Mar 9, 2006, 4:18 PM
Post #3 of 14
THIS WAS TAKEN FROM ANOTHER BOARD ON THIS SUBJECT:
Re: [Esteban] 35% of Profit to Mexican Gov
Can't Post | Private Reply
Mexican capital gains tax on real estate woes
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