Property taxes in Mexico must be clearly understood before buying or selling real estate in Los Cabos. It is crucial for you to have a good grasp of the laws before buying and selling real estate to avoid errors and incorrect decisions. The best route to take is to meet a broker, lawyer, and the bookkeeper to ensure everything on the process runs smoothly. Keep on reading to discover some basic knowledge about the property taxes in Mexico.
What is Transfer Tax?
One of the common property taxes in Mexico is the Transfer tax. This is the tax you have to pay when buying real estate in Los Cabos. It is a 2% acquisition tax that the buyer pays when the property changes hands.
Why should I pay the Transfer Tax?
If you pay the 2% acquisition tax in getting your property trust, you will be eligible in obtaining an inflationary credit every year. It will be from the Mexican government. The additional credit is promptly added to your cost basis when you sell your house. The credit is related to consumer index adjustment.
In the past, when inflation was higher, credits in excess of fifteen percent has been possible. The percentage is applied to a cost basis for property acquisitions. Let’s say you have a million-dollar property. If you get the 15% applied, a huge amount of $150,000 can be added to your cost basis every year. This only means that if ever you decide to sell your property in the future, the capital gains tax will also reduce in significant amounts because your cost basis gets higher and higher.
How much are Capital Gains Taxes in Mexico?
Capital gains taxes in Mexico are taken from the profit you receive from selling a property or home. When you sell a property, you owe the government with the capital gains tax. According to the law, you have two options to choose from in order to pay this property tax.
- You can pay 25% of the gross sales amount with no deductions. Gross sales amount refers to the declared value of the transaction.
- You can pay 35% of the net value with multiple deductions included. Net value refers to the difference between the assessed values at the time you bought the property and the value when you sell it. Important matters should be taken into consideration when calculating these multiple deductions:
- The time the property was held
- Improvements made
- Commissions paid
- Other allowable expenses.
We strongly suggest you get an accountant or a notary public to calculate the value in both ways and take the one where you can pay lower capital gains tax. Whichever option you choose, Mexico offers procedures and laws that will help you optimize the cost.
How important is it to record real purchase price value?
Never indicate a property value lower than what you really paid for to get away with obligations in paying the correct property taxes in Mexico. It will help you save a few bucks for now but not really in the future. There have been numerous mistakes in the past that cost people more money. We want to help you avoid those errors too so we will go through them now. Before, there were Real Estate companies who encourage indicating a lower purchase price value on Trust documents to help their clients lessen the tax. People were under the wrong impression that a lesser price recorded on the trust will help clients save money on the 2% acquisition tax. Yes, in a way, they saved money. However, you will see the point of indicating the correct value once you decide to sell the property in the future.
Capital gains taxes are calculated by subtracting the value you have recorded on the trust from the sale price of the property. If you have indicated a lower value of the property upon initial purchase, you will have to pay more capital gains tax, which is probably more than the money you save from the 2% acquisition tax. This is why it is important to record, check, and DOUBLE check if the purchase price indicated on your trust document is the exact and correct amount you paid.
How will I know if my value is accurately recorded?
A great broker will be in charge of facilitating and creating the completion of your trust. He will also be in charge of reviewing all documents to ensure everything is accurate and correct. Once the document is presented to you, you can also double check all the documents and ask questions if needed. When checking your documents, be sure to pay close attention to the amount written in text. The trust document will indicate the amount in Mexican peso or US dollars. The document should also contain the current exchange rate. If there is none indicated, you can check for the rates online or the bank and ask the notary to write it on the trust document. Ideally, you will get a certified translation of your Spanish trust.
Should I be concerned about the primary residence capital gains exclusion?
Mexico provides residents to a capital gains tax incentive for their main residence. According to the law, you are not required to pay capital gains tax if the property you are selling is your primary residence. This means you have to obtain a residency status in Mexico to tale advantage of this incentive.
There are a few requirements for you to establish a residency status in Mexico. First, you must prove that the property was your primary residence for five years. You must provide documents under your name that proves your five-year residence: proof of a bank account, utility statements, and trust information. You will also be asked to provide a working permit (FM2) or a residence visa. In some cases, the tax ID is needed.
Please bear in mind that these are simple guidelines of the requirements. You must talk to your local Notary before closing to ensure you are eligible for the exemption. [In some parts of Mexico, the public notary exempts foreigners with either Residente Temporal and Residente Permanente. In other parts, only foreigns with Residente Permanente residency is exempted.]
Here are some important bits of information to bear in mind when it comes to property taxes in Mexico:
- You are not allowed to have two primary residences. If you want to take advantage of the capital gains exclusion in the future, you must give up your US or Canada residency status before you claim your home in Mexico as your primary residence.
- Capital gains tax exemption is a law for residents of Mexico. You must have a residency. It is not for property owners who only use their property as a second home on vacations.
- The purchase price of the property has no direct impact on your annual property tax.
- You can attach the Capital Gains tax you paid in Mexico to your US or Canada taxes.
- Pay the correct taxes, declare the right property value, and enjoy long-term benefits in the future.
Just like in Canada and the United States, there are no shortcuts or legal ways around paying taxes; paying property taxes in Mexico is no different. Having safety measures will allow you to protect your home, property, and investments. Simply follow the law and have the best advisors, be it a lawyer, a bookkeeper, and the broker! If you need more advice on buying real estate in Los Cabos, you may call us at +011 521 (624)164 2607. Are you ready to find your next home?