Information for Sellers If you own real estate, used for housing, (apartments, houses, etc.) and fulfill the few requirements the law establishes to apply for tax exemption, you will save thousands of dollars in Capital Gains taxes if and when you sell the property. "CAPITAL GAINS TAX" is part of the tax known as IMPUESTO SOBRE LA RENTA (ISR), which taxes individuals and corporations INCOME. The tax exemption benefit is given only to individuals who live in Mexico for more than 182 days a year, such as Non immigrants (Visitante no Inmigrante), Immigrants (Visitante Inmigrante), Permanent Residents (Inmigrados), and Mexican Citizens. A foreigner without at least a non immigrant status (FM3) will pay higher income taxes and/or not receive the tax exemptions given to Mexicans and foreigners who FULFILL THE FOLLOWING REQUIREMENTS: The law has been updated (the following info to avoid capital gains is no longer true as of January 2004 this law.) What is required now is a FM3 working visa It is the same as an FM3 residential visa only it is amplified to be an independent working visa such as an artist or photographer (or any work visa) will exempt you from capital gains. Also being of imigrante status or having an FM2 Visa. The other option which is necessary if you are selling a property to bring the value registered in Public Registry to the actual value (Which is to re evaluate the property and bring it up to the sales price) by (this is done with an architect) registering the actual value or market value in the public registry and receiving a document called “manifestacion de construccion” this document when submitted in a closing of the sale of your property will eliminate the capital gain if the value in the document and the sales value are the same, This is an easy process and necessary in most sales as most foreign owned property registered value is way below the actual sales value This is done during “escrow” and is very inexpensive compared to paying capital gains the fees to do this can vary an architect will charge a fee for the paperwork involved and the licenses and permits with public works Costs are from 1500 US to 3500 US depending on the value you are registering. This is not true for bare land this only applies to properties with construction and improvements. These are the laws before Jan 2004 to eliminate capital gains. It is better and you have an obligation to the buyer to bring your property up to actual value in public registry so whether you have an FM3 or are a tourist status this will save you greatly on capital gains when selling your property) Have a telephone line or bank account, for at least 2 years previous to the side. Own the property for at least 2 years previous to the closing date. (This is proven with the telephone bills and/or bank statements) Have an FM3 visa (Non Immigrant) or better migratory status that proves that you have lived in the country of Mexico for more than 182 days a year, for 2 years previous to the sale. Your FM3 visa will have an entrance and exit page, which Immigration will stamp every time you enter and leave the country. You should be able to keep a record of the number of days you stayed in Mexico. If you do not have a telephone or bank account, you can also use electricity or gas receipts. All documents should show the address of the property and must be in your, your spouse, parents or children's name. Your stay in Mexico does not have to be consecutive. You can leave and come back as long as you stay more than l82 days in one year. The General Population Act establishes the requirements that must be met by Foreigners who wish to obtain any of the migratory statuses described by the Act (Tourist, FM3, FM2, permanent resident, citizen, etc). If you fulfill the above requirements, you WILL BE EXEMPTED FROM PAYING CAPITAL GAINS TAXES WHEN SELLING YOUR REAL ESTATE. Other acts that exempt one from paying the tax are: Donations to your spouse, parents or children. Inheritance* (It is important that you name death beneficiaries and that their names are included in the deed). Selling, for the first time, regularized land (ejido land that has been deeded). Bona Mobilia* Personal property that is not real estate. (Restrictions apply). WHO PAYS CAPITAL GAINS TAXES? If you are one of those owners who, every time they come to Mexico, do so on a tourist VISA, it will be hard to qualify for tax exemption, since a tourist card allows you to stay in the country for periods of only 180 days at a time. Besides, airport immigration will request that you return the Tourist card to them when you leave Mexico, which will leave you with no record of status of residency in the Country. Tourists, who have purchased real estate and wish to sell it, will have three options when paying their Income tax (capital gains tax). First Option: 20% of the total sales price. Example: if you are selling the property for 100.000.00 USD, you, as the SELLER will have to pay $20,000.00 USD in taxes. Second Option: Mexican law provides that foreigners can opt to pay 40% on the amount that represents the difference between the purchase price and the selling price. Example, if you purchased your home for $100,000.00 USD and sell it for 120,000.00 USD, then, you will pay 40% of $20,000.00 USD or $8,000.00 USD. The second option is generally better if you have owned the property for a number of years. The original purchase price shown in your deed is updated (inflation, value growth, etc) and is used as the actual purchase price. The third option is to re evaluate the property and bring it up to the sales price by registering the actual value or market value in the public registry and receiving a document called “manifestacion de construccion” this document when submitted in a closing of the sale of your property will eliminate the capital gain if the value in the document and the sales value are the same, This is an easy process and necessary in most sales as most foreign owned property registered value is way below the actual sales value This is done during "escrow" and is very inexpensive compared to paying capital gains. If you know, based on the information you have read so far that you do not qualify for tax exemption, request that your attorney or real estate agent help you figure out which option is best for you. Your attorney should obtain an estimated tax to pay before you decide to list your property for sale. At closing, the notary issuing the deed will also calculate and collect all applicable taxes, including: transfer tax, property registration tax and capital gains tax. I hope that this article is as clear as possible. Of course each case should be analyzed individually. A real estate attorney or professional real estate agent will help you find the best legal way to help you save on taxes. A few hundred dollars investment now could mean thousands of dollars savings in a future transaction. Disclaimer: All information deemed reliable but not guaranteed and should be independently verified. All properties are subject to prior sale, change or withdrawal. Sidne Byars Herrero shall not be responsible for any typographical errors, misinformation, misprints and shall be held totally harmless. All pages and images copyright © 1996-2005 Sidne Byars Herrero