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You are required to terminate employees, be they full or part-time, when selling a home. Otherwise, the buyer has obligations to any employee who is later terminated back to originate date of employment. A good real estate agent and notario should always raise this issue. The same may be true when renting if the employee/s continue from last tenant.
The buyer selects the notario but the seller may also have their own or have the buyer's notario represent you. Previously, some buyers recorded a lower purchase price to reduce property tax. If you are buying a home that was recorded to have been bought in say 2007 for considerably less than the true purchase price this may significantly affect what may be the taxes when you sell. Again, make sure your notario checks this aspect. In Mexico, it is all buyer beware. Real estate agents and brokers usually have minimal training and I personally would not rely on them to protect your interests from legal, construction issues, zoning or any other aspect.
Mexico applies a capital gains tax on residential property of 25% on the gross sales value of the transaction without any deductions OR between 1.92% and 35% on the value of the gain (purchase costs less allowable exemptions and deductions).
A one-off exemption is available under Article 92, Fraction XIX a) of Mexican Income Tax Law that reduces the tax liability for many family homes, although you and the property must meet certain criteria to qualify for the exemption:
You must be resident in Mexico with a Mexican tax ID number known as a RFC, or Registro Federal de Contribuyentes. This tax identification type can be applied to companies and to people. An RFC number for a company is 12 characters, while an RFC number for a person is 13 characters. The first four letters are taken from the person' s name, followed by their date of birth (YYMMDD), then three letters chosen at random. An example would be Monique Maldonado Lemarque, MALM620202GQ1. Anyone who is thinking of listing a property for sale should as soon as possible obtain an RFC and have it on TelMex and CFE bills. CFE is normally billed every 2 months. TelMex is billed monthly. Once obtained and reported to utility company an RFC may appear on next bill or one after depending on timing.
The property you’re selling must be your primary residence; and
The land subject to the sale must not exceed three times the size of the construction on that land (measured in square meters); and
You can only claim this exemption once every three years.
The flat-rate exemption is the peso equivalent of 700,000 UDIs. At the time of writing, 700,000 UDIs equates to approximately $4.37 million Mexican pesos, and you can deduct this amount from the sales price if you qualify.
If the same home is properly co-titled with your spouse or other family member and they are resident in Mexico with a Mexican tax ID, and the house is their primary residence too, you can deduct an additional 700,000 UDIs in their name.
The exemption is not automatic: you must qualify, and you must prove the qualification. Talk to your notario about how to arrange this and what you need to do to present the necessary records for proof.
Mexican income tax law does not expressly state whether the foreign person selling a property must have temporary or permanent residency status to avail themselves of capital gain tax exemptions; it does, however, expressly state that the seller must be selling his / her primary residence in order to qualify for tax exemptions on capital gains. The Notary Public dealing with the matter will interpret the law; some will apply the capital gains exemptions only if the seller has residente permanente status; some Notary Public offices may apply the exemptions to foreign residents with residente temporal status. If your notario does not apply the tax savings because you are a temporary resident look for another one.
Deductions for Capital Improvements: You may deduct the costs of any capital improvements (e.g. building extensions, new flooring, swimming pools, new rooms) while you owned the property, as well as some closing costs commonly incurred when purchasing a home. You need official receipts. In Mexico, these are known as ‘facturas’, for all services and building work to claim these allowances when you sell, so be sure to take advice from your notario on how to account for these and follow it. Any capital improvements made using a firm or builders who didn’t issue you with facturas for the work cannot be deducted. Maintenance and home improvements, like remodeled kitchens or new bathrooms, do not count as capital improvements.
The Exchange Rate Effect: In most towns and cities across Mexico, home prices are quoted in Mexican pesos when they are offered for sale. However, a few places and most notably in Los Cabos, Puerto Vallarta, San Miguel de Allende, Ajijic/Chapala, and Cancun/Riviera Maya, home prices are often seen quoted in US dollars. Even though the transaction may be quoted in dollars, the deed will show the amount in Mexican pesos at the exchange rate prevalent on the date of the closing. Your tax liabilities when you come to sell are calculated in pesos, not dollars.
If you are not a resident in Mexico and/or you don’t have a Mexican tax ID, you cannot claim the one-off exemption explained above, although you can claim qualifying deductions, so long as you have the official receipts (facturas) to prove the expenditures which can be deducted.
Your Notario is Key
The Notario Publico is the most important professional person you will deal with when you buy and sell property in Mexico. Don’t rely on hear-say and instead get the Notary Public to assess your individual situation and the taxes that will likely apply to it. When you’re buying property, talk with the Notary about what you need to do to plan your estate efficiently, how to structure your arrangements, and how to keep the proper records you need to ensure that when you come to sell your property you (or your heirs) are prepared. Every property transaction has its own quirks and unique characteristics; cultivating a good relationship with your Notary Public is a crucial aspect of successful property investment in Mexico.
