Purchasing property in Mexico, as in any other country of the world, is without a doubt the best and safest investment you can make. Here in Mexico, laws have been created to protect buyers allowing them to rest easy at night knowing that their money is safe and secure in real estate property.
Nevertheless, as with any venture, there are certain obligations to which investors must adhere. Most notably are the tax considerations which must be fulfilled by both Mexicans and foreigners alike.
Capital Gains tax, the tax which is derived whenever a person or company sells a property and realizes a profit, is an unavoidable and necessary burden. However, by properly applying applicable deductions, investors can reduce or eliminate their overall obligation. Additionally helping investors, this year, various tax reforms modifying the current Income Tax Laws were put into place. The following excerpts are from those reforms:
. Homestead/Residence Exemption
. New laws for its application
. Income Tax Law for 2007
Article 109.- Capital Gains tax will not be paid on the following income:
XV. Those stemming from the transfer of:
a).- The taxpayer s residence; whenever the total consideration obtained does not exceed one million five hundred thousand (1,500,000) units of investment and the transfer is formalized before a notary public attorney. The capital gains, in this case, will be considered income and the annual tax and provisional payments will also be calculated under the terms of Chapter IV of this Section, considering the proportional deductions that result by dividing by the amount of the consideration obtained. The calculation and the entire amount of the tax corresponding to the provisional payment will be made by the notary public attorney in accordance with the aforementioned Chapter.-
The anticipated exemption in this section will not apply to the second or subsequent transfers of residences carried out during the same calendar year.-
The limit established in the first paragraph of this section will not apply when the Petitioner demonstrates that he or she has resided in the residence for the five years immediately preceding the date of transfer, in the terms of the Law.-
The notary public attorney shall notify the fiscal authorities if the taxpayer has previously transferred a residence during the same calendar year and, if exemption is pending, he or she will notify the fiscal authorities.-
Note: During the next fiscal year, the residence exemption shall be subject to rules distinct from those that were applied previously. Therefore, so as not to incur further tax effects the following considerations must be in place:
a).- The maximum exemption is 1,500,00 UDIS2, which is equivalent to 5,739,055.50 (five million seven hundred thirty nin thousand fifty-five pesos and 50/100 M.N.).
The income tax will be calculated according to the capital gains.
By use of documents allowed by established Income Tax Laws, the above will not
apply to those taxpayers who can prove that they have resided in the property being transfered for the last five years.-
b).- Only one exemption may be applied per fiscal year. With the new regulations, the authority intends to avoid any question in regard to residence exemptions and expressly indicates that there may only be one exemption per fiscal year. The reason for this change is that, in the past, there have been various occasions when this exemption has been abused and various exemptions have been granted within the same fiscal year.-
c).- The notary shall notify the fiscal authority. This represents an entirely new provision of the law. Previously, the Authority relied expressly on the affirmation of the seller who proved residence by means of documents allowed by Income Tax Law Regulations. However, now, with the changes in this law and the allowance of only one exemption per year, it is therefore an additional requirement that the originator also obtain proof from the fiscal authority that only one exemption has thus far been granted this year.-
In consideration of the Petitioner s agreement under penalty of perjury, the modifications made to this law are intended to ascertain that this transaction is the first residence transfer carried out in the calendar year.
The Notary shall communicate to the Petitioner that he or she is to give Notice to the Tax Administration System of the transaction carried out.-
DOCUMENTS TO PROVE EXEMPTION
Income Tax Law for 2007
ARTICLE 130. For the purposes of the Article 109 Chapter XV, Section a) of the Law, taxpayers must prove to the notary public attorney carrying out the transaction, with any of the documents mentioned below, that said property in question is indeed the taxpayer s residence, and that the address of the property listed in the document is indeed the address of the property being transferred.
I. A voter registration card, issued by the Federal Election Institute.
II. Proof of payments made for electricity and permanent landline telephone services.
III. Account statements from financial institutions, commercial merchants/retailers or non-bank credit cards.
The documentation referred to in the previous section must be in the name of the taxpayer, the taxpayer s spouse, or his or her direct ancestors or descendants.
Note: The same documents that were used in 2006 can be used again, with the exception of receipts for payments made for natural gas services.
a).- A Voter Registration Card, issued by the Federal Election Institute.
b).- Receipts for electricity or permanent landline telephone services. Changes require that receipts must be for permanent landline telephone service. Receipts for electricity service are not accepted.
c).- Account statements from institutions which form part of the financial system, can be for checking accounts, debit or credit cards or account statements provided by commercial merchants/retailers as well as for credit card or banking statements.
All of the documentation mentioned must be in the name of the petitioner, his or her direct ancestors or descendants and the address of the property listed in the document must indeed be the address of the property being transfered. It is important to note that the law that was in force in 2006 excludes from this rule the voter registration cards issued by the IFE (Federal Election Institute) in the name of the Petitioner s ancestors or descendants, since the transfer would only be valid when completed in the name of the Petitioner.
In the case of tracts of land that were originally communal lands and were first transferred after the aforementioned modification to the law, they are exempt from the Capital Gains Tax as long as the property owner can demonstrate that he or she is indeed the original owner of the communal land. If not, the land will be subject to Income Tax.
Foreigners that make investments in this country also qualify for these Capital Gains Tax exemptions if they strictly follow Articles 109 and 130, mentioned above, as well as prove their legal residence in Mexico.
Finally, tax payments for the acquisition of real estate, for capital gains, for the possession of land, for the rights of register and any other rights related to or derived from the investment in or purchase or sale of real estate in Mexico, have all the guarantees and securities that this country offers to national and foreign investors and people that choose to either vacation or reside permanently on out beaches.
Lic. Francisco Ruiz Higuera
Notary Public Attorney No. 3
Puerto Vallarta, Jalisco.