Taxes in Mexico

Everyone’s favorite subject.  And here there is a mixture of good and bad news.   Real estate purchase, sale and ownership  are subject to three main taxes:

a)    Acquisition tax (ISABI), usually 2%, payable by the buyer, with the proceeds going mainly to the local municipality.

b)    Capital gains tax (technically, an income tax on profits, called ISR), payable by seller, with the proceeds going to the federal tax authority, Hacienda.

c)    Annual real estate taxes (predial), paid by the owner, with the proceeds again mostly staying local.

 

The acquisition tax is part of the somewhat higher closing costs picture described elsewhere in this part of the website.   That is part of the bad news, although we know there are comparable acquisition taxes charged in many locations in the United States, so it’s no purely Mexican.

 

The annual real estate taxes have traditionally been very low, and they remain so although the state and local governments in our state have recently made some changes, some of which will stay in effect and others of which will be at least partly undone.  The net result is good news:     the tax cost of owning property in B.C.S. is much lower than it would be for a comparable property anywhere in the US or Canada.

 

The capital gains picture is a little more complicated, and is a mix of good and not so good.     The tax is calculated  in the classic manner, by subtracting the recorded acquisition price of the property from the recorded sale price, defining a mathematical gain.   That gain is then reduced by the properly documented costs seller incurred when he bought.  It is also reduced by the cost of capital improvements, if it has been documented properly.   Finally, it is reduced by a small percentage of the original price for each year the seller has owned the property – in other words, it is “indexed” against inflation.    The adjusted mathematical gain is then subject to tax, and the rates is currently 30%.

For a seller who is selling a genuine principal residence – Mexican, or a foreigner with the correct visa status documenting long-term residence and intent to remain  — some or all of the gain may be exempt from taxation.   Eligibility requirements are technical, but they generally involve demonstrating that the property has been in fact a primary residence for the seller.     NOTE that if the beneficial rights of the trust are being held by a foreign LLC or corporation, there will be not exemption, because the exemption is to protect the family home,  and LLC’s and corporations do not have family homes.

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