Los Cabos Real Estate, buying one is a process, already owning one is still a process. It requires knowledge to ensure you always abide the law and do things correctly. On this article, we will dig deeper into the processes involved when you already purchased a real estate property and you want to tweak things up by constructing and building.
What is manifesting construction?
Manifesting refers to the action of recording the sum of money used in the construction, renovation, or remodeling of a property. There is a need to manifest the construction of your property to ensure it is added to your property’s cost basis. Manifesting construction is also a great way to reduce capital gains tax. When manifesting construction for your Los Cabos Real Estate, it is vital to put everything in documents. Proper documentation will ensure that your construction costs are recognized.
Why is there a need to manifest my construction?
Manifesting the construction of your Los Cabos Real Estate will be most beneficial to you in the future when you decide to sell your property. If you will correctly add manifested costs to the cost basis of your property, the capital gains tax will also significantly reduce when you sell it. Both the manifested cost and the property cost indicated on your trust are added together to form the net value. Then, the net value and the current sale price of your real estate property become the basis for the capital gains tax. The net value is subtracted to the sale price to get the profit. From that amount, the tax percentage is obtained.
If you have missed or disregarded manifesting your construction, the Mexican tax law will not recognize your construction costs at all. You will not be able to use the manifested cost as a deductible expense for your capital gains tax. Even if you have compiled all of your construction related receipts, checks, and bank statements, none of these documents will be useful if you have not completed manifesting your constructions.
How do I manifest the construction of my Los Cabos Real Estate?
Before you start your property construction, you must decide first on how to structure your financial arrangements with your contractor. Your two main options are Cost Plus and Fixed Bid. If you use Fixed Bid, make it clear with the contractor that you want a factura with no 11% sales tax added to each payment. If the contractor agrees, ensure that it is in writing in your construction contract. Once the financial arrangement is decided, you can start the with the process of pulling your building permit. Getting the building permit is the first step in manifesting your property correctly. Then, closely record all expenses. When the construction is complete, you must follow steps in declaring termination of work. We’ll go into more details in the next questions on how each step is carried out.
How can I pull a Building Permit?
In order to begin and finish any construction, you will need a building permit. The permit is obtained from the Departamento de Obras Publicas or Department of Public Works. Obtaining the building permit is one of the important tasks of your contractor. However, you should be responsible for checking and ensuring all information are correct: Below are the information you must be watchful about.
- Beneficiary name/s on the permit must be the same name/s indicated on your trust.
- Based on how much you and your contractor agrees upon, the approximate amount they say your construction would cost must correctly reflect on the permit.
The fee for the permit is obtained based on the estimated value of your construction. This is why it is important that the value is correct. Do not allow your contractor to indicate a reduced amount on the permit. It’s just not economical in the long run. Again, capital gains taxes become an issue in the future.
What do I do after the construction is finished?
Hurray, the construction is complete! The next step for you is to complete the manifestation of your construction. You must take your building permit back to the Departamento de Obras Publicas. You also have to bring a letter. Either you or your contractor can write this letter. The letter should state the total amount you spent on your Los Cabos Real Estate construction. You must also indicate that the construction is complete. The letter is intended to request for an official statement of completion which they call “Aviso de Termination de Obra” or “Letter of Termination of Works”. After your request for the letter, there a few more things you must do.
What happens if taxes are not paid correctly?
You must ensure that all taxes are paid correctly, most especially the Social Security taxes. If you do not pay them properly, it can become a huge problem in the future. Your property can be sold to force payment if taxes are not paid correctly. Before you get the Letter of Termination of Works, you should receive the Social Security letter first. The letter is called “Carta de Razonabilidad de Pago” which can be translated to “Letter of Reasonability of Payment”. If the amount you pay for Social Security taxes corresponds to the amount of your construction, there should be no problem. Once you get it, keep it safe as it will be a proof that you followed the processes correctly. It will also serve as your protection from future claims of Social Security tax non-payment.
How do I complete manifesting my construction?
Once you have both the Letter of Reasonability of Payment and Letter of Termination of Works, take them to Oficina de Catastro or tax office. The letter will serve as the document establishing the construction cost basis in the tax office. The manifested value will be recorded and added to the cost basis, as reflected in your trust document. Congratulations! You have made it to the last step in manifesting your Los Cabos Real Estate. You have completed manifesting your construction and established an accurate tax basis for your property!
Here are some important bits of information to bear in mind during the process:
- Never begin a construction without a trust. Trust documents are needed to obtain a building permit, to begin with.
- Like what we always say, never indicate incorrect values to get away with taxes. Annual property taxes in Mexico are low while capital gains taxes aren’t. Better pay the correct amount now or suffer later.
- Always manifest your constructions!
These are just some of the things you should know about buying real estate in Los Cabos. Every process is unique. They can vary on a case-to-case- basis. If you need more advice about Los Cabos Real Estate, you may call us at +1-310-860-6063 for US or at +52 1 624 688 6841 for Mexico. Are you ready to find your next home?