New Capital Gain Tax regulations In Mexico
Posted by Roxanna McDade on Mon, Feb 01, 2010 @ 03:37 PM
The Capital Gain Tax “ISR” (Impuesto Sobre la Renta), in general terms applies to income, not necessarily gain. Nevertheless, in real estate transactions, usually is applied to profit and in some cases to gross income. Both Mexican Nationals and non-Mexicans are subject to this tax. For non-residents, the law has provided the 25% from gross income (with no right for deductions) or 29% from profit (with right to deductions). For residents in Mexico, the highest rate for this year is 30%, from the gain.
Now, what tax benefits can a resident in Mexico file? On one hand, we have tax deductions; on the other hand, tax exemptions might be applicable. In order to have deductions there are several conditions according to law might be used to reduce the tax base and pay lower taxes. Tax deductions are another subject altogether so for now, we will address the capital gains tax exemption only.
With respect to the capital gains tax exemption, last year, the ISR (capital gains tax) law provided that any legal resident in Mexico (including foreigners under certain conditions) could exempt capital gain tax respecting the sale of their residential property, by providing certain utility bills showing residence for at least 6 months; Before that, there was a 2 year residency requirement. Now in 2010, in order to exempt capital gain tax, still have to be the residential property under the name of Seller, and the new requirement of five years residency applies in order to be exempt from the capital gains tax.
Last year, Sellers could exempt capital gain on the sale of their homes, as long as the transaction amount did not exceed $500,000 USD (1.5 million UDIS, investment units) which is an amount result from applying a certain formula of calculation that the law provides {investment units} that the Mexican government uses to measure the value of Mexican currency according to the national index and that every day have small variations. For the exceeding amount, capital gains had to be paid. Among other requirements, Seller (non-Mexican) had to prove residency for 6 months at least, and have in place the corresponding FM3. However, last year, it did not matter the amount of the transaction as long as seller could prove residency for 5 years.
Now, for 2010, the only way to exempt capital gain tax in a sale of your residential home is to prove with the appropriate documents residency for 5 years, and only allowed once for a period of 5 years. Among other things, now Notarios and Hacienda will review more in detail the immigration aspect of the seller. In other words, a tourist visa or even an FM3 with a category different than residential purposes, will not suffice for this purpose. Therefore, before someone engages in a real estate transaction, make sure to meet all requirements, or otherwise, seller might pay capital gains tax.
Now, the amended law provides that if the transaction amount exceeds from $500, 000 USD (1.5 million UDIS), the profit will be determined and the tax will be calculated. As long as seller did not sell any other residential home within the past 5 years, and it must declare before the Notario such fact. However, this law change is contradictory since the same section provides that there is no limit on the transaction amount, as long as the seller probes residency for 5 years, under the abovementioned requirements. Bottom line, until notaries unify the criteria and Hacienda clarifies this aspect, it is clear about the requirement of the five year legal residency, in order to have the benefit of the exemption.
Notarios shall consult the site of Hacienda (Mexican IRS) to see if the Seller has sold a property within the past 5 years. It will also, inform Hacienda about the amount of the transaction and if it is applicable, the corresponding tax payment.
Capital gains taxes are paid to federal government but are usually collected by Notarios whom at the close of escrow receive the corresponding money from Seller and pays the Federal Government during the recording process. Although the Law is the same for everyone and has a general application, minor rulings can vary from one Notario to another Notario, but all parties in a transaction, (Attorneys and Notarios) have to follow the same law. Now, this benefit of capital gains tax exemption is limited to one sale every five years under same conditions.
If the exemption does not apply in certain transactions, deductions might be applicable. People should be well advised in order to get the maximum benefits of the law, as long as every situation meets the legal requirements.
This article was written by Eduardo Rosales, Real Estate Attorney at Law, with 12 years of experience in Baja Civil Law and Real Estate Transactions coordination. President of “E4” Escrow-Closing, Estate Planning & Escrituras Experts. For legal questions or consultation please call (661) 100 25 72 or send an email to rosalesandassociates@hotmail.com.
Article from Baja Times