Capital gains tax laws in Mexico require that tax is owed on the profit you receive when you sell your Mexican home or property. The current capital gains tax is computed two ways, and the seller gets to choose which computation to use, depending upon his circumstances:
- 25% tax on the gross sales amount; or
- 35% tax on the net profit
Let’s say you bought your house in Mexico on January 1, 2012 for US$100,000, and the exchange rate on that date was 13 pesos to the dollar. So, as far as Mexico’s tax agency is concerned, you paid 1,300,000 pesos for your house. Suppose you sold that house on December 31, 2016 for US$100,000. Obviously, there was no economic profit on your investment. Let’s say the exchange rate on the day you closed that sale was 20 pesos to the dollar. As far as Mexico is concerned, you sold that house for 2,000,000 pesos.
So how much tax do you owe Mexico on that sale? Let’s look at a simplified example:
- 25% of the gross sales amount. That would be 25% of 2,000,000 pesos, or a tax of 500,000 pesos, US$25,000; or
- 35% of your gain. Your taxable gain is the 2,000,000 peso sales price, less your 1,300,000 peso cost, times 35%. That works out to a taxable gain of 700,000 pesos, which when taxed at 35%, creates a tax bill of 245,000 pesos, or US$12,250. The notario handling your home sale will take that out of your sales proceeds and send it in. Imagine paying a US$12,250 capital gains tax on a sale where you did not make any economic profit. All this is because the peso has depreciated against the dollar while you owned your Mexican house.
If you and your home were in the United States, you would owe zero income taxes, as there was no taxable gain on the sale. In the example, you bought the home for $100,000 and sold it for $100,000.
There is also a United States federal income tax exemption on the first $250,000 of gain on the sale of a personal residence held for 5 years which was your principle residence for two of those five years; $500,000 for a married couple. Mexico has a similar rule, but which will not apply to most Americans. In Mexico, if you are a Mexican citizen, or a permanent resident, there is a tax exemption on your primary residence. In order to get this exemption, you must have used the house as your permanent residence for 3 years (5 years before 2015). The land area cannot be more than three times the building footprint, and it cannot have been used for commercial purposes, e.g. not rented out, even for a short period. Basically, you will have to sign a sworn oath under penalty of perjury that you are a resident of Mexico for tax purposes. If you have not filed any Mexican tax returns, don’t expect to qualify for this exemption. Notarios (notary public), who handle these transactions, are personally responsible for any taxes they failed to collect on the sale. It is difficult to find a notario who will not collect taxes from a foreigner when a house is sold.
Is that all? No it gets better (or worse, depending upon your point of view). If you pay a salesman a commission to sell your home, you also owe a 16% IVA (sales tax) on the commission you paid. In Mexico, sales taxes are collected on goods and services.