Whether you are a Mexican national, a Mexican resident or a foreigner, if you sell your property in Mexico, you may be required to pay capital gains tax. There are ways to reduce or claim a capital gains exemption. Before finalizing the sale of your property, you should seek advice from an accountant in Mexico. Assessing capital gains tax in Mexico can be complicated and change over the years.
Deductions vs. no deductions
The capital gains tax rate varies widely and should be reviewed by an accountant to ensure you are getting the biggest deduction possible. For example, without any deduction, the tax can be obtained at 25% of the gross sales price of the property. Or, it could range from 1.92% to 35% of profit.
Pesos, not dollars!
All real estate transactions are recorded in Mexican Pesos, whether you negotiated the purchase price and paid for your property in USD or CAD. You must take official exchange rates into account when calculating a capital gain. Let's say you bought your property on January 1, 2010 for $100,000 and sold it on January 1, 2023 for $100,000. In USD, there seems to be no gain. However, you must use the exchange rate provided daily by the "Diario Oficial de la Federación" to convert buying and selling prices to MXN.
Exchange rate 01/01/2010: $13.0437 x $100,000 US = $1,304,370 MXN
Exchange rate 01/01/2023: $19.3615 x $100,000 US = $1,936,150 MXN
Capital gain = $631,780 MXN or $32,630.73 US
Mexican resident vs. non-resident
There are significant advantages to having permanent or temporary residency in Mexico when it comes to reducing or being exempt from capital gains tax. A non-resident without an RFC (Mexican Tax Identification Number) or CURP will be liable for a 35% capital gains tax. As a property owner, you should consider obtaining Mexican residency to reduce or even eliminate your tax liability if you decide to sell your property.
As a foreigner residing in Mexico, you receive the same consideration and benefits as a Mexican national, which means you may be eligible for a full capital gains exemption. If you are able to prove that you are selling your main residence and that you have resided there for at least three years, you can benefit from the capital gains exemption. Additionally, you must have an RFC and CURP.
As a Mexican resident, if you do not meet the above criteria for a full capital gains exemption, you can still reduce your tax liability by taking deductions on improvements made to the property. You will need to provide all official invoices (facturas) for property improvements and other related expenses such as brokerage fees, legal fees and taxes paid. If you do not have an official invoice issued by the service provider and registered with the SAT, improvements and costs will not be eligible for deduction.
Additionally, if you co-own with your spouse, you and your spouse can claim the property as your primary residence and both can claim the deduction for additional capital gains reduction.
The role of notaries
Notaries are responsible and liable for the calculation and collection of tax on residential transactions. Notaries can also interpret and apply tax laws differently. It is important to understand how the notary considers, for example, the eligibility of deductions or the residence status of the seller.
Commercial property sales tax are not handled by notaries and business owners should consult an accountant to assess tax deductions and obligations.
How a Mexican Tax Professional Can Help You
Navigating the intricacies of capital gains tax in Mexico is best handled by a professional. Tax experts can review all deduction and exemption requirements to ensure you qualify and provide expert advice on what to do if you do not qualify for an exemption or a reduction.