Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the same way it is determined in the United States. Here, the gain from the sale of property is treated as normal income at a tax rate of up to 35%. To determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:
- The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes;
- Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above;
- Commissions paid to real estate brokers by the seller;
- The closing costs, including all expenses, taxes and fees paid by the seller.
The Notary will retain the calculated gain after deductions, forwarding it to the Mexican tax authorities. The seller will then deduct this amount against his annual tax return, which becomes an adjustable tax credit in the U.S.A.
On the other hand, there is no capital gains tax in Mexico if there is conclusive proof the seller has used the property as his primary residence.
Explanation of Closing Costs
The closing procedure generally takes from 30 to 45 days and these costs are paid by the buyer.
Note: All amounts are in US Dollars, with an exchange rate of $10.50 pesos per dollar.
When a property is acquired through a Purchase-Offer or when a Trust Transfer Domain is carried out before a Notary Public, in order for them to be legally constituted they must meet with a series of permits and expenses, which are described as follows:
1. TRUSTEE FEES: These are charged on a yearly basis and are paid upfront. They may vary according to the transaction and considering the property and the trustee; nonetheless most of them charge $450. in properties priced under $700,000.00. For properties priced up to $l,500,000 they charge $600. and over $1,500,001.00 they charge $1,000.
In Addition to this all the Trustees collect the same fee for the Trust Acceptance, which is charged only once.
2. FOREIGN AFFAIRS PERMIT (SRE): This is a permit that the Notary Public or the Trustee process through their agents and they may cost $1,100. as a maximum fee; this may be in proportion to the agents fees, since the permit fee from the Foreign Relations Office does not vary.
3. NATIONAL FOREIGN INVESTMENTS REGISTRATION (RNIE): – The Trustee has the obligation to process the registration of the Deed within a 30 day period after the granting and the cost per fees and rights may vary from $285 to $330 according to the Trustee.
4. NOTARY PUBLIC FEES: These are regulated by a fee list authorized by the Notary Law valid in every State. In the State of Jalisco the fee list is as follows:
From $1,000 up to $9,523 = 2% From$9,524 up to $1,9047 = 1.15%
From $19,048 up to $47,619 = .85% From $47,619 up to$71,428=.65%
from $71,429 up to $95,238 = .50% From $95,239 up to $476,190 =.25% from $476,191 and over =.20%.
(Note: The fees can be for a lesser amount but never for an amount over this fee list.)
5. PROPERTY ACQUISITION TAX: – This is a State Tax. The notary Public is responsible to charge and declare it without surcharges. In the case of the State of Nayarit this takes place within a 30 day period after the granting of the Deed. It is 2% based on the highest value of the previously authorized construction appraisal.
In the case of the State of Jalisco it takes 60 days. This tax is charged based on the construction appraisal value using different percentages and fixed amounts. It is important to mention that in order to calculate this tax you must apply a special procedure and the real closing costs cannot be determined on
your own, a notary must determine these costs.
6. APPRAISAL AND DIVISION: Your cost is calculated as follows:
on values up to:
$250,000 = 3%
$250,001 – $500,000 = 2%
$500,001 – and up = 1%
(Note: These percentages may vary according to the appraiser’s criteria.).
7. PUBLIC REGISTRY RIGHTS: – This permit can be processed through the notary. Once the corresponding rights are paid, the notary will be able to process the registration in the Local Public Registration Office where the property is located. The costs vary as stated by the valid law in every State.
The State of Nayarit charges 0.9% base don the transaction value. This amount cannot exceed $6,952.
In the State of Jalisco a $190 fee is charged per property.
8. NO LIENS CERTIFICATE:
NO LIENS ON PROPERTY TAX, NO LIENS ON WATER OR MAINTENANCE FEES
The notary has the obligation to check that the subject property has no lien. The notary will gather the certificates from the corresponding Government offices and from the Condominium administration. This charge is normally not more than $60
9. OTHER CHARGES: This depends on the notary and these can be: Travel expenses when there is need to sign documents. Copies and other administrative costs. This is usually not more than $767
10.TITLE INSURANCE: – This varies according to the value of the transaction and the Insurance company but it should not exceed 0.5% – 0.7%
11. ESCROW ACCOUNT: – In order to manage the funds for the purchase of a property it is recommended to open an ESCROW. The fees are $500 as opening costs.
It is important to mention that all the aforementioned expenses are mandatory and they must be made. In the case of a Trust Transfer Domain for a Purchase-Offer you can omit steps 1, 2 and 3.
With this information our clients can determine the real closing costs. Nevertheless, it is very important to visit your notary for assistance or if this is not possible then you should go to a Real Estate Agency which has qualified personnel to supervise your closing.
All of this information about closing costs it is necessary to have an idea of what your closing costs may be and according to my expertise in this field, I prepared a chart which can help determine the approximate costs very fast.
(ONLY WHEN CONSTITUTING A TRUST)
Up to $20,000 17%
From $20,000 to $50,000 10% to 15%
From $50000 to $100,000 7% to 10%
From $100,000 to $150,000 6%
From $150,000 to $250,000 5%
From $ 250,000 to $450,000 4%
From $450,000 to $1500,000 3.5%
$1500,000 and over 2.5% al 3%
The real estate industry in Mexico is similar in many ways to that of the United States , which is probably the most advanced in the world. It is developing quickly, taking advantage of today’s technology; however, it seems to be paralleling the system as it exists in the U.S.A.
The only national professional real estate organization in Mexico is the “Associación Mexicana de Profesionales Inmobiliarios” (Mexican Association of Real Estate Professionals) or “A.M.P.I.” with 24 chapters in 38 cities. This organization is somewhat similar to the National Association of Realtors (NAR) in the United States.
Licensing – At this time, there are no government license laws regulating real estate brokerage and sales in Mexico. Anybody can, in effect, offer properties for sale. Therefore, caution should be taken to select an established and reputable real estate company. A potential buyer may want to check with the local Chamber of Commerce associations or a prominent law firm.
Financing – Historically, due to lack of capital markets and high Mexican interest rates, most transactions were made in cash. In 1993 and 1994, the Mexican economy picked up to such an extent that annual inflation went down to one digit and interest rates were more or less accessible.
Banks introduced attractive mortgage programs and, consequently, sales proliferated throughout Mexico . Due to the devaluation in December 1994, the situation has reverted and the few banks that offer mortgages do so at such high variable interest rates that very few buyers are in a position to take advantage of them.
However, this is changing. Recently Scotiabank Inverlat introduced long-term mortgages at rates between 15-17%. These mortgages, however, are only available to foreigners with FM-2 immigration status. With the demand of lending in Mexico there are more mortgage brokers opening up offices. The criteria are very strict and at the moment are only offered to American citizens. The interest rates average around 8%. The only programs available at this time is for purchases, in the future we may see programs for those interested in refinancing there current properties located in Mexico.