· Inherited property is exempt from capital gains tax.
· You may be exempt if you the property is a donation, consult a tax attorney for stipulations.
· Corporations have a different tax system than private real estate.
Raw land is taxed differently than developed properties.
There are some other rules that apply to determine the cost of construction and I recommend that you check with a consultant on which may apply to your case.
Mortgages are available with a typical rate of 8 to 12 per cent interest. More and more Mexican banks and financial institutions will lend to expats. Commission plus life and property insurance are usually a must. Mortgages may have to be paid off by the time you are in early 70's but some financial institutions have raised the age to when you are in your 80's. So one of your first questions will be at what age must my mortgage be paid off. To qualify for a mortgage, Mexican banks usually only consider your Mexican credit score and the amount you deposit into a Mexican financial institution. However, some other mortgages sources will consider your US or Canadian credit score. If a bank will not consider your foreign credit score my suggestion should you think you may want a mortgage, car loan, extra money for a medical bills etc. is to open a Mexican bank account. I cover how to open a bank account under the heading ETC. Once you have done so, obtain a charge card. Initially, the limit on your card will be low and 5000 pesos limit is not uncommon. You can have your bank automatically pay each months charges in full avoiding high interest which are typically 40 to 65% with the upper range being more common. Each month buy something on credit or buy an item with 12 payments with zero interest. When allowed, which is usually annually, increase your card's limit.
A mortgage takes many weeks to approve. There will be pages and pages of forms, all in Spanish. Typically, plan to start an application 3 months in advance.
Rentals and at times homes for sale may be found on these two web sites: Mitula and Locanto. Usually prices are "Mexican" vs sites such as VRBO or through property managers and other expats. Rentals may be found in many parts of Mexico.
Building techniques are very different in Mexico. Whether buying, renting or building here are some considerations based on our experience renovating and building. If seeking an excellent, bilingual team consisting of architects, engineer, contractor for renovations and building anything from casitas, modest homes, apartments, offices and luxury properties please contact me. We have had excellent experience with this team and they are available throughout central Mexico. Paying well over $100 per square foot for a home to be built is not required. That home above with central vacuum, 10 solar electric panels, double pane windows, quartz counter tops, solar hot water, porcelain tiles, roof, with rubber membrane, fireplace, concrete block walls, wiring and plumbing to Canadian standards, cantilever stairs, and numerous other upgrades was under $100 sq ft.
First lesson is buyer beware for issues such as: expats are all considered wealthy and the cost of labor and materials can be the Mexican price or the expat price; plumbing often lacks traps meaning an odor emanates from drains. Water supply lines are usually 1/2" whereas 3/4" for main lines is better; limited vents on plumbing systems means showers etc drain slowly; electrical wiring is not what is the code in Canada and the US, eg receptacles may be cheap and pull apart, color of wire does not mean black is hot, white is neutral and green is ground; wiring is #12 and breakers 20 amp but appliances and receptacles are only rated for 15 amps. The proper receptacle for a home with 20 amp breakers is the one shown with a "T". You may never see these in Mexico. Fifteen amp rated receptacles are the proper ones.
Wiring should be #14, breakers 15 amps and lots of circuits with ground fault receptacles in wet areas. Normally electrical connections consist of twisted wires and electrical tape where as proper connectors called marettes is what should be used.
Spend a little extra and purchase vinyl or aluminum windows and doors with proper screens. Double pane widows are rare and rather common are windows with glass held in with silicone. With proper windows and doors your house will have less dust and rain entering your home, require less heat or air conditioning and your home will be more comfortable.
Leaking roofs are not uncommon including on new homes. Sometimes mold may be found. The proper way to seal a nearly flat roof or a boveda roof is called "torch down" method. In this application a type of rubber is rolled out and applied with a torch to bond this membrane to your roof.
A common construction material is small red bricks manufactured with no standards and often containing manure. Beams made from concrete vs steel are used over large window openings. Re-bar in concrete is often too small to provide the required strength. Consider 10' ceilings vs 8'.
In many parts of Mexico nights are very cool and this can last for 3 months. Often homes are adjoining other homes meaning few windows to let in the heat from the sun. If your heat source is a fireplace or open flame propane heaters they lack efficiency and create a safety issue with carbon monoxide. Consider an efficient, vented, propane wall furnace such as those made by Rinnai and Empire.
