A question that many expats who own Mexico real estate will be wondering about is the exemption from capital gains taxes when selling a property and how the new immigration laws affect this exemption.
The Capital Gains Tax and It’s Exemption in the Past
Very briefly, if an expat sells a property in Mexico, and the government deems that they are selling this property at a significant profit, they will pay approximately a 28% percent tax on the profit. For example, if you buy Mexico land for sale for $60,000 USD and because of increasing demand you later sell that same unimproved lot for $90,000 USD, the tax on the $30,000 USD gain might be about $8,400 USD.
Under the old immigration laws, non-Mexicans would be exempt from this status if they held the FM2 document, which was the second stage, following the FM3.
The question is whether under the new immigration laws, which combine the old FM3 and FM2 into one new visa (Temporary Resident), this exemption will continue to be granted, and what status is necessary.
Exemption in the New System
Unfortunately the answer is not 100% clear yet, but we can take a look at what the situation will probably be based on documents which the government has released.
From my understanding, the capital gains tax exemption is currently not available for foreigners who hold Temporary or Permanent Resident cards. However, in January tax laws are laws are usually updated, and I suspect that the law will be updated to allow anyone having either a Temporary or Permanent Resident document to have the exemption. I explain my reason for this below.
I will also point out that some people are speculating that the exemption may only be applicable to Permanent Residents.
The Laws & Explanation
Solomon Freimuth has investigated the following in terms of this situation:
1. The clarification made by the SAT explaining that holders of the FM2 (“Inmigrante” document) were eligible for the mentioned income tax exemption was originally made in an interior circular. No further clarification has been made.
That document says that in order to apply the exemption, Notaries must use the networked system called “DeclarNot” in order to check that the person hasn’t sold a house in the previous 5 years and that they are authorized to do so. The “DeclarNot” system may be as advanced as to require the identification number/type from the seller; therefore the ruling made by the system would in this case be binding and we will be at its mercy, at least until the system is updated to reflect any changes in the tax law that may occur.
2. Because there has been no further change in the tax dispositions we currently are in a position of uncertainty with the tax law: in Mexico, tributary law is to be applied exactly (Art. 3, fracc. IV, Mexican Constitution). In many branches of the law, analogy can be applied to places in the law that are left unclear, but in the case of taxes that is not allowed.
3. Even though there has been no change in the law, as far as I know, there is one last consideration: the Notary has the ultimate say in the application of the dispositions of the tax law, because he/she is solely responsible for the payment of the corresponding tax for profits made on the sale of a home by an individual. This means that until the Notaries are comfortable with the new immigration documents, they will probably be hesitant to allow foreigners to use them to get any tax exemption.
Based on the previous points, I do not believe that the income tax exemption is currently available for foreigners who hold Temporary or Permanent Resident cards.
However, tax law is updated every year, usually many times, but specifically in January. Hopefully, we will be included in this year’s changes. I would suspect that the law will allow anyone having either a Temporary or Permanent Resident document to have the exemption, but only time will tell. We can expect changes to the tax law in late December 2013.
We will keep you updated as new information becomes available and actual cases start offering examples of how this plays out in real transactions. Watch this blog for updates on the new immigration law in general.
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