Living in Los Cabos: More on Capital Gains Tax

Baja Pony Express is a great newsletter/egroup based in Las Barriles, I always enjoy getting it but feel like I’m kind of free-loading since I don’t have anything to share. Well, yesterday someone posted a question I could answer. And, since someone is asking that means there are probably more out there who could the information. So here’s the exchange:

Questions:

c. Re: Immigration Status in Mexico
Baja Insider recently published an article reviewing the four immigration status' which seemed very up to date and informative. The article was written by Lic.J.E Beauine, LLB. 045-(612)348-9793 cell in La Paz at the end of August.
It stated that one needs the FM-3 status only if one is in the country for more than 180 continuous days.
Previously, we had heard that having the FM-3 would help to reduce or eliminate the "Capital Gains" tax imposed upon selling your home.
It appears that now you have to have an FM-2 to actually accomplish this. Is this correct?
I also wonder if when it states that," One must be in Mexico for no less than 3 out of 5 years", does that mean one must enter into Mexico for at least 3 out of 5 years or actually reside in Mexico for three out of five years in order to obtain FM-2 status which would then enable you to reduce your "Capital Gains".
Thank you for your assistance in finding the answers to these questions.

and here’s my answer:

Disclaimer: I'm not a Notaria or attorney, just a broker who has to walk clients through this on a regular basis. A year or so ago Sabrina Lear had me on her program on CaboMil with two notarios (one state and one federal) and this topic was a major part of the conversation both on and off air. This would be the summary, since I can't remember which parts occurred on the air.  
The exemption is at the discretion of the Notario Publico presiding over the transaction. Of critical importance is that the transaction being exempted must be on the party's primary residence regardless of nationality. So just having FM2 status is not going to be enough, you've got to convince the Notario that this property is indeed your primary residence. Notarios are hesitant to give the exemption unless they're sure as the new tax laws hold them personally liable. So if SAT (Hacienda) disagrees they could end up paying the amount of tax exempted out of pocket. So you've got to give them proof that you do occupy the Mexican property year-round, or at least more than half the year that they can pass on to SAT during their semi-annual audit. Utility bills are one way to do this. One East Cape resident who was off the grid successful proved her case by producing propane bills that didn't vary seasonally. I haven't had a client try it yet, but it seems to me that the receipts from your ATM withdrawals would be rock solid. I'm pretty sure we were in station break when one of the notarios admitted to me that they really don't feel comfortable unless they know the person first hand, or if they are so prominent and well known in the community that no one would question their full time status. That said, I do know of people who were able to plead their case successfully. And remember it's five years right now, which is always subject to change.
 
The big point, one that I always make to clients, is to find out about the exemption BEFORE you put your home on the market. Most of the Notarios will meet with you at no charge to see your documentation. If you can get one of them to agree to exempt you (preferably in writing), then we can make using that Notario a condition of sale. The FLEX MLS system has a section for private remarks visible only to other agents where we can designate this; it's pretty much universally understood what requiring a specific notario means.
 
One more thing to consider. Don Nelson, the CPA/Attorney specializing in ex-pat US taxes, spoke to our AMPI group last summer about the 3520 and 3520A forms. At the end he just made one quick comment that for US citizens there might be US tax advantages to declaring Mexico as your legal primary residence a few years prior to selling. So you might want to have that conversation with your US tax advisor.
 
Hope that helps!
Carol

So, hopefully somebody got something of value from that information. If you’re into the East Cape you might want to subscribe to the BPE, you can reach them at bajaponyexpress3@gmail.com.

Carol Billups is Broker/Owner of REALTY EXECUTIVES Los Cabos. A Certified Home Marketing Specialist, she has enjoyed working with both buyers and sellers for over ten years and still thinks hers is the best job on earth. She is also the real estate columnist for Los Cabos Magazine and Chairman of the AMPI Los Cabos Board of Realtors. You can read more of her articles on www.reloscabos.com. You can reach her from the U.S. or Canada at 1-760-481-7694, or in Cabo at 044-624-147-7541. You can listen to our 24/7 broadcast on http://www.livecabo.net.

© 2011 Carol S. Billups