If a major project or building whole home, rent or buy a cement mixer as you will obtain a more even and stronger mix vs workers mixing on the ground and you save workers' backs. Workers never wear hard hats, safety glasses or back braces, etc.
Please obtain a building permit!
When looking at existing homes do not be impressed by granite or marble but look beyond as those materials are relatively inexpensive. If you wish to tile an existing concrete floor very likely it requires levelling and therefor a jack hammer to "etch" existing concrete, creating a major mess. Concrete is not a good bonding agent for floor tiles. "Pega Piso" is the proper material. Be sure steel beams are used above patio doors and large window openings. It is more common to see a concrete beam with under sized rebar made in location and later cracks appear with the home's structural integrity seriously at risk.
Labor while much cheaper than one pays outside of Mexico is not as cheap as it appears as they lack "productivity" tools and often do everything by hand including mixing concrete. And, due to amazing weather a smaller house will suffice. A very nice home may be built for $50 to $60 a sq foot plus land.
These issues are common even in more expensive homes. There are no apprenticeships, no formal training and no and 93% of Mexican municipalities have no construction regulations.
Architects and engineers should both be retained when designing and building. To prove their credentials ask for their cedula number which is a designation for all professionals including doctors, lawyers, notario's etc.
Pesos Payment and Rental Receipts
Pesos are the only legal currency in Mexico. If your rent contract is in USD, your landlord must accept payment in pesos at the exchange rate posted daily in the Official Journal of the Federation (Diario Oficial de la Federación) found by clicking the green button. It is illegal not to accept pesos in payment anywhere in Mexico.
Taxation For Landlords / Tenants
Your landlord must give you a fiscal receipt or invoice in exchange for the rental payment. A fiscal receipt must show the landlord's full name, fiscal domicile, RFC, the rental property address, your RFC (if you have one, otherwise the generic RFC for "Sales to the General Foreign Public" XEXX010101000 must be used), the rent amount, the period covered by that payment and, if a furnished dwelling, the IVA tax must be disclosed, and the receipt must be duly authorized by the SAT. Official facturas are evidence that your rent payment will be properly reported as income by the landlord. A tourist can not legally be a landlord.
Many landlords would tell you that, if they give you a receipt meeting all fiscal requirements, they will charge you IVA tax above and beyond the rent; of course. They are mistaken. For furnished rentals, IVA tax MUST be included in the agreed upon rent, by law. Any landlord attempting to add a second IVA tax to the rent may be subject to fiscal and criminal penalties, if reported or otherwise discovered, above and beyond the criminal penalties applicable for the fraud committed against the tenant.When a tenant pays rent to a foreigner not residing in Mexico.
HOW DO FOREIGN RESIDENTS PAY TAXES?
Foreign residents (not residing in Mexico) who are landlords etc. subject to tax payment in Mexico generally fulfilll this obligation when the person (tenant, etc) who pays them withholds the tax and pays it to the Tax Administration Service (Servicio de Administración Tributaria).
Residents in Mexico, or foreign residents with a permanent establishment in Mexico, and who pay foreign residents, are compelled to withhold the tax. When the rent is paid to a trust company / property manager, the fiduciary institution must issue the receipts, withhold and pay the corresponding tax. The tax is 25% that tenant must withhold by law.
The person who withholds the tax must pay monthly, at the latest on the 17th day of the following month to that in which withholding was carried out. If a fiduciary they must pay by 15th of the following month. Payment shall be made through the Internet or at a banking window, according to the person's obligation.
All of my services are available in Puerto Vallarta / Riviera Nayarit and San Miguel de Allende.
Please contact me for your health, life, auto, evacuation and property insurance.
Renting / Buying
It is usually better to rent first prior to buying. If you need a referral to a trustworthy Realtor please email me and I’ll be happy to share an excellent resource. There are few building codes and restrictions. Hence, you may be in an area with a carpenter shop, metal worker, event center, retail outlet very nearby or one that can appear at any time. That little store selling soda, bread, junk food and beer may seem handy but quite possibly on a Saturday night it is a local hangout for beer drinking, crude language, loud music, etc. for which complaining may mean they will make sure you move. Children play on the street as many homes have no yard. Your front and / or garage door becomes the stop for their soccer balls and this may go on until late. Complaining may result in retaliation and your being forced to move. Fireworks may initially be a novelty as may be church bells but after some time a distraction. As noted below you are likely not familiar with Mexican building techniques and the lack of codes so while the granite may impress you the wiring, plumbing, unstable ground, poor quality of windows and doors, lack of screens and improperly mixed concrete will become a major negative. If the company representing you as a purchaser does not provide a real estate disclosure form, and few do, then insist on the seller completing it before proceeding with a purchase.