By Harriet Murray ● Cochran Real Estate ● March 2014
The law for establishment of fiscal residency in Mexico has been recently clarified for foreigners and nationals. The law has not changed, but the interpretation of how to enforce it has.
The current procedures for applying for and receiving an exemption amount of approximately 250,000usd per person are for residential real estate declared as your primary residence. If you do not qualify for the exemption, and you have made permanent improvements to your property you can apply to have an appraisal by the city authorities and request this to be included in your tax value. This will mean you have been able to raise your basis in the property and you will pay for this appraisal, normally at closing if you are selling.
The tax rate is now 35% of the gain, after allowable deductions such as real estate commissions plus iva.
It is important to note that fiscal residence for tax purposes varies by country.
In Ireland, see the definition:
‘’By working in another Member State and by transferring your residence there, you are likely to become “resident for tax purposes” there. The definition of fiscal residence varies from one Member State to another. You must comply with the laws of the country where you have established your residence.’’
The question to concentrate on at this moment is: How do you establish your fiscal residence in Mexico?
The law says the notary has to decide if the applicant qualifies for fiscal residence and, therefore the exemption. In 2014, the notaries have been made more accountable for collecting taxes. So they did what a lot of people do in contemporary times: they pass the responsibility on to another entity. In this case, it is Hacienda or Mexican IRS who must furnish proof which the notary will use to establish the capital gains exemption.
Hacienda will set rules to establish if a person will receive a constancia:
Criteria for Qualification:
- Residente Temporal (working status) with monthly tax declarations; or
- Residente Permanente (working or non-working status)
- RFC required for either Temporal or Permanente and must be from a DIFFERENT address
- Obtain a constancia (official proof) of fiscal residence from Hacienda
- Original receipts of electric or water bill with the seal of payment on the bill or a payment ticket (not a receipt showing that the previous month has been paid)
The constancia must be an address other than the one where you live. You must show you have a business in a different location and you are registered and paying taxes on the income you are generating in Mexico.
What does this current procedure or interpretation of the law mean to retired persons who live here in their only home, have a permanent visa, and receive income such as social security or other retirement benefits from the US or Canada or wherever? They do not fit the description of having a fiscal residency here and they will not be given the exemption when they sell.
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review.