Capital Gains
We have heard different interpretations of the Mexican capital gains
tax and what we must do to avoid it, what is yours?
We have FM3s (working, not just retiring) and have had them and lived here for 11
years not owning any other house. Our rental business is a sole
proprietorship that pays all pertinent local, state and federal payroll
taxes, income taxes, etc. I have a permit from the city and a tax ID number.
Would the closing (the $ transfer) be in the US?
Here is something a local colleague, Wayne Franklin, wrote up to illustrate the UDI formula:
I'm going to show you two different sales.
Both have the same sales price for today, but different purchase prices:
one at $5,000,000 pesos (or approximately $455,000 USD)
and another at $7,000,000 pesos (or approximately $635,000 USD).
The calculations are for foreigners, as for Mexicans, they can be different
based on the Mexican's tax base rate.
The calculations assume an 8% brokerage fee.
Note that the Adjusted Purchase Price does NOT include any fiscal adjustment
that would also be applied since the purchase of the property, which would
effectively reduce the taxes to be paid. As to the real estate commission,
IVA is not factored in for this calculation.
$5,000,000 Peso Original Purchase Price:
Current Sales Price $9,000,000 March 2007
UDI Deduction ($5,737,809) (1.5M UDIs x 3.825206)
Amount Exceeding Deduction $3,262,191 (36.25% of sales price)
Adjusted Purchase Price ($1,812,500) ( 36.25% x $5,000,000)
Adjusted Real Estate Commission ($ 261,000) (36.25% x $720,000)
Total Gain $1,188,691
Capital Gains Tax Due $ 332,833 (28% x $1,188,691)
---------------------------------------------------------------------------
$7,000,000 Peso Original Purchase Price:
Current Sales Price $9,000,000 March 2007
UDI Deduction ($5,737,809) (1.5M UDIs x 3.825206)
Amount Exceeding Deduction $3,262,191 (36.25% of sales price)
Adjusted Purchase Price ($2,537,500) ( 36.25% x $7,000,000)
Adjusted Real Estate Commission ($ 261,000) (36.25% x $720,000)
Total Gain $ 463,691
Capital Gains Tax Due $ 129,833 (28% x $463,691)
In the first scenario, your REAL profit is approximately $3.3 million pesos
($9M, minus $5M, minus brokerage fees). That means that your REAL tax rate
is just over 10%! ($332,833 divided by $3,280,000) – remember, that's all
pesos.
If EVERYBODY had a 10% flat tax, I think we'd all be pretty happy about it.
In the second scenario, it's the same – just over 10%. While there are still
criteria to meet for this, you don't have to meet the most difficult
criteria item, which is to reside in the home for 5 years; only 6 or more
months.
All things considered, this is not such a bad deal.
As you can see, despite the fact that some think that the 1.5M UDIs is an
«exemption» to that amount and then you pay taxes on all the value that
exceeds that, this is not the case. So despite the fact that you may have
purchased a property exceeding the UDI exemption, the current law does have
benefits for you too.
These figures are based on the law as of today and can change at any time.
In addition, you MUST confirm all calculations in your particular situation
with the Notario Publico in your transaction as each case is different and
there may be idiosyncrasies of your deal that may affect your particular
situation. As you can see from these examples, owning property in Mexico is
still a very good investment.
Based on what I know, you have had title for 11 years and are very much in the clear.
As for a straight answer to the issue, I'm no lawyer, but as I understand it, like anywhere, capital gains tax codes are continually modified to fit the times and the big change this year is in the "no exemptions" code.
Last year you had to own the property as your primary residence for 6 months to avoid the tax. This year, they changed it to 5 years residency.
It is cooling speculation and the notarios have less latitude and are getting more organized/standardized.
------------------------------------------------------------------------
Starting January 2007 there are three levels of exemption:
Total exemption, Partial exemption and No exemption.
Total exemption
------------------------------------------------------
Proof of five year residency: FM2-3, business accounting/hacienda documentation, utility bills
No Exemption:
------------------------------------------------------
25% of the gross sales price or 28% of the net gain
Deductions:
brokerage fees
capital improvements
Partial Exemption
------------------------------------------------------
Proof of six month residency: FM2-3, business accounting/hacienda documentation, utility bills
The partial exemption is calculated using the Unidad De Inversion (UDI)
http://coinmill.com/MXV_calculator.html
Unidad de Inversion (UDI). Loans denominated in UDIs maintain their purchasing power and provide a real rate of return in pesos.
