Tales of Caution from the (Real Estate) Trenches!

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By Heather Borquez

There are many stories, some true, some exaggerated, of people buying property in Mexico and later finding out that they have high Capital Gains Tax bills to pay upon the sale of the property.

Here are some of the most common dilemmas people run into which can affect a later sale.

Most of these can be avoided or even solved after the fact, with a little thought and attention.

  1. Title was registered using a lower price than the actual purchase price.

This practice has pretty much been eliminated. However, it did happen occasionally in the past.

If a property was registered for a lower amount than you paid, you could be affected when it comes time to sell. Capital gains tax is calculated on the increase in value (in pesos) from the purchase price and the later sales price. If your property was registered for a value less than the actual purchase price and assuming your property increased in value, you could be facing a capital gains tax bill when you go to sell.

Sometimes this was done to save on property taxes, but as property tax is so inexpensive in Mexico already, it wouldn´t have been much of a savings. It might have also saved on the seller´s capital gains tax and sometimes it also saved on transfer tax.   However, none of these actions are legal nor recommended. Savings on a 2% land transfer tax or $50.00 US a year on property taxes doesn´t compare to paying 35% in capital gains tax down the road.

Check that your Fideicomiso does in fact reflect what you actually paid for your property. If it doesn´t, speak to a lawyer about possible tax mitigation strategies that can be used to help reduce capital gains tax when you do go to sell.   Or let us introduce you to one of our tax specialists to help you with your tax strategies.

2. Lot purchased and house built later but not added to Title (Fideicomiso)

This can happen when people buy a lot and later decide to build. The lot is registered correctly and property taxes are being paid. But the house didn´t get added to the Fideicomiso and so the Fideicomiso doesn´t accurately reflect the value of the property and property taxes are not being paid at the full value of the property. This is easy to solve with construction documents.

If this might be you, you should get this sorted out before you put your property on the market.   It is simple enough to solve with copies of your final construction permits, but you may wish to use a lawyer to help you correct your Title and to adjust your back property taxes.

3. Selling at a loss (in USD) but still facing a capital gains tax

This one is tough to swallow but there are some tax mitigation strategies out there that can help.

To explain Capital Gains tax, two things must be kept in mind.

  1. a) Property is registered in Mexican pesos, therefore gains in value in pesos will trigger a capital gains tax.
  2. b) The recent devaluation of the peso makes it harder to understand why a loss in dollars could still trigger a capital gains tax liability.

It works like this.

In 2007 you bought a property for $200,000 USD when the peso was 10 pesos to 1 USD. Your property was registered correctly at 2,000,000 pesos. Over the years you decide to sell but because of a slow market you can´t get more than 195,000 USD for it. That translates into 3,900,000 pesos at today´s approximate rate of 20 pesos to 1 USD. Yikes! Now you have a peso gain of $1,900,000 (3,900,000 – 2,000,000) pesos upon which capital gains taxes are payable and could be substantial. All on top of your loss in dollars… L

There are several mitigation strategies for this, including declaring the property to be your principal residence (you need to be a Residente Permanente of Mexico) although it is very hard for foreigners to qualify for the principal residence exemption. You could have an RFC number and keep all official receipts/facturas for work done on your property to account for the increase in value.

As well there are depreciation strategies and inflationary credits that can help reduce your taxes, which the notaries will take into account. As with any tax or legal information, please check with your lawyer or accountant.

 If you suspect you will have significant capital gains tax, please speak to a lawyer or accountant about possible mitigation strategies. Or let us introduce you to one of our tax specialists.

Lastly, my two rules for buying happily and wisely in Mexico are:

1. Use a good realtor.

How to find one? Ask around…look for experience. Look at their broker´s experience and length of stay in the market place. Ask for referrals. Speak to people who have bought or sold from that agent/broker.

It isn´t the quality of the agent´s smile that is going to keep you out of trouble but their (and more importantly) their broker´s involvement, experience and knowledge.

2. Use a good lawyer.

We are lucky. There are many good lawyers in La Paz. Be sure to use a good closing attorney. A good lawyer should point out any flaws in the agreement. The fees you pay to a good closing attorney lawyer are worth their weight in gold.

Please note that I am not a lawyer and not qualified to give tax advice. For specific questions, please refer to your lawyer or your accountant. We are happy to provide referrals to tax specialists and lawyers should you wish.

For other real estate needs, I would be more than happy to help you.

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