By Harriet Murray ● Cochran Real Estate ● May 2014
Since last year, 2013, when the President of Mexico and Congress accomplished sweeping fiscal reform, we have had a change in determination of capital gains. A mainstay of the current policy is to collect taxes from a broader base, with fewer loopholes or policies for non-payment or exemptions.
The notaries in our area of Western Mexico met and in January, 2014 published guidelines and procedures to assure that the fiscal policies are being followed. The main issue is how Capital Gains Tax is handled upon the sale of a Mexican property.
It is first important is get our heads around the word, “fiscal.”Fiscal is related to government revenue, especially taxes through monetary and fiscal policy.
Mexico’s fiscal policy is to require a person selling his real estate (not land) tofurnish evidence that his fiscal residence is Mexico. If this is the case, he can be granted an exemption to be applied toward his tax obligation.
Your fiscal residence is where you pay taxes generated from income or the sale of a property, or other investments, stocks, and bonds. Where do you pay your tax first? This will be your fiscal residence. Many National and Foreigners live, work, and invest in Mexico and have no other place where they make money and pay taxes. Mexico is their fiscal residence.
If you own a home in Mexico and come for 6 months a year, but do not generate any income and pay taxes in Mexico from this activity (property tax or car tax do not apply), you are not a fiscal resident of Mexico.
At this time, if you own a home only in Mexico, retired and do not generate income or profit in Mexico – you are not registered in Hacienda and paying Mexican taxes – you are not a fiscal resident of Mexico.
The exemption which tax payers want badly is currently an amount of UDIS equal to between 250-270,000usd as a deduction from the sales price in US dollars. If two people whose fiscal residence is Mexico own a condo they are selling for $650,000usd, each one can use his exemption against the sales price and pay tax on the difference.
How did the notaries decide they would require proof of a seller having a fiscal residence in Mexico? The notaries decided this proof must be furnished by Hacienda or SAT, the equivalent in the USA to the IRS.
What does Hacienda require in order to issue a letter of Fiscal Residency? It wants to see an address of a business in Mexico tied to tax returns showing activity of filings and payments. In order to make tax payments, Hacienda has the information of what your business is, and proof that you are registered as a tax payer in the Mexican system.
Currently, the property you are living in and selling would be given the benefit of the exemption. The fiscal address is not where you live and is needed to meet the litmus test that you are a fiscal resident of Mexico. You may travel most of the year but your income and taxes are paid in Mexico, not in Spain, Ireland, and Canada. You may very well be paying taxes in your country of origin as well.
You may receive credit for your Mexican taxes against tax liabilities you may owe another country where you are a citizen. This credit depends on the other country’s fiscal policies, not Mexico’s.
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.