New tax law misconceptions
There has been much controversy and misinformation around the new Mexican tax laws that were finalized last November and put into effect at the beginning of this year. These laws were were part of the reforms Pena Nieto’s administration has passed along with labor, security, energy, telecommunications and many others since his inauguration a little more than a year ago. The stated goal of this tax overhaul is to close loopholes and force the underground economy, which is estimated to be 50% of Mexico’s economy, to be included in the tax base. This reform includes changes to the old policies on VAT, corporate income tax and new consumption taxes on sugary drinks and pet food. For this article I will just be concentrating on the capital gains exemption.
Once passed, extensive changes like these take a while to shake out through the system to see exactly how they will be enacted and enforced. Although many aspects are still being debated and looked at as to how they will effect the real estate sales process there are some common misconceptions that we can clear up.
Misconception #1: Everyone will have to pay a 30% capital gains tax from now on.
The capital gain tax exception still exists. The only thing that has changed is the amount that can be exempted has been cut by more than half from around 7.6 million pesos ($570,000 US) to 3.55 million pesos ($267,000 US). This means that if your house is sold for less than $300,000 you will not be liable to pay any capital gains. Also, there are many instances where your sales price is over this amount and will need to pay only a small amount or possibly nothing at all.
Misconception #2: You will now need a receipt from the contractor to deduct any additions that you have made to your property.
It is true that the tax authority will ask for receipts directly from the contractors if you wish to deduct that exact amount at closing. However, if you have already had work done to your property but do not possess the receipts there are still ways that you can deduct close to the same amount using a special assessment. It is important to note that if you have not been getting them you should from now on be collecting a factura from any contractors that work on your property and have it reflect the highest possible value if you later wish to use it as a tax deduction.
Misconception #3: You can only deduct 3 times the constructed land from the entire sales price.
This is a provision which will not effect most people in or near centro but only property owners who have a large amount (parcel) of land where only a small percentage of which has construction. It is true that the maximum area that you can use for deductions is three times the constructed land. What many people do not know is that all of the land inside of your lot is not necessarily valued the same. Normally people will build on and around the best part of the land and will leave the least valuable amount unconstructed. There are ways to revalue your property where you are able to adjust the valued percentages higher on your constructed land and lower on the unconstructed land in order for you to have a higher possible deductible amount percentage wise.
Misconception #4: You need a electricity and water bill in your name for the past five years as well as a voter registration card to qualify for the exemption.
You may be asked to produce all of these things by the notary. However, different notaries interpret the law in different ways and some will ask for over and above what the law requires in order to play it safe. If you are unable to produce the documents asked by the notary you may want to check with a different notary to see if they will accept different documentation that will qualify you as a fiscal resident. It is the responsibility of the notary, not you, to interpret the law in this manner so there is no risk to you in following a different notaries instructions.
Misconception #5: Real estate brokers have just started being charged IVA on their commissions.
The laws have not changed in this regard. What has recently changed is the requirement by the local real estate association to include commission + IVA in the broker contracts if the property is to be marketed in the Mexican MLS. Also, the new law may cause sellers who may now have to pay higher capital gains taxes to seek as many deductions as possible. If they want to use the realtors commission as a deduction they will need to get factura which must include an additional 16% