I have covered income taxes and strategies to reduce costs within the allowed guidelines in recent articles. We have a few options to minimize capital gains based on resident and tax status for foreigners with property in Mexico.
Honestly, this is a difficult subject for most foreigners to understand, even though much is the same here as in the USA and Canada. We can take for granted our systems and not always think through all it takes to understand another culture and their system.
We must also balance how we pay taxes here and what we can declare in our home country to avoid double taxation. The USA and Mexico have a treaty allowing credits to avoid double taxing their citizens. Mexico allows even tourist cardholders to buy properties in the country.
Tax deductions will only be allowed, with Mexican residency being more permanent. Capital gains tax when selling will be higher for foreigners on a tourist card. Notary strategies vary and have certain conditions, usually including proofs of some kind of residency for the seller.
Notaries charge for their tax strategy advice, and the cost is passed on to the seller. Residency requirements with fiscal residency allows foreigners to be eligible to apply for the deduction against their capital gains with the use of UDIs, which affect the currency exchange on the day of sale.
Currently, the Mexican tax allowance using UDIs per fiscal resident is a 5,800,000 peso deduction. Currency Evaluation is at the heart of the equity or profit a seller achieves in a sale.
What does this mean? All countries evaluate the taxes owed by residents and non-residents with real estate property ownership. The Mexican peso rate on the closing day will be recorded in the escritura when you purchase in US dollars or other currencies.
The sales price on the day of closing will also be required to be noted in Mexican pesos. The difference in basis when buying and selling is the difference between the sales price in Mexican pesos and the purchase price in Mexican pesos.
Whatever currency you are receiving in the sale will also be noted. If you bought your Mexican property in 2004 and the peso was 24 pesos to the US dollar, and you are selling tomorrow with the value of the US dollar is 17, you will have a loss. The seller, at this time, may not have to pay any ISR (tax).
This is unusual for our market. It is a consequence of the US dollar being weaker now than the Mexican peso. No Capital Gains Tax due is a good surprise!
This article is based upon legal opinions, current practices, and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review.
