Capital Gains Exemptions
Updated: Oct 19
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. As an example, if you make a purchase at Home Depot you will be given a receipt at the checkout, you then need to take that receipt to a special machine that will generate a factura for you. Basically it will 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. This is not an investment property or one you rent out – you live here. 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 tax resident of Mexico.
There are a couple of ways to be deemed a tax resident. #1 You have established a place of residence in Mexico. If you do own a home in Mexico and another country, you will be considered a tax resident of Mexico if your center of vital interests are in Mexico; or more than 50 percent of your total income is derived from Mexican sources; or your primary professional activities are carried out in Mexico #2 You have not taken the deduction within the last 3 years.
Those are the basics. If you qualify, you 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. In an inexplicable twist, if there are two owners and only one meets the requirements, then the deduction for the owner that meets the requirement is cut in half. It is important for both owners to be residents AND have an RFC with their name on a receipt. As an example, in a recent transaction both owners met the requirements, the husband's name and RFC was on the electrical bill, we had to get the wife's name and RFC on the water bill in order to get the full double deduction.
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.
Unfortunately, there is an "unknown variable" in real estate transactions: the notary or notaría in Spanish.
Notaries here are not like in the U.S. or Canada where someone verifies the ID of someone before they sign an important document. In Mexico, the notaries do much more and in real estate deals, they are solely responsible for interpreting the laws and withholding taxes due. The problem is that those interpretations of the law and how to apply it are not uniform across the board. One notary could look at some documents and determine the person qualified for a tax exemption and another notary down the road could look at the same documents and say they did not qualify.
For example, some notaries will only allow people with permanent residency and citizens to earn an exemption. Temporary residents are denied, but some notaries will allow temporary residents.
Some notaries will necessitate that the person lived at the property for at least three years prior to applying, while others will just look to see if the exemption was claimed within the last three years.
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. It is the law in Mexico that any owner of a property have an RFC, however most notarios assign a generic tax number or RFC to foreign buyers. It's a good idea to apply for and get your RFC once you obtain your residency- it's easy and can be done online. You also then need to add that RFC to any or all your accounts, something that banks, utilities, and phone companies know how to do.
I have Mexican nationals as clients and even they often don't know about this. Technically the law does not say it is necessary. It is one of the those “notary interpretations”.
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.
It says in their name, it doesn’t say that it must include their RFC, but that’s where the interpretation part came in. Most notaries will tell you that without an RFC attached to the account (bank, telephone, electric, water, etc) there is no fiscal proof and thus you will owe capital gains taxes.
I heard about a recent transaction from another agency where the sellers were presented with a $30,000 USD tax bill. Luckily, the buyers were very understanding and were willing to delay the closing until the sellers could add the RFC to the electric bill. This does not happen overnight, Electric bills only come out every two months so the sellers had to ask for a hefty extension on the closing date by amending the contract, in this instance it was a 3 month process. Most buyers will not comply with this and simply move on, these sellers were lucky.
Utilizing a trusted AMPI affiliated real estate agent will help you avoid these, and other, kinds of pitfalls.
“If You Think It’s Expensive To Hire A Professional To Do The Job, Wait Until You Hire An Amateur.” Red Adair
Interested in finding out what your home is worth? Contact us and we will provide you with a no cost no obligation Comparative Market Analysis. Prices have changed quite a bit in PV over the last year and a half, you may be pleasantly surprised at the value of your home! Nik_Valcic@coldwellbanker.com.mx or WhatsApp 52-322-274-7775