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May 22 2015

Generally most real estate sales transactions in Mexico will result in the payment of income taxes, or capital gains, which depending on the amount of the gain, can be as high as 35%. However, in some cases, exemptions to the taxes paid on the gain or profit made from the sale are possible.

To qualify for an exemption, first of all it is essential to establish fiscal residency. This applies to anyone, Mexicans included, who also reside in another country for a portion of the year. To meet this requirement, in essence to be considered a resident of Mexico, individuals  must prove their “center of vital interests” occurs within Mexico. The main way to qualify is by having the majority of one’s professional or business activities located in Mexico, and by earning more than 50% of one’s total income here. Corporations that have established the main administration or management of their business within Mexico qualify as well.

Once fiscal residency of the taxpayer has been proven, any income up to 700,000 Investment Units (UDI’s) is exempt regardless of the sales price of the property. This is know as Limited Total Exemption, which today is approximately $300,000USD. The value of a UDI is determined by the Mexican government and fluctuates daily as does any currency, such as the peso or dollar. 

For gains in excess of 700,000 UDI’s, tax liability is determined and calculated by the notary, using the formula of Income (sales price minus purchase price) minus Cost (land and construction) minus Deductions (improvements, notary fees, local tax on title transfer, acquisition and sales tax, appraisal, real estate commissions). This is known as Partial Exemption and establishes the gain on which the tax will be assessed.

In order to qualify for either of these exemptions, the taxpayer must also establish that the property sold is their prime residence, and has been owned for at least 5 years. This requires supplying supporting documents including electrical or land line phone receipts/bills, or bank statements which match the address of the sold property. Capital gains exemptions are only allowable once every 5 years.

Other exemptions include property received via inheritance, or first private property sales of Ejido land.

For additional information relating to this or other real estate topics, please contact Audrey International.