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Thursday, March 25, 2010

REAL ESTATE - Mexico Cracking Down on Capital Gains Tax

Mexico Cracking Down on Capital Gains Taxby Kevin Brass, International Property Journal

Changes in Mexico’s tax laws have made it more difficult for foreigners selling real estate to avoid the country’s steep capital gains tax, which can run as high as 30 percent.

Under the new rules, homeowners must prove the house has been their primary residence for at least five years to qualify for an exemption to the tax on the sale of property. In the past the residency requirement was typically one or two years, and, to put it tactfully, foreign sellers often could find a way to qualify for the exemption.

There is “absolutely” a new focus on enforcement in Mexico, says Linda Neil of the Settlement Company, a Baja California-based firm.

“Foreign buyers who buy for rental or for vacations should not expect to receive the residence exemption,” Neil said.

The residency exemption to the tax has been changed frequently in recent years, but the law has never been this strict, according to Raoul Rodriguez-Walters, managing director of Mexico Advisor, which has offices in Portland, Oregon, and San Miguel de Allende. (For the record, it’s not technically a capital gains tax, but simply a tax on the income from the sale.)

Some aspects of the law are still confusing and open to interpretation, Rodriguez-Walters says. For example, it’s unclear from the wording of the new law whether sales of less than $500,000 are exempt from the tax, as they have been in the past. (That confusion can be found in this recent article on the new tax.)

The issues are further complicated by a long-running debate about how the tax system classifies residents and non-residents, he says. In most cases a notario publico has tremendous leeway to determine residency status, and the interpretation and application of the law varies among notarios and jurisdictions.

“Some notarios are more comfortable granting exemptions to foreign nationals than others,” said Rodríguez-Walters. “It is important to find one that will provide an exemption if you feel you qualify.”

The easy residency exemption was particularly useful for developers and landlords, who could work the system to claim multiple properties, using evidence such as utility bills to verify residence. But a five-year benchmark sets a high standard.

“If you can’t prove you’ve been there for five years, it’s going to be practically impossible” to avoid the tax, Rodríguez-Walters said.

In some cases, the tax can be a shock to sellers. In the past, buyers were often encouraged to record a lower property value when they buy a house, only to face a large capital gains hit when they go to sell the property.

“This is the reason [buyers] should definitely insist upon declaring full value paid in their deed so that when they sell they will pay an income or capital gains tax on only the profit,” Neil said.

U.S. and Canadian residents can typically declare the tax they pay in Mexico on their home-country income taxes, easing some of the hit.

“Foreign buyers need to be sure they do it right, declare full value, pay taxes and get the proper documentation to prove to tax authorities in their home countries that they need a credit/deduction on their Mexican properties,” Neil said.


Kevin Brass, is the editor of International Property Journal. Through booms and busts, Kevin has chronicled the international property industry for the International Herald Tribune and New York Times. His popular International Herald Tribune blog, “Raising the Roof,” was named one of the Top 20 real estate blogs in the world by NuWire Investor. A frequent speaker at industry events, Kevin’s features and analysis have appeared in a wide variety of publications, including the Los Angeles Times, San Diego Tribune, San Diego Magazine and Hispanic Business. In 2008 GlobalEdge named Kevin one of the 100 most powerful property journalists in the world.

This article is reprinted with permission from Kevin Brass and the International Property Journal www.internationalpropertyjournal.com.