Selling Property as a Foreigner

Are you considering selling your property in Mexico but don’t know where to begin? Vista Properties is here to help. Please talk to us first.  We can guide you through the process of how to sell a house in Mexico so that your experience is easy and positive. Selling your property in Mexico is similar to selling your property in your own country. There are, however, some slight but important differences that can impact the sale of your home. Before you start to think about selling, please consider the following:

Capital Gains Tax

A foreigner who sells property in Mexico is liable under special rules, much like the U.S. and Canada, for the payment of I.S.R. tax (Impuesto Sobre de la Renta) which is the Mexican equivalent of the Capital Gains tax.  Liability is 35% of the profit from the transaction less the improvements made, commissions paid and other allowable expenses. The formula is complicated and the tax should be figured and confirmed by the Notary Public who will be preparing the final deed and tax declarations. Although a 35 percent capital gains may seem high, there are some means that will assist you in maximizing your cost basis, thereby reducing your net profit and lowering your capital gains.

Manifesting (Manifestacion)

Manifesting is simply recording the amount of money spent on a house’s construction or remodel, in order to add to the owners’ cost basis. Increasing your cost basis is the key to reducing your capital gains tax. Proper documentation and manifestation of your construction is vital to building and selling your  home. When you sell your home, the manifested cost plus the original cost of your property stated in your trust (title), will be used to determine the basis for capital gains tax. Receipts, cancelled checks and bank statements will not help, actual facturas (an invoice to the property owners which is registered with the Mexican government) for building and improvements are necessary. If you have not manifested any new construction that was done on your property, you cannot sell until this is done.

Exempt Taxpayer

Another way of lessening or eliminating capital gains is if you are an exempt taxpayer. First of all, you have to have lived in your home for three years. You would need to possess an RFC number, which is a taxpayer identification number. In addition, you would need to show income for a least one year by producing a Mexican tax return. It is also important that your taxes, fideicomiso yearly payment, utilities, and property management fees are paid and up to date. If not, this will slow the selling process.

• Typical Closing costs for the seller include:
• Capital Gains: varies 0 to 35%
• Commissions: varies 6-10%  + 16% IVA
• Manifestacion de obra (If needed): $4000-$6000 usd
• Termination of trust (if needed) up to $2500 usd depending on the bank holding the trust document
• Power of Attorney, if needed: up to $250 usd

Understanding the details of selling property in Mexico can save you thousands of dollars. The team at Vista Properties is experienced and can help you transform your concerns into peace of mind. 

Hey! What’s all this fuss about capital gains?  Isn’t that when I sell for more money than I bought for?

Yes, that’s exactly what it is, and it applies in Mexico, just like in other countries.  Profits on the sale of your home are considered income earned, and the government wants its share…35% of it!  There are some factors that have come together in recent years that have made this an issue for folks that bought at the top of the market…pre-2008 and through 2013. 

Many homes purchased more than 4 or 5 years ago were declared on the title document at a lower value than was actually paid.  This was mostly to save the original owner from paying capital gains, but also to save the buyer some of the transfer taxes and keep yearly property taxes low.  The theory was that, when the new owners wanted to sell at some point in the future, they would also declare a lower value for the sale.  But times have changed.   Now it is a requirement to state the actual selling price, and present-day sellers are stuck with capital gains taxes charged on the original value declared vs the current selling price.

(If you want to know the declared amount of the purchase of your property, find the clause called “Contraprestacion” in your fideicomiso or escritura.  You’ll see the value, usually in USD, followed by the exchange rate and the amount in pesos.  It’s important to note that the capital gains are calculated on the peso amount…even though you may have paid in US dollars.)

Another factor which has really affected sellers is the huge change in the peso to US dollar exchange.  If you bought your house for $100,000 US when the peso was 10 to the dollar, and sold it for $100,000 US at 18 to the dollar, you will show a profit of 800,000 pesos, minus allowable deductions. 

But don’t despair!  There are ways and means to legally minimize the effects of the changes that occurred with the law and the market in the last few years.

If you bought a lot and subsequently built a house, make sure that you always get facturas (official registered proof of payment) or declare the building costs at city hall of the actual value of the construction.  This will provide proof of the value of the improvements you made to the property.  If you have already built, and didn’t do this, you can have the value increased.

There are many ways to mitigate capital gains taxes through different deductions and exemptions.  We recommend using a knowledgeable real estate agent  (ahem!) and an experienced closing attorney.   The team at Vista Properties can help make the sale of your home go smoothly. 

To summarize:

• Always put the full purchase price on your title document.
• Ensure that any improvements you make to your property are properly documented.
• Sell with an experienced and knowledgeable closing team who know how to minimize taxes.

The Vista Team can help!