TIME TO SELL: WHAT YOU NEED TO KNOW ABOUT MEXICAN CAPITAL GAINS TAX
Here is the basic rule about Mexican capital gains income taxes on the sale of real estate: Unless you are exempt as a “resident” as defined by the Mexican tax law, you as a seller must pay either 25% of the price or the amount resulting from applying the highest marginal income tax rate in Mexico (about 30-40%) to the gain, whichever is lower.
A) THE “HOMESTEAD” EXEMPTION
A homestead tax exemption is available to all individual Mexican or foreign persons (but not corporations) who meet the requirements of “tax residence”. If you qualify, you will not have to pay any Mexican income tax on the sale, no matter how much you made on the transaction (except when your residence takes up only a small part of the land which was sold, in which case you will get a partial exemption).
Article 9 of the Mexican Federal Tax Code, amended in 2004, establishes that tax residents are those “who have established an abode in Mexico”.
As with many things in Mexico, there is no hard and fast rule about what constitutes “tax residence” or “abode”. Since income tax on the sale of real estate by an individual is payable at the time of the sale rather than annually, and since the Mexican notario publico is the official who does the paperwork for the sale and files the tax return, it is the notario who will decide if you as the seller qualify for the exemption.
To make this determination, notarios base their decision on two different sets of laws: Mexican tax laws and Mexican immigration laws.
Here are some of the factors the notario will take into account:
1. Do you have a Mexican visa that allows you to legally live in Mexico? Either an FM-2 Visa (permanent residence) or FM-3 Visa (temporary residence) will qualify. An FM-3 Visa can be obtained relatively quickly. Make sure your address listed on your FM-3 is the same as the property address. An FMT (tourist visa) will not qualify.
2. Do you have a Mexican tax identification number, known as “RFC”? Since the homestead exemption is available to “taxpayers” under Article 109 of the Mexican Income Tax Law, you might want to consider obtaining a Mexican tax identification number, known as “RFC”. If you have other income in Mexico (interest on money in a bank account), you will need to get an RFC anyway. In my experience, having an RFC is helpful but is not viewed as a requirement for the exemption.
3. Have you lived in your home for at least six months? To prove that, make sure the utility bills are in your own name (two names if the property is jointly owned). Note: before 2004, six continual months (183 days) of residence was an absolute requirement: now it is just one more factor.
4. Do you have a home in another country which you claim as your primary residence? If so, your Mexican home might not be determined to be your “abode”.
Remember: Different notarios look at this situation differently. Get a second opinion if the first one says you don’t qualify.
Since corporations don’t qualify for the homeowners exemption, it is no longer recommended to have a Nevada or Delaware corporation or LLC be the beneficiary in a bank trust. That was done years ago as a way to avoid Mexican taxes on the sale of property (by selling the shares instead of the land), but now it is counterproductive.
B) THE U.S.-MEXICO TREATY AGAINST DOUBLE TAXATION
NAFTA reflects a movement to equalize the tax burdens in the U.S. and Mexico. Both countries are parties to a Treaty Against Double Taxation. In effect, the taxpayer will pay taxes in both countries, but will also have offsetting tax credits. The net result is that the taxpayer usually pays an amount of taxes equivalent to the highest tax bracket among both countries.
In practice, the way this works is that when a non-Mexican sells real estate in Mexico, if he is not exempt, then he will pay the income tax stated above at the time of the sale. Then, next April 15 when he files his U.S. annual tax return, he will report the gain on the sale and claim a credit for taxes already paid in Mexico on the same sale.
Mr. Thompson is a San Diego Attorney who specializes in Mexican law and Mexican Real Estate. He has handled over 3,000 mexican transactions over the past 29 years of practice. He can be contacted at (619) 962-7344.