In 1995, during the devaluation, Mexico introduced a price-level-adjusting unit of account called the Unidad de Inversion (UDI), an index unit of funds.
It can be traded in many currency markets because its value changes with respect to currencies. Unlike currencies, it is designed to retain its purchasing power and not be subject to inflation.
The Mexican credit system (especially mortgages) uses the UDI rather than the peso because of its stability.
The UDI fluctuates daily and is currently at +/- 3 UDIs to the peso.
The new tax law describes a partial exemption of up to 1.5 million UDIs and can be calculated using a rather complicated formula that has variable worth gong over personally with a lawyer.
You will need a lawyer to get the most accurate assessment.
That it is difficult to get a straight answer is bad for everyone.
I think we both know you are perfectly exempt, but would like it in stone before making the big decisions.
The lawyers and Notarios we use can help with that.
but you should keep asking the questions Here is a link with good info
http://www.virtualvallarta.com/puertovallarta/realestate/re-articles/useful-information-for-th.shtml
and here are well reputed lawyers you can talk to
David Connell
CONNELL & ASSOCIATES
Hermenegildo Galeana #18
Col. Centro, Zihuatanejo, Gro.
C.P.: 40880 M e x i c o
Phone: 011 52 (755) 555 0400 or 554 1370
Fax: 011 52 (755) 554 2035
http://www2.blogger.com/www.mexicolaw.com.mx
dconnell@mexicolaw.com.mx
María Elizabeth O'Connor
Robles, Lazo y Gallardo, S.C.
Carretera a Mismaloya No. 479, Int.107
Edificio Scala
Puerto Vallarta, Jalisco 48380
Tel. 011-52-322-223-3218
Fax 011-52-322-223-2790
moc@rlg.com.mx
http://www2.blogger.com/www.rlg.com.mx
Javier de La Pena
Marina Las Palmas 2 Local 25
Acceso por Calle de Ancla.
Marina Vallarta, C.P. 48334.
Puerto Vallarta, Jalisco, Mexico.
Tel: 322 2091549
Fax: 322 2090544
Cel: 322 2275815
javierdelapena@yahoo.com
Other interesting reading:
http://www.pwc.com/extweb/service.nsf/docid/6A6886056BC7C8A6802570B3005D6FCF
tax and what we must do to avoid it, what is yours?
We have FM3s (working, not just retiring) and have had them and lived here for 11
years not owning any other house. Our rental business is a sole
proprietorship that pays all pertinent local, state and federal payroll
taxes, income taxes, etc. I have a permit from the city and a tax ID number.
Would the closing (the $ transfer) be in the US?
Here is something a local colleague, Wayne Franklin, wrote up to illustrate the UDI formula:
I'm going to show you two different sales.
Both have the same sales price for today, but different purchase prices:
one at $5,000,000 pesos (or approximately $455,000 USD)
and another at $7,000,000 pesos (or approximately $635,000 USD).
The calculations are for foreigners, as for Mexicans, they can be different
based on the Mexican's tax base rate.
The calculations assume an 8% brokerage fee.
Note that the Adjusted Purchase Price does NOT include any fiscal adjustment
that would also be applied since the purchase of the property, which would
effectively reduce the taxes to be paid. As to the real estate commission,
IVA is not factored in for this calculation.
$5,000,000 Peso Original Purchase Price:
Current Sales Price $9,000,000 March 2007
UDI Deduction ($5,737,809) (1.5M UDIs x 3.825206)
Amount Exceeding Deduction $3,262,191 (36.25% of sales price)
Adjusted Purchase Price ($1,812,500) ( 36.25% x $5,000,000)
Adjusted Real Estate Commission ($ 261,000) (36.25% x $720,000)
Total Gain $1,188,691
Capital Gains Tax Due $ 332,833 (28% x $1,188,691)
---------------------------------------------------------------------------
$7,000,000 Peso Original Purchase Price:
Current Sales Price $9,000,000 March 2007
UDI Deduction ($5,737,809) (1.5M UDIs x 3.825206)
Amount Exceeding Deduction $3,262,191 (36.25% of sales price)
Adjusted Purchase Price ($2,537,500) ( 36.25% x $7,000,000)
Adjusted Real Estate Commission ($ 261,000) (36.25% x $720,000)
Total Gain $ 463,691
Capital Gains Tax Due $ 129,833 (28% x $463,691)
In the first scenario, your REAL profit is approximately $3.3 million pesos
($9M, minus $5M, minus brokerage fees). That means that your REAL tax rate
is just over 10%! ($332,833 divided by $3,280,000) – remember, that's all
pesos.
