I often receive emails asking about “capital gains tax” on real estate sales in Mexico. There is a common expat legend that in order to get out of paying the 30-35% tax on the profits from the sale of a piece of property, foreigners must show their FM2/Inmigrante documents to the notary to prove their resident status. Recently I had someone come to me worried that the “capital gains” exemption was going to disappear with the new immigration law. With all the speculation and guessing associated with this tax, I thought it would make an interesting topic for an article.
What does the law say about capital gains tax?
Lets start with the most fundamental part, where does the law say that we have to pay taxes? First, the constitution gives congress faculties to establish the expenditures and corresponding income for the nation. That income comes primarily from taxes, of which there are many, but the taxes that most commonly apply to common people are: Impuesto Sobre la Renta (Income tax), Impuesto de Valor Agregado (Value added tax) and Impuesto Empresarial de Tasa Unica (Enterprise tax). There are other taxes, but most of them don’t apply to common people or individuals, at least not in a manner in which we notice their existence.
Notice that I didn’t mention capital gains tax? Lets examine what capital gains tax really is: it is a tax on the income from the sale of capital, but more importantly it is just income. So it is regulated in the income tax. The law doesn’t give special treatment to capital sales because they are capital sales, but instead gives special treatment to real estate sales because they are, by legal disposition, carried out by means of public deed and registered by a notary public in the Public Property Registry.
Article 154 of the income tax law says that any property sold by means of public deed is subject to income tax that in cases of individuals will be paid no later than 15 days after the sale of the property. In order to ensure the payment of these taxes the law leaves it up to the notary to calculate and collect the payment. The notary then is solely responsible for making the payment to the tax authority.
So what about the capital gains tax exemption?
The law talks about income that is not subject to income tax in Article 109, and specifically talks about primary residences in fraction XV, subsection a:
Art. 109. – The following income is exempt from income tax:
XV. The sale of:
a. Residential housing, as long as the cost of the operation is does not exceed one million five hundred thousand UDI* (aprox. $7 million pesos or $525,000 dollars) and the transmission is formalized before a notary public…
The limit established in the first paragraph of this fraction will not apply when the seller demonstrates that he has resided in the home during the five years immediately preceding the date of the sale, according to the terms of the Regulations of this Law.
That is the exemption. It is pretty clear, but we need to pay attention to that last part: according to the terms of the Regulations of this Law. Here is what the regulations say:
Article 130. For effects of article 109, fraction XV, subsection a) of the Law, taxpayers must accredit before the public functionary that formalizes the operation that the property that is object of the operation is his residence with any of the evidentiary documents mentioned below, as long as the address expressed in said document coincides with the address of the sold real estate:
I. The electoral identification, issued by the electoral authority.
II. Paid electric or telephone bills.
III. Account statements issued by financial institutions, trading houses or non-bank credit cards.
The documentation mentioned in the previous fractions should be in the name of the taxpayer, his/her spouse or his or her direct ancestors or descendants (parents, grandparents, children, grandchildren, etc..).
Nowhere does it say that foreigners have to show their FM2’s or that an FM3 doesn’t work as a evidentiary document, in fact, the law doesn’t mention anywhere that you have to show your migratory document as proof of residence. There is a legal precept that states that, “For the individual, anything that is not expressly prohibited is permitted.” This should mean that because it is not mentioned in the law that foreigners, or people possessing No-Inmigrante documents, cannot take advantage of the income tax exemption, there is no legal basis for anyone requiring an FM2 for said exemption.
So this begs the question, why do the notaries insist that you must show your FM2 in order to be exempt from income tax on property sales? Remember when I mentioned that notaries are solely responsible for the payment of the tax? Your notary does not want to be on the hook for your 28.5% income tax; therefore, he does everything he can to protect himself. This means interpreting the law in a stricter manner than actually necessary. If pressed, many notaries will allow the sale to go through and the exemption to happen with just an FM3, but this may require that someone explain to him the currently valid tax law and these specific dispositions.
Now, I think that when the new law takes effect and everyone has a Temporary Resident visa, the confusion will be diminished, but for the next couple of months this information might be able to help you when you try to sell your home.
Knowing this little bit about the tax law and the exemptions laid out in it can save you money in the sale of your Mexican dream home. Remember, accepting expat lore as the law of the land can often cost you money. When you are dealing with decisions that can cost you tens of thousands of dollars, it is always a good idea to spend a little bit of money to hire someone who can advocate for your rights.