PROPERTY TAXATION IN MEXICO
Buying a property in Mexico comes with a range of ‘closing costs’ that usually add up to between 4% to 8% of the property’s sale price. When you eventually come to sell your Mexican property, the buyer will pay most of the closing costs, but there are also selling costs and taxes you the seller will be responsible for.
The three main costs when you’re selling a property in Mexico are:
- Real Estate Agency Sales Fees
- Capital Gains Taxes
- Extinguishment of the Trust
1. Sales Fees
When it comes to marketing and selling your property in Mexico, not all agents and agencies are equal. Understand the difference between a Full-Service Agency and a Discount Broker. A good agent should offer a full-service marketing program – including robust Social Media platforms, professional photography, local – national – global network, a top-ranked Google website, a professional-looking full-service office(s), a closing coordinator, an in-house attorney, be able to diligently act as a conduit between the negotiating parties through sale to successful closing at the Notary’s Office. Not just stick a sign in the ground and hope the phone rings.
Real Estate agents in Mexico typically charge between 6% and 10% of the sale price in commission— and you need to add Mexican Value Added Tax to this (16%), so if the agent’s commission is 5%, the tax-inclusive payment will be 5.80%; and if the agent’s commission is 8%, the tax-inclusive payment will be 9.28%. This is because most reputable agencies today declare 100% of their income and the only manner that they can do so is by adding the value-added tax – and …. IMPORTANT …. Issuing official ‘facturas’ (tax receipt) in return. This is critical to you the seller, but more on that below.
In Mexico, the Notary Public is paramount in property transactions in that they are legal professionals with very important statutory roles. The fees for the Notary Public are paid for by the buyer.
Today almost all real estate transactions utilize the services of an escrow company who will act as a secure third party depository for the deposit on the Promise Agreement (Purchase Contract) as well as the balance of the purchase price – all disbursed by written mutual consent at closing. The escrow fee is also paid for by the buyer.
- Capital Gains Taxes on the sale of residential property in Mexico
Taxation on residential property sales is a complex area of Mexican tax law and every case will be slightly different depending on the circumstances. At the same time, tax laws are subject to reform and because house purchases tend to be long-term investments, the tax laws which apply today might apply entirely, in-part, or not at all when you come to sell your property years from now. Here are a few key principles of residential property taxation as of the date of this article, and guidelines here are intended to understand conceptually the taxes you will be expected to account for when you sell a residential property in Mexico. (Different tax rules and rates apply when you sell commercial property.) You should seek professional advice to get a detailed appraisal of your own situation.
Taxes due on the sale of residential property are calculated by the Notary Public, who also withholds these amounts for direct transfer to the Mexican Treasury. The tax law makes each Notary Public fully liable for taxes due, so they will absolutely ensure that the rules have been followed and certify that sellers qualify for any exemptions and deductions they are claiming for tax relief.
Capital Gains Tax Rate
For Non-Nationals (only), Mexico applies a capital gains tax on residential property of 25% on the gross sales value of the transaction without any deductions OR about 35% on the value of the gain (purchase costs less allowable exemptions and deductions): the percentage is calculated on a sliding scale in relation to the gain and we recommend you assume 35% as residential property sales with again above $250,000 pesos (c.$13,000 US dollars) will be subject to this rate.
One-time Tax Allowance Exemption
A one-time tax allowance exemption is available under Article 92, Fraction XIX a) of Mexican income tax law that reduces the tax liability for many family homes, although you and the property must meet certain criteria to qualify for the exemption:
- you must be a legal resident in Mexico with a Mexican tax ID (known as an RFC, or Registro Federal de Contribuyentes); and
- the property you’re selling must be your primary residence; and
- you can only claim this exemption once every three years.
The flat-rate exemption is the peso equivalent of 700,000 UDIs; the value of UDIs fluctuates and you can get current UDI exchange rates on the Bank of Mexico website. At the time of writing, 700,000 UDIs equates to approximately $4.9 million Mexican pesos, and you can deduct this amount from the sale price if you qualify.
If the same home is properly co-titled with your spouse or other family member and they are resident in Mexico with a Mexican tax ID, and the house is their primary residence, you can deduct an additional 700,000 UDIs in their name.
NOTE: the tax-deductible allowance is not automatic: you must qualify, and you must prove the qualification. Talk to your Notary Public or Closing Coordinator about how to arrange this and what you need to do to present the necessary records for proof.
Selling your Mexican home as a Non-Resident
If you are not a resident in Mexico and/or you don’t have a Mexican tax ID, you cannot claim the one-off allowance exemption explained above, although you can claim qualifying deductions, so long as you have the official receipts (facturas) to prove the expenditures which can be deducted.
Allowable Tax Deductions
- the costs of any capital improvements (e.g. building extensions, new flooring, swimming pools, new rooms) while you owned the property, You need official tax receipts —in Mexico, these are known as ‘facturas’. Any capital improvements, including general maintenance and home improvements made using a firm or builders who didn’t issue you with facturas for the work cannot be deducted.
- Some closing costs and transfer taxes commonly incurred when purchasing a residential property are deductible.
- The cost of the real estate agency fee upon exhibit of the validated factura is 100% deductible against the capital gains tax. Often, this deduction is the only valid deduction that most sellers have available to them and quite often means the difference between paying the capital gains tax or not.
The Currency Exchange Rate effect on Capital Gains
In most locations across Mexico, prices are quoted in Mexican pesos. However, a few places and such as Puerto Vallarta, home prices are often seen quoted in USD. Even though the transaction may be quoted in dollars, the deed will show the amount in Mexican pesos at the exchange rate published by the Bank of Mexico at the Official Federation Gazzette, 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 – and create – a capital gain calculation as expressed in a foreign currency. Thus foreign exchange rates can influence capital gains calculations on the property in Mexico because your tax liabilities when you come to sell are calculated in pesos, not dollars.
- The Extinguishment of the Trust Fee
If the property you are selling is held in a Bank Trust (fideicomiso), then you will also need to budget for a ‘trust cancellation fee’ that is levied by the bank; the amount varies, but you should budget for around US$1,000 to cover this as this fee is payable by the Seller.