Mexican Tax Exeptions

by San Miguel MLS on October 1, 2024

In Mexico, capital gains tax (ISR – Impuesto Sobre la Renta) on real estate can apply when you sell a property, and the tax implications can vary based on several factors, including your residency status, the property’s use, and how long you’ve owned the property. Here’s a breakdown of the key factors that influence capital gains tax on real estate in Mexico:

1. Capital Gains Tax Rate

• The capital gains tax rate for real estate in Mexico can range from 15% to 35% of the net gain, depending on your income and tax situation.
• Non-residents typically pay a flat capital gains tax rate of 25% on the gross amount or 35% on the net gain, depending on how the sale is structured and whether deductions are applied.

2. Exemptions for Primary Residence

• If you are a Mexican resident (including foreign residents with temporary or permanent residency) and the property is your primary residence, you may qualify for an exemption from capital gains tax, under certain conditions:
  • You must have lived in the property for at least 3 years before the sale.
  • The exemption is available once every 3 years.
  • The maximum amount exempted from capital gains tax is approximately 700,000 UDIs, which is around $230,000 USD (based on the current exchange rate).
  • You need to prove residency through utility bills or an official identification card (INE).

3. Deductions and Adjustments

• If your property does not qualify for the full exemption, you can still deduct certain expenses to reduce the capital gains tax:
  • Acquisition costs: Including the original purchase price, notary fees, and title transfer costs.
  • Improvements and renovations: If they are properly documented and officially recognized.
  • Selling expenses: Including notary fees, real estate agent commissions, and legal fees related to the sale.
• The property’s original purchase price can also be adjusted for inflation, which can reduce the taxable capital gain.

4. Special Considerations for Foreigners

• Non-resident sellers may be subject to different rules and higher taxes, typically paying 25% of the gross sale amount or 35% on the net gain if the sale is structured through a notary who applies deductions.
• Foreigners can claim capital gains tax deductions and exemptions if they have legal residency in Mexico and meet other criteria related to the property’s use as a primary residence.

5. Appraised Value vs. Sale Price

• The tax calculation is based on the higher of the appraised value (as determined by the tax authorities) or the actual sale price. This can influence the amount of capital gains tax you owe.

6. Tax Payment and Compliance

• The Notary Public handling the sale is responsible for calculating and withholding capital gains tax from the seller at the time of the sale.
• The notary submits this tax to the Mexican tax authorities, ensuring compliance with local tax laws.

7. Capital Gains Tax for Corporations

• If the property is owned by a corporation, different tax rules apply. Corporations are subject to a flat 30% corporate income tax on the gain, without the option for individual exemptions or deductions.

8. Tax Residency

• To qualify for favorable tax treatment or exemptions, the seller must typically be a Mexican tax resident (i.e., someone with temporary or permanent residency who spends more than 183 days per year in Mexico or who has declared Mexico as their primary residence for tax purposes).

Conclusion:

When selling real estate in Mexico, capital gains tax is an important consideration, especially for non-residents or those with investment properties. Planning ahead, documenting all eligible deductions, and working with a qualified notary and tax advisor can help minimize the tax burden. Additionally, foreign sellers may want to consider obtaining temporary or permanent residency to take advantage of the tax exemptions available for primary residences.

Please confirm all information with a qualified tax advisor.