Overview of Capital Gains in Mexico
Taxation on the difference
between cost and selling price of a real estate property in Mexico
by Lic. J.
For a long time a lot of persons did things the way they thought it should or could be done so as to benefit personally. With time the legislator changed laws and by-laws so as to make it more difficult for one to defraud the government and also to make it equal for all the citizens. This is what happened in the area of taxation on the profit obtained by selling a real estate property. As any where else in the world in Mexico there is a correct legal way of doing things and an incorrect and not legal way of doing things and this is what we will illustrate in this article by categorizing the real estate properties the Rights that one holds and the taxes. Having established that we will illustrate who is responsible regarding the payment of the taxes when the law dictates imposition and the consequences if the law is not respected.
Categories of real estate properties
There are four categories of real estate property, commercial, industrial, rustic and residential. Once the type is identified we know which legislation we must consider regarding taxation on the difference between the cost and the selling price of a real estate property. From these four categories we can now spilt them so that the first two are both “commercial real estate property”, the rustic as a property without any construction and residential as a real estate property with a building which is used as a residence or domicile. In other word we now have only three types of real estate property: Commercial, rustic and dwelling.
Categories of Rights on a real estate property.
Under the legal system we find two categories of Rights. One is the “Personal Right” which is attached to the person and the other is “Real Right” which is attached to the property. Example a mortgage is a Right which is attached to the property; in other words it follows the property compare to the Right one has when he is a beneficiary of a Fideicomiso Translativo de Dominio contract (FTD contract).
Categories of taxation to be considered and responsibilities to pay.
There are four different taxes that can be levied on real estate property. The first one is the property tax called “predial” which is imposed by the municipality. This tax is to be paid annually; in the event that the tax is not paid as the law stipulates one will pay at time of selling back taxes and interests. Municipalities provide incentives such as discount for the ones who pay the “predial” in the early months of the year.
The second tax is commonly called IVA. This tax is not imposed at the alienation time and must not be applied to any purchases related to a real estate property that falls in the residence category as per the dispositions of the law:
LEY DEL IMPUESTO AL VALOR AGREGADO ( LAW OF TAXES ON AGGREGATED VALUE):
WILL NOT PAY THE TAX IN THE ALINEATION OF THE FOLLOWING GOODS:
II.-CONSTRUCTIONS ATTACHED TO THE GROUND, DESIGNATED OR USED AS A DWELLING. WHEN ONLY PART OF THE CONSTRUCTIONS IS USED OR IS DESIGNATED AS DWELLING, TAX WILL NOT BE IMPOSED ON THE SAID PART ONLY ON THE PART OF THE CONSTRUCTIONS NOT DESIGNATED AS THE DWELLING. HOTELS ARE NOT INCLUDED IN THIS FRACTION.
When reading legislation one has to know the meaning of words and the intention of the legislator. At this point one word that we must analyse it the word “Alienation” which is found in every law to be considered and this we do by first looking at a definition in a dictionary:
verb alienated, alienating
To transfer ownership of (property) to another person.
Thus we now know that we can apply this to a sale of Rights or Session of Rights on a real estate property. When one “sells” a property which has a FTD contract one actually does a Session of Rights and not a sale.
We must now look at article 14 of the CÓDIGO FISCAL DE LA FEDERACIÓN (Fiscal Code of the Federation) which says:
WILL BE CONSIDERED ALIENATION OF GOODS:
1. ALL TRANSMISSION OF PROPERTY, WITH EXCEPTION TO THE ALINEATION WITH RESERVE OF OWNERSHIP OF THE GOOD ALINIEATED WITH EXCEPTION TO THE ACTS OF FUSION OR FISSION TO WHICH IT IS REFERED AT ARTICLE 14-A.
In other words no IVA shall be applied to real estate property designated or used as a residence.
The third tax is called acquisition tax and it is imposed by the State government.
This tax is to be paid by the buyer at time of purchase and it is the responsibility of the “Notario Público” (contract lawyer) to retain said tax and remit the amount to the government based on the divulged selling price which is called the “valor de la operación” by said professionals.
The third tax that can be applied depending of various factors. It is called “Capital Gain Tax” by foreigners but its definition is more as a tax imposed on the profit obtained between the purchase price and the divulged selling price. In other word it is called “Income tax”.
Application of the “capital gain tax”.
a) Commercial real estate property.
Once a property is registered at the “CATASTRO” office (land registry office) as being commercial (with or without building) there will be a tax imposed which will be in relation with the profit made when calculating the price paid at purchase and the amount paid by the buyer when it is sold.
b) Rustic real estate property.
A real estate property which has no building (lot) and is registered at “Catastro” as a non commercial property will be taxed.
c) Residential real estate property.
When a property is been used as a dwelling the person who is alienating his Rights is not to be taxed because he is making a profit.
This is in accordance with the dispositions of the LEY DEL IMPUESTO SOBRE LA RENTA (Income tax law):
First of all article 1. tells us that everyone has to pay income tax:
The physical and moral persons, are obligated to pay the tax on income in the following cases:
I- The residents of Mexico, in respect to all their income whatever is the provenance....
Contact Information for Can-Am-Mex
Lic. J.E. Beaulne, LL.B.
Abogado / Avocat / Attorney at Law,
Cedula profesional # 0086,
Miembro del Colegio de Abogados de B.C.S.
Member of the Lawyer's College of B.C.S.
Plaza Cerralvo, Suite 6
Alvaro Obregon #1665
La Paz, B.C.S., Mexico C.P. 23000
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