a big mistake. Never record a lower value than what
you actually paid for the property. Doing so simply establishes
a lower cost basis for the property, which increases your Capital
Gains Tax liability.
An oversimplified example
is: You wisely purchase a lot for $1,000,000.00, but unwisely record
a value of $500,000.00. In the eyes of Mexican Tax Law, your cost
basis is now $500,000.00. If you sell the lot for $1,200,000.00,
you see a profit of $200,000.00, however, according your recorded
cost basis, Mexico sees a profit of $700,000.00. Your Capital Gains
Tax for Mexico will be 35% of $700,000.00 ($245,000.00.) You just
lost $45,000.00 instead of making a profit.
Rule
Number 1: Always record the full value of your purchase.
Ownership in
Mexico, specifically the Trust process, has been established to
protect you and provide you with the legal means to safeguard your
investment. Recording your real purchase price and proper documentation
is the only way to maximize your potential profits. The bottom line
is to always secure a Trust over your property as quickly as possible
for the real value of your purchase.
Never allow
anyone to convince you to record a lower value than what you have
actually paid for your property, or YOU will assume the seller's
Capital Gains Tax liability. Recording a lower value today can cost
you plenty should you decide to sell in the coming years.
It's like the old "shell game"... if a seller can get
a buyer to record a lower value, the tax liability is simply passed
along, and eventually someone will have to pay. Don't let anyone
tell you "That's how we do it here." Mexico is like everywhere
else. The Capital Gains Tax is the responsibility of the Seller.
It's
simple:
1) It isn't yours until
you have the title in your name.
2) If you don't record the accurate value of your purchase, you're
most likely taking on someone else's capital gains liability.
Fact: Recording the real
value benefits you and establishes your cost basis in the eyes of
Mexico.
Fact: The amount you
pay for a property has no impact on your yearly property taxes.
Fact: Capital Gains Taxes
you pay in Mexico can be applied to your U.S. Taxes.
HOW
DO I KNOW IF MY VALUE IS RECORDED CORRECTLY?
La Punta Realty closing
department will oversee the creation and completion of your Trust.
We will review the documents with you and, to make certain everything
is in order, we will be present when you sign your Trust.
You can verify the value
yourself by examining the first page of the Trust Document and noting
the amount written out in text, which is always in Pesos. Simply
divide the current exchange rate into the Peso amount and make sure
the result reflects the actual dollar amount you have paid. If you
want to check an old Trust, simply determine the peso rate for the
day and year the Trust was executed. We can give you the exchange
rate, or the bank and the Internet are also helpful.
(Helpful hint: When you
sign your new Trust, have the Notary jot down the exchange rate
on the document itself. This will come in handy years later.)
WHAT
IS AN INFLATIONARY CREDIT?
As soon as you pay your
2% Acquisition Tax to receive your Trust, you are eligible to receive
an inflationary credit from the Mexican Government for every year
you own the property. This credit is added to your cost basis when
you decide to sell your property.
The credit is based on
Consumer Index Adjustments (inflation) and can be quite significant.
We have seen credits in excess of 20% per year applied to a cost
basis. On a million dollar property, this can be as much as $200,000.00
U.S. per year added to your cost basis, significantly reducing your
capital gains tax should you decide to sell in the coming years.
Fact: You are not eligible
to receive the inflationary credit unless you have paid your 2%
Acquisition Tax.
Fact: You can receive
the inflationary credit based on the date of your buy/sell agreement,
provided you paid the 2% Acquisition Tax for the property.
WHAT
ABOUT THE TWO-YEAR CAPITAL GAIN EXCLUSION?
Mexico, as well as the
United States, provides its residents a Capital Gains Tax Incentive
for their primary home. The Tax Incentive in Mexico states that
if you sell your "primary residence" after two years,
you pay no Capital Gains. This law is in place for "Residents"
(Mexicans Nationals or Foreigners) of Mexico only, and there are
several items required to establish residency status. In order to
claim your home as your primary residence in Mexico, you must be
able to prove that it really is your Primary Residence.
At the closing, you will
be required to provide the Notary with a residence visa or working
permit (FM3 or FM2), as well as a bank account, water, phone and
electric bills, paid tax receipts and your Trust, all in your name,
all with the address of the home and all in place for over 2 years.
Fact:
You cannot have two primary residences at the same time,
therefore, if you claim the home in Mexico as your primary residence,
you give up your primary residency status in the U.S.
Fact:
The Capital Gains Tax Exclusion is intended for residents of Mexico,
not for persons owning second homes or vacation homes.
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 agent.
If you plan on building
a home or doing a major remodel to an existing home, please read
our Informational Brochure called Manifesting Your Construction
to make certain all your expenses are added to your cost basis.
La Punta Realty is the
recognized real estate leader in North Bay Puerto Vallarta. We pioneered
the use of 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
is 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
and secure.
Our strength
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.
We never forget it's your money and your investment... it's our
job to protect it.
This
article is taken from Snell Real Estate in Cabo San Lucas
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