If EVERYBODY had a 10% flat tax, I think we'd all be pretty happy about it.
In the second scenario, it's the same – just over 10%. While there are still
criteria to meet for this, you don't have to meet the most difficult
criteria item, which is to reside in the home for 5 years; only 6 or more
months.
All things considered, this is not such a bad deal.
As you can see, despite the fact that some think that the 1.5M UDIs is an
«exemption» to that amount and then you pay taxes on all the value that
exceeds that, this is not the case. So despite the fact that you may have
purchased a property exceeding the UDI exemption, the current law does have
benefits for you too.
These figures are based on the law as of today and can change at any time.
In addition, you MUST confirm all calculations in your particular situation
with the Notario Publico in your transaction as each case is different and
there may be idiosyncrasies of your deal that may affect your particular
situation. As you can see from these examples, owning property in Mexico is
still a very good investment.
Based on what I know, you have had title for 11 years and are very much in the clear.
As for a straight answer to the issue, I'm no lawyer, but as I understand it, like anywhere, capital gains tax codes are continually modified to fit the times and the big change this year is in the "no exemptions" code.
Last year you had to own the property as your primary residence for 6 months to avoid the tax. This year, they changed it to 5 years residency.
It is cooling speculation and the notarios have less latitude and are getting more organized/standardized.
------------------------------------------------------------------------
Starting January 2007 there are three levels of exemption:
Total exemption, Partial exemption and No exemption.
Total exemption
------------------------------------------------------
Proof of five year residency: FM2-3, business accounting/hacienda documentation, utility bills
No Exemption:
------------------------------------------------------
25% of the gross sales price or 28% of the net gain
Deductions:
brokerage fees
capital improvements
Partial Exemption
------------------------------------------------------
Proof of six month residency: FM2-3, business accounting/hacienda documentation, utility bills
The partial exemption is calculated using the Unidad De Inversion (UDI)
http://coinmill.com/MXV_calculator.html
Unidad de Inversion (UDI). Loans denominated in UDIs maintain their purchasing power and provide a real rate of return in pesos.
In 1995, during the devaluation, Mexico introduced a price-level-adjusting unit of account called the Unidad de Inversion (UDI), an index unit of funds.
It can be traded in many currency markets because its value changes with respect to currencies. Unlike currencies, it is designed to retain its purchasing power and not be subject to inflation.
The Mexican credit system (especially mortgages) uses the UDI rather than the peso because of its stability.
The UDI fluctuates daily and is currently at +/- 3 UDIs to the peso.
The new tax law describes a partial exemption of up to 1.5 million UDIs and can be calculated using a rather complicated formula that has variable worth gong over personally with a lawyer.
You will need a lawyer to get the most accurate assessment.
That it is difficult to get a straight answer is bad for everyone.
I think we both know you are perfectly exempt, but would like it in stone before making the big decisions.
The lawyers and Notarios we use can help with that.
but you should keep asking the questions Here is a link with good info
http://www.virtualvallarta.com/puertovallarta/realestate/re-articles/useful-information-for-th.shtml
and here are well reputed lawyers you can talk to
David Connell
CONNELL & ASSOCIATES
Hermenegildo Galeana #18
Col. Centro, Zihuatanejo, Gro.
C.P.: 40880 M e x i c o
Phone: 011 52 (755) 555 0400 or 554 1370
Fax: 011 52 (755) 554 2035
http://www2.blogger.com/www.mexicolaw.com.mx
dconnell@mexicolaw.com.mx
María Elizabeth O'Connor
Robles, Lazo y Gallardo, S.C.
Carretera a Mismaloya No. 479, Int.107
Edificio Scala
Puerto Vallarta, Jalisco 48380
Tel. 011-52-322-223-3218
Fax 011-52-322-223-2790
moc@rlg.com.mx
http://www2.blogger.com/www.rlg.com.mx
Javier de La Pena
Marina Las Palmas 2 Local 25
Acceso por Calle de Ancla.
Marina Vallarta, C.P. 48334.
Puerto Vallarta, Jalisco, Mexico.
Tel: 322 2091549
Fax: 322 2090544
Cel: 322 2275815
javierdelapena@yahoo.com
Other interesting reading:
http://www.pwc.com/extweb/service.nsf/docid/6A6886056BC7C8A6802570B3005D6FCF
posted by La Punta Realty at 11:55:00 AM
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