Capital Gains Exemptions
Updated: Aug 19, 2022
Capital gains tax or specifically called Impuesto Sobre la Renta, or ISR for short – it is an income tax on the sale of real estate. It can be calculated a couple of different ways.
You can pay 25% of the “gross sales amount” , without any deductions.
You can pay 35% of the “net value” and include deductions. Net value is the difference between the original recorded property value when you bought it and what you sold it for. You can deduct quite a few things, property improvements etc. but you will need to have official tax receipts called facturas.
Facturas are official receipts that are accepted by the government for tax purposes. Unlike in the US or Canada a simple receipt or invoice with a "PAID" stamp on it will not suffice. Basically it is a method to electronically connect your personal information, tax ID, name etc to the receipt which then becomes the factura.
As you can see these taxes are quite high so getting an exemption is important. Here are the qualifications:
It’s your primary residence. It has not been purchased under a corporation, you either hold direct title in your name or you have a bank trust (or fideicomiso) in your name.
You are a perm resident of Mexico.
Those are the basics. If you qualify, each owner can get an exemption of up to 700,00 UDI.
UDI is an abbreviation for Unidades de Inversión. It’s a value established by the Bank of Mexico to determine financial debt, credits etc. The value of a UDI changes but as of today, 700,000 UDIs would be $ 4,869,316 pesos or $243,465 USD. If there are multiple owners of the property each of the names on the deed can claim that deduction - BUT each person must meet all the above requirements. It is important for both owners to be residents AND have an RFC with their name on a utility receipt.
Important to note is that the real estate commissions that you pay as a seller are 100% deductible from any ISR tax you may owe.
Notary's calculate your ISR tax
Notaries here are not like in the U.S. or Canada. In Mexico, the notaries are lawyers that are specifically tasked to handle real estate law, they are solely responsible for interpreting the laws and withholding taxes due.
It is important to note that although all your bills and bank accounts can be in your name with the address of the property for sale, they also need to be linked to your Mexican tax number called an RFC.
Artículo 155 of the reglamento de la ley sobre la renta says that you can use the following to show proof that you reside at the property being sold:
A Mexican voter ID card with that address.
Fiscal proof (facturas) showing payment of electric bills or home phone, or
Account status reports from financial institutions or credit card companies,
And this part is important, the law says that the preceding documents must be in the name of the contributor, the spouse or family members in direct line of descent.
Most notaries will tell you that without an RFC attached to the account (bank, telephone, electric, water, etc) there is no fiscal proof that this is your residence and thus you will owe capital gains taxes.
Utilizing a trusted AMPI affiliated real estate agent will help you avoid these, and other, kinds of pitfalls.
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