What Will I Have to Pay if I Sell My Property Some Day?
An important thing to consider when buying a property is your exit strategy. You might say, “I never plan to sell”, but things change in life and you should understand how the process works and what costs you might incur if you end up selling some day. One cost that is impossible to calculate for the future is your capital gains taxes, especially for properties that were paid for in US dollars. The reason for this is that properties in Mexico are registered in MXN or Pesos and no one can predict what the exchange rate from USD to MXN will be in the future.
How Does The Exchange Rate Affect Capital Gains Tax?
This situation has surprised many homeowners that bought when the dollar was 10 to 1 years ago who are now selling their properties when the dollar is 20 to 1. If you paid $300,000 back in the day and now you want to sell for the exact same amount in USD, there is a huge capital gain in Mexican pesos and you have to pay a 35% tax on that gain as a foreigner.
Let’s do the math.
$300,000 x 10 MXN = 3,000,000 MXN versus $300,000 x 20 MXN = $6,000,000
This is a 3,000,000 gain X 35% tax = 1,050,000 tax liability which is about $50,000 USD in tax!
Get Residency to Qualify for an Exemption
To avoid unpleasant surprises and huge tax liabilities in the future, foreigners can get residency and then qualify for a capital gains exemption. You need to get your Mexican tax ID or RFC after getting the residency card and CURP. Once you have the RFC then you can have it added to your CFE/electric bill, Mexican Bank Statements, or Telmex telephone/internet bill. Each person on title can qualify to get an exemption.
The exemption is 700,000 UDIS, which is a measurement adjusted annually with inflation and cost of living. Currently, as of December 5, 2022, one UDIS is worth 7.630190 and 700,000 would be 5,341,133 MXN. The amount in dollars depends on the exchange rate, which can fluctuate between 19 and 20. That can be a swing of $267,000 to $281,000.
Important tips
You’re allowed to use an exemption once every 3 years. Married couples on title can use both their exemptions to get double the amount to get them over $500,000 in tax exemption.
You Need to Know How a Notary Interprets the Tax Law to Avoid Disqualification
There is one weird detail that many people don’t know about. Your fiscal address for SAT (Mexican Tax Authority) needs to be different from the property address that you want to sell. You might think, well, I only have one address in Mexico, so I guess I don’t qualify. Well, the crazy thing is that you can use a different address that you can get from a friend, lawyer, or accountant and put that as your fiscal address. Sounds insane, but that could be what you have to do.
Some notaries are more flexible with the rules and allow the capital gains exemption without this criteria being met, but if you get a notary that wants to follow the letter of the law, then the property owner has to change their fiscal address with SAT to qualify for the capital gains exemption. The laws are open to interpretation and notaries have different thresholds for risk so you can get varying opinions, which adds to the complexity of this situation. Getting appointments with SAT if you don’t have the ability to make changes online can take weeks as I write this article, so you need to be prepared.
What If I Don’t Qualify for an Exemption?
If you’re buying through a Mexican Corporation or an LLC, you don’t qualify for the exemption, it’s only for individuals. If you’re an individual and you don’t have residency when you sell your property, then you can look into foreign tax credits. Most countries have treaties where if you pay the tax in one country you don’t have to pay it again in the other. There are also tax strategies that a Mexican Tax Expert or Real Estate attorney can help you with to reduce your capital gains taxes.
Also, you need to research what your long term capital gains taxes are in your home country. For example, in the USA, for most people, long term capital gains can be 0%, 15%, or 20% depending on your income and filing status. Again, if you pay the tax in Mexico, U.S. taxpayers can use that as a foreign tax credit for USA taxes.
Be Prepared or Prepare to Lose Money
It’s better to be prepared and to start working on getting residency or a tax strategy sooner as opposed to later as it could save you thousands of dollars. It’s highly recommended that you talk to a Tax expert in both your home country and a Mexico to help you understand your obligations and the tax laws. I’m not an expert in taxes so please do your due diligence and hire an expert or experts for tax advice. Also, remember that laws and rules can change so you need to work with a professional tax expert. If you plan on selling your property in Mexico, it’s recommended that you get a capital gains calculation or residency before you list to minimize stress and unpleasant surprises.
