Foreigners Must Pay Capital Gains Taxes When Selling Property
By: Agustin Galindo, Attorney at Law*
Capital gain on real estate transfers is currently regulated in Mexico by the Income Tax Law and its Regulations and provides for a tax rate for income taxes of up to 35% over the gain, minus deductibles.
The Tax Law and its Regulations also provide for an option to calculate the taxation on a 25% basis over the price of the deal, which is not really an option.
A tax exemption at the time of transferring a dwelling home is provided by the Tax Law in its article 93 fraction XIX, which considers the transfer of a dwelling home an exempted income, whenever the following conditions are met:
- That the property is the dwelling home and this is proved by documents such as a Voting card (IFE, currently, INE card), telephone and electric bills, and bank statements.
- That the contributor has not sold another dwelling home in three consecutive years.
- The exemption has a ceiling of 700,000 UDIS (Investment Units), which are updated every day.
The exceeding of this limit is taxed over the gain, and deductions can be applied proportionally by dividing the exceeding by the price obtained.
This tax exemption is applicable only to tax residents in Mexico. If you are a foreigner, you are entitled to this benefit as a “Tax Resident”, with the understanding that tax authorities grant some benefits through certain tax criteria (Miscelanea Fiscal) that allow foreigners to be tax exempted when they met the status of “Tax Residents”.
To achieve such status, you have to show proof of the following:
- That you are registered before the tax authority and have a tax id number (in Mexico, called the registro federal de contribuyentes, R.F.C. for its acronyms in Spanish).
- That you have filed your last tax annual report and you are currently filing taxes in Mexico.
- That the property that you are transferring is different from your tax address in Mexico.
If you fulfill these requirements, then the authority may issue a statement as a “Tax Resident” so you can provide it to the Notary Public who will formalize the transfer of your property, allowing you to enjoy the tax exemption.
Please do not get confused with your immigration status, either temporary or permanent resident. In order to become a “Tax Resident” you need to show proof that you are legally in Mexico, but bear in mind that these are two different matters; what counts here is to show that you are a “Tax Resident” in order to become tax exempted.
If you are selling your dwelling home in Mexico, you are legally in Mexico and paying taxes in Mexico, please look for professional assistance so you can be tax exempted.
*About the Author: Agustin Galindo is a Mexican Attorney-at-Law with a master’s degree in International and Comparative Law from Southern Methodist University in Texas and holds a tax degree from ITAM in Mexico City.