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Rondiver

Mar 1, 2003, 1:15 PM

Post #1 of 5 (1944 views)

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selling a home and taxes

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I am not planning on selling but was just curious. If you keep your home and live in it for two years there are not capital gains taxes to be paid. But lets say you do not live in it and sell it. In the U.S. you pay capital gains on the amount you made as profit. not the original investment. I was told in Mexico you pay on the entire amount of the house. Could this be true? You would be paying taxes on your own money not just the profit of the sale of the house. Surely not even the Mexican gov't would call your original investment captial gaines.

Abq

Mar 1, 2003, 4:23 PM

Post #2 of 5 (1776 views)

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Re: [Rondiver] selling a home and taxes

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Mexico doesn't have the two year rule, but I know in San Miguel you will pay a lower tax rate if you have an FM3 and owned the home a couple of years.

They call it capital gains, but Mexico doesn't have that kind of tax on the sale of real estate. Their "capital gains" is really what we in the US call a transfer tax. The percentages vary, but the tax is based on the reported sale price (usually a fraction of the real sale price) Expect to pay about 1 or 2%

David(MTY)

Mar 1, 2003, 4:48 PM

Post #3 of 5 (1734 views)

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Re: [Rondiver] selling a home and taxes

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Hi Rondiver, I need a break from all the toxic discussion, as I am on the road and have nothing I can add there to the kind people. My teclado-happy fingers can't resist answering a brand new question though.

The two year residence condition was basically dropped from the tax code in the overhaul for last year. But your question still stands. Many foreigners get confused between the concept of a retention and capital gains tax. There is a notary-calculated Hacienda required retention of (I think it is up to 25% now), just like you might get from a state in the US where you might have sold a home not qualified as a resident/principal residence.

Mexico protects its interest, as it should by enforcing the retention by threatening the notary personal responsibility for the eventual tax due, if not retained. Of course you don't know how much tax you will pay during the tax year. And a foreigner will leave the country. This gets complicated for foreigners who can't simply file for a refund of retention and nothing else.

The majority of notaries do not understand the tax code in this case enough to kneel to the level of a foreigner: and really they shouldn't have to, your taxes are not their job, the house transaction is. Taxes are a financial advisor or accountant's job. So the short answer is you lose your retention after cutting your ties to Hacienda, unless you understand how to appropiately plan for that or invest a relatively quite paultry sum to pay an advisor to make it not so

Historically, profits have been over 33.3% on home sales, so just booking out of there was a common reaction with positive cash flow impact on the foreign seller, and no one really worried about it or probably even understood it. But now it is not always easy to make 33.33% capital gains and so if the legal preparation of your annual tax return is possible, it might also be a good cash flow decision. You can then even defer taxes on capital gains now it is time to say: You will need a tax ID to make it go smoothly, and a good advisor -one who can read code and you trust.

PS, if it is not a commercial property, Hacienda has a big problem with foreigners just claiming it is their residence, and taking the exemption, when in fact it isn't. Since the notary is also responsible for you as I mentioned, they muct have interesting discussions.

(This post was edited by David(MTY) on Mar 1, 2003, 4:53 PM)

Abq

Mar 1, 2003, 7:10 PM

Post #4 of 5 (1707 views)

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Re: [David(MTY)] selling a home and taxes

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One thing I've figured out about Mexico is that rules are different (and applied differently) depending on where in Mexico you happen to be. So I won't say the previous poster is absolutely wrong, he is just not describing the reality of a typical home sale in SMA. For example in SMA it is accepted practice to declare a much lower sale price than actually took place. This will have a huge effect on closing costs because the numbers you are working with are much smaller. They don't really scrutinize residency in less you own more than one home. They are satisfied with the FM3 as proof. This may not be the case where you live. I think to get the best answer, ask a local notario.

David(MTY)

Mar 2, 2003, 12:19 PM

Post #5 of 5 (1660 views)

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Re: [Abq] selling a home and taxes

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Essentially, everything of substance in Abq's prior posts is either illegal or incorrect, or strongly misleading except the "see a notary". I seem to recall discussing with an "Abq", who had just been involved in a single transaction, these issues on Mexconnect about a year ago with the same results. No need to introduce tax fraud and dismiss my explanation of Hacienda law as "not absolutely wrong" when the original post seems to just be trying to compare how the law treats capital gains in the two countries.

That said, I reread my own post and apologise that it ambiguous in a couple of places. Since the original poster asked about Mexico tax law was regarding Capital Gains, my answer addressed that. I will comment quickly on the specifics of Abq's completely misleading responses:

Mexico doesn't have the two year rule, but I know in San Miguel you will pay a lower tax rate if you have an FM3 and owned the home a couple of years.

Mexico used to have the two year rule, at this writing the requirement of actually proving the two years with utility receipts has been dropped and replaced with simply a statement by the seller that it is their residential property. You will pay no ISR if you qualify for the exemption, not a "lower tax rate". For foreigner sellers, the added requirement is to show your immigration document. If the immigration document does not show your residence as the property, suddenly the notary has to cope with reconciling how you could claim the residential exemption yet have a different residence in your visa. On the other hand, if it did match, many notaries used to use this as support for the two year requirement, perhaps without needing the utility bills.

They call it capital gains, but Mexico doesn't have that kind of tax on the sale of real estate. Their "capital gains" is really what we in the US call a transfer tax. The percentages vary, but the tax is based on the reported sale price (usually a fraction of the real sale price) Expect to pay about 1 or 2%

Mexico most certainly has a capital gains tax on the sale of real estate in the true sense of the meaning of "capital gains tax" from Webster, Oxford, and the IRS. As I mentioned above, the exemption is available for many cases in residential real estate. The ISAI asset transfer tax mentioned is a different animal. It is exactly 2%, unless you have a property under about 360,000 pesos, which has a special credit. Aside from considering the credit, the this federal percentage does not vary. And perhaps more importantly, the ISAI is not the seller's responsibility, it is the buyer's, barring odd ball negotiations on sale price.

One thing I've figured out about Mexico is that rules are different (and applied differently) depending on where in Mexico you happen to be.

The ISR and ISAI rules are identical for most purposes. They are federal laws.

So I won't say the previous poster is absolutely wrong, he is just not describing the reality of a typical home sale in SMA.

Jajajajajaja jejejejejeje jojojojojojo. No other comments.

For example in SMA it is accepted practice to declare a much lower sale price than actually took place. This will have a huge effect on closing costs because the numbers you are working with are much smaller.

Accepted practice to commit "huge effect" tax fraud in an area of high real estate values where relatively wealthy foreigners prop up much of the market, while Mexico doesn't have federal money to clean up the Salamanca disaster zone mega-superfund type site a half hour away? That certainly is a huge effect. My we have deviated from knowing the Mexican tax treatment in this post!!!!!

They don't really scrutinize residency in less you own more than one home. They are satisfied with the FM3 as proof. This may not be the case where you live. I think to get the best answer, ask a local notario.

There is no need to "scrutinize" an honest person's declarations, dealing with an honest notary upholding the minimum regulations that vest the notarial power in the notary. "Ask a local notario", that is the only thing that is not abominable in this post. While there are plenty of ways to bend the tax code to your benefit and push the concept of what is legal, the statements in Abq's posts are almost entirely wrong or misleading on every point. An accountant or financial advisor who understands foreigner tax issues, not a notario, in any case, is the most appropriate person to discuss your tax situation with, and then it'd be time to hear out the notary's expertise for the transaction.

Regarding some of the ambiguity I noticed, after re-reading my own post:

PS, if it is not a commercial property, Hacienda has a big problem with foreigners just claiming it is their residence, and taking the exemption, when in fact it isn't. Since the notary is also responsible for you as I mentioned, they muct have interesting discussions.

When I say "Hacienda has a big problem with", someone worried about getting audited might interpret this to mean they come down hard on this issue, allowing little flexibility. On the contrary, let me clarify that "Hacienda has a big problem with", means just what it says. That is, that most tax fraud commited by cheaters on this exemption go undetected by Hacienda. It doesn't mean Hacienda will hunt them down and and bring them to justice. If that were the case Hacienda wouldn't have the problem.

The other potential ambiguity I noticed in my post:

So the short answer is you lose your retention after cutting your ties to Hacienda, unless you understand how to appropiately plan for that or invest a relatively quite paultry sum to pay an advisor to make it not so

The current tax code is very generous in the use of the residential exemption, so in most cases you don't need to worry about not taking advantage of it. But one important exception in understand the biggest cash risk potential, to qualifying is the case when a foreigner seller will not be able to file a Mexican tax return after selling, to get back a legally held retention. This would be the case, for example, with just having a rental property sold for which you couldn't qualify for the exemption. You would then abandon your hefty retention which an honest notary would turn over to the government, and hopefully it would make it back to perhaps clean up Salamanca.