Tax options when selling your home in Mexico are very similar to the United States and Canada. The government requires you to pay taxes on any capital gains made when selling a property in Mexico. There are two tax options when you sell your home:
- After itemizing any allowable deductions, you will forfeit 35% of the net profit in taxes to Mexico’s government.
- You can elect to pay a straight 25% of the gross amount of the sale without utilizing any deductions.
There are certain advantages to Mexico’s tax laws that most North Americans don’t realize or understand. It is a good idea to study up on these tax laws before you decide to buy and not afterwards. It could possibly save you lots of money and headaches. Nobody really likes giving away their hard-earned money to the government, but it is a necessary evil. Here are a few suggestions that might help you keep more of your profits.
Recording the property’s true purchase price
- Always officially record your exact purchase price. Some realtors and/or title companies will record a lower value of the property than what you actually paid for it. This creates a larger gap between your purchase and future selling price. Thus, making your net gains seem much more than they really are.
- If you are a foreigner, always make sure your record shows the actual selling price of the property in the trust. If you are a Mexican citizen or legal resident make sure your deed reflects the true purchase price, as well.
- Don’t try to let someone talk you into lowering your property’s value thinking this will save you tax dollars in the interim. Intentionally lowering the value of your property is in violation of Mexico’s money laundering law. Capital gains taxes are the responsibility of the seller. Eventually someone will have to fess up to the true value selling price and pay the actual taxes due.
- Capital gains taxes paid in Mexico can be credited to your US or Canadian tax filing. The treaty between these two and other countries eliminates double taxation back in your home countries.
When you pay the two percent acquisition tax at closing (a sales tax needed to receive your trust), the government gives you an inflationary credit every year you own the property. This credit was created for inflationary purposes and can be used as a deduction when itemizing against capital gains. It can be up to 15% depending on how long you have owned the property. However, all this depends on if you paid the acquisition fee or not.
There is a capital gains exemption if you sell your home as your primary residence. Again, this only applies to Mexican nationals and foreign citizens who have resident status. If you have a resident status as a foreigner, you must be able to prove at closing that you lived in the property for five years. The notary will require your Permanent Resident Visa, proof of a Mexican bank account, utility bills and trust paperwork. All these need to reflect the property’s address. Please keep in mind that the above is only a guideline and more information could be required.
Other valuable information for your capital gains
- You cannot have two primary homes. Simply put, you cannot have another home in either another country or a different part of Mexico. The Mexico government shares information between state and countries.
- Many of the deductions and/or exemptions allowed against capital gains are for Mexico residents only.
- Capital gains deductions cannot be itemized on second or vacation homes or investment properties.
- Always have the Notary make a note of the exchange rate. This will possible help in the future for an additional deduction.
Last but not least, we highly recommend you consult a Mexico lawyer that specializes in property purchases and sales. They will be able to advise you on which tax option to use when you sell your home in Mexico. In the long run, it will help you save money, time and a ton of headaches.
And remember, at Top Mexico Real Estate…we make it happen!