Taxable Residents

According to the Mexican Tax Code, it´s essential to know if you fall under the category of “Taxable Resident”.

A foreigner is considered a Mexican Tax resident when:

• • You have established a place of residence in Mexico
  • You also own a home in Mexico and in another country and if the center of your vital interests is in Mexico
  • More than 50 percent of your total income is derived from Mexican sources, and your primary professional activities are carried out in Mexico.

Business travelers may avoid being categorized as Taxable Residents unless they have established a home in Mexico and generate most of their income in Mexico.

Capital Gains are Subject to Capital Gains Taxes

In Mexico, any capital gains are subject to capital gains taxes including property.

To begin it´s important for you to understand the following:

• • Currently, the tax rate is 35% for non-Mexican residents
  • 25% on the gross amount of the transaction
  • Or 30% of the total Capital Gain
  • For expatriates, the Capital Gains Tax in Cabo San Lucas will depend on the Tax Cost Basis, the Type of Asset to be Liquidated, the Sales Price, and other factors that may apply
  • For real estate, you will also be required to pay 2%–5% of the total transaction in local taxes.
  • If you are a resident, Capital Gains in Cabo San Lucas apply to worldwide income; otherwise, you will only be taxed on income earned from the property in Mexico.
  • In the event of a significant capital gain, we recommend talking to a re vetted Mexican tax advisor.

It´s Possible to Reduce or Eliminate Capital Gains Tax in Cabo San Lucas

Capital Gain Tax or ISR, Impuesto Sobre La Renta is assessed on the profit gained by selling a property. It´s possible to reduce or eliminate capital gains tax when it comes time to sell your property, please consider the below mentioned:

• • As the property seller, you must hold an RFC, Registro Federal de Contribuyentes which is your Mexican Tax Registration number
  • In Mexico, there are Capital Gain Tax Exemptions and to qualify you must provide proof that the property is your principal residence in Mexico. This exemption applies to both Mexican nationals, as well as to foreigners who have resident status in Mexico. The income tax law does not explicitly state that a foreign property owner must have temporary or permanent residency status to qualify for the capital gain tax exemptions, however, it does state that the seller must be selling their primary residence in order to be eligible for tax exemptions on capital gains.
  • A one-time tax allowance exemption is available and it reduces the tax liability for many family homes, although you and the property must meet certain criteria to qualify for the exemption.
  • If the same property is legally co-titled with your spouse or a family member and they are residents in Mexico with a Mexican tax ID, and the property is their primary residence as well, then you may qualify for an additional deduction in their name. This tax-deductible allowance is not automatic, you must qualify, and you must prove the qualification. We always suggest contacting a Windermere vetted Notary Public, as well as a Tax Accountant about how to arrange this and what you need to do to present the necessary records for proof.
  • The property that you’re selling must be your primary residence in Mexico
  • The land subject to the sale must not exceed three times the size of the construction on that land which will be measured in square meters
  • You can only claim this exemption once every three years
  • Some notaries require you to prove that the property was your primary residence for three years or even five years, but in some cases, they only require you to prove this is your full-time residence
  • Non-residents selling Mexican property are obligated to pay 25% of the Total Gross Income or 35% of the Net Gain Less Allowable Deductibles
  • You must be clear that Capital Gains Taxes paid in Mexico by Canadians and U.S. citizens are not subject to double taxation back home.
  • The 2% Acquisition Tax you paid during purchase may be used as an approved deduction. As soon as you pay your two percent acquisition tax to receive your trust, you are eligible to receive an inflationary credit from the Mexican government for each 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 or inflation and can be quite significant. The inflationary Credit is calculated depending on each year of property ownership. In addition, there is a 3% depreciation for the construction and that reduces your tax base. The normal is 20% for the land and 80% for the construction. Land does not depreciate. You are not eligible to receive the inflationary credit unless you have paid your two percent
    acquisition tax.
  • If you made significant improvements to the condition of your property and increased its value, you have decreased the gap between cost and profit. If your expenses exceed 20% of the purchase price, you should request a new assessment by the property tax authority. Registering the increased property value will reduce your capital gains in the future.

Deductions allowed for capital improvements

You can deduct the costs of any capital improvements, for example, if you added building extensions, new flooring, swimming pools, and new rooms while you owned the property, as well as some closing costs commonly incurred when purchasing a home.

All capital improvements must be made by registered building firms or builders who issued legal invoices or facturas for their work. Please note that general maintenance and home improvements, like furniture, remodeled kitchens, or new bathrooms, do not count as capital improvements.

Recording all property renovations and officially registering all official invoices or facturas of funds spent on improving the property is called manifesting your property and can be used as a deduction when the property is sold.

• • If the principal residence was sold at a loss, this amount may be divided by the number of years the home was held, ten years maximum. This loss may be used to offset other taxable income on gains from other property sales, but not used to reduce business or employment income tax.
  • Inherited property is exempt from capital gains tax.
  • You may be exempt if you acquired the property as a donation, please consult a Windermere vetted Tax Attorney for stipulations.

Selling your Mexican Home as a Non-Resident

If you are a Non-Mexican Resident or you don’t have a Mexican tax ID, you cannot claim the one-off allowance exemption, although you can claim qualifying deductions, as long as you have the official receipts or facturas to prove the expenditures which can then be deducted.

Mexican Companies May Acquire Property Without Capital Gain

In Mexico when a company sells its properties, it is taxed based on the overall of its income versus all of its expenses. A Mexican Company may acquire a property and may sell it but if it has losses for other activities then they are offset. Living expenses are not deductible unless they are needed to generate the income. The deductions are done monthly through accounting with expenses against income and then the Mexican Company’s annual tax returns. Depreciation also applies and it´s paramount to understand that setting up a Mexican company is not a way to avoid Capital Gains Taxes in Cabo San Lucas

Be sure to contact your American or Canadian Accountant as Capital gains taxes paid in Mexico can be applied to your U.S. or Canadian taxes as a tax credit.

Capital Gains in Cabo San Lucas are Calculated in Pesos Even if the Property is Marked in Dollars

Even though the home may be marketed in dollars and the transaction amounts may be quoted in dollars, the deed will show the amount in Mexican pesos at the exchange rate prevalent on the date of the closing. Any capital gains are calculated only in Mexican pesos and therefore, shifts in the exchange rate can affect the capital gain calculation as expressed in a foreign currency.

Fideicomisos, Notaries, and Capital Gain Tax

Some Fideicomiso Trusts as well as some Notarios may have a policy that does not accept deductions and automatically charges 25% tax on the full sale price before releasing the title to the new buyer, so it´s always best to inquire about Capital Gain procedures with your Fideicomiso Trust before signing up.

Don´t Fall for Tricky, Old, and Risky Practices

Don´t fall for tricky, old, and risky practices such as sellers recording a lower selling price to save on capital gains in Los Cabos and achieve a lower transfer tax. This will only increase the gap between your purchase price and the selling price. More importantly, agreeing to register a lower value is a violation of Mexico’s anti-money laundering law.