Now adding on to yesterday’s blog about the Notario radio show, we finally got on to the topic of Capital Gains Tax. Just as a disclaimer: that hour zips by and I don’t always remember what was said on the break versus what was actually on air. So some of this might have been from the conversations we had off the air….
In real estate we talk about paying the Mexican Capital Gains tax. But the Notarios pointed out that that is a misnomer. The ISR, or Impuestos Sobre La Renta, is actually income tax no different than the income tax most workers pay. The difference is that it is such a large, one-time payment that the Notario holds it out of the transaction proceeds and pays it on behalf of the seller. Now some people are exempt from paying this tax on income from the sale of their primary residence; the question of who they are is largely discretionary to the Notario. I have not seen this year’s version of the ISR law (it is re-issued every January); the Notarios check the new version and they interpret the changes. The sticky points in the past few years (including 2010) are the definition of primary residence and the tax status of the person.
Some years ago the wording of the tax law changed just a bit, referring to the exemption for the tax payer’s primary residence. Taxpayer would be the problem. Or problems. Two classes of people immediately got eliminated from the exemption: retirees and commission workers. Commission workers pay income tax (at least this one does) but sometimes under a different clause in the tax law that some persons disagree with. That’s as far into that can of worms as I wish to go; let’s just leave it at they file different sets of paperwork which may or may not please the Notario deciding on the exemption. The big worry is the thousands of American and Canadian retirees living in Mexico.
Make no mistake, these people are paying the Federal Sales Tax on all their purchases, but they’re not filing monthly income tax because (duh) they have no income in Mexico. Most are living off pensions from their home country. But, the home they are selling in Mexico is their primary residence. In some cases their only real estate asset. It would appeal to everyone’s sense of fair play that they should be exempt. But are they?
Here’s the thing: the Notario is responsible for collecting the tax owed the government. And the government audits them on a regular basis. If the government finds that they exempted someone who wasn’t qualified the Notario is responsible to pay the tax out of their own pocket. So of course they are going to be extremely cautious on this one. I believe it was during the break they mentioned that it was helpful if they knew or knew of the retiree. For example, if the retiree was active in a charity or church where their name was regularly publicized the Notario would feel more comfortable granting the exemption. Bills might be useful if they could show that the retiree was buying gas or groceries year round. Although it wasn’t discussed, some retirees have registered as expatriots with their consulate and have made home-country tax declarations. I don’t know for sure, but that might help the Notario document the reason for an exemption.
The bottom line: if you’re a foreigner selling your primary residence and want the tax exemption you should visit the Notario before you even list your home for sale. Most Notarios are willing to meet, look at your documents, and make a ruling as to your eligibility. Once you’ve agreed what sort of documentation they will accept you are well within your rights as a seller to stipulate in the listing that Notario #X is the only acceptable option for the closing and to make that a condition of any sale. I have been known to write counter-offers in which that was the only condition: the original offer was acceptable but as the buyer arranges the closing we want to be absolutely crystal that they will use the Notario who has already agreed to exempt the seller from the tax.
Just one more thing that could be very significant; this time to the buyer. Right now some people are getting just amazing deals on property in Los Cabos. So significant that they become liable for income tax at the closing! How is this possible? Well, in order to complete the closing there must be an official appraisal of the property by the fine folks in the tax office. So let’s say you’re buying a lot from desperate seller, you offer $100,000 US and they accept it. During the closing the appraisal comes in at $200,000. At closing you will immediately receive a large profit on this purchase. The law says you pay tax on that windfall. Not only that: your 2% acquisition tax is based on the appraised value, not the purchase price. How is all this possible? Well, the municipal appraisal is based on charts. They look up your purchase, and the chart tells them how much it’s worth per square meter. Which would be OK, except the charts they are using were compiled three years ago. As in: during the real estate boom. It’s pretty commonly agreed that since then property values in Los Cabos have dropped 30%. The charts don’t reflect that. The Notarios explained that there is a 10% discrepancy allowed by law: if your lot appraises at $110,000 you’re OK; but if the value comes in at $111,000 taxes are due. There is a legal way to disagree. If you think the municipal appraisal is out of line you can (at your own expense) have a Federal Appraiser calculate the value of the land; they use comparable sales and current property value. The Federal Appraisal evidently trumps the Municipal Appraisal and since it would take into consideration the dire state of our real estate market would be more realistic.
So these are what I consider the high lights of the show. Such nice young men to have such a serious career. But so impressive! Thanks again to Federal Notario Javier Mazoy and State Notario Armando Aguilar Mondragon for taking the time to explain all of these points.
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 nine years and still thinks hers is the best job on earth. She is also the real estate columnist for Los Cabos Magazine and the real estate co-ordinator for the Los Cabos Now program on CaboMil FM (www.cabomil.com.mx). 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.
© 2010 Carol S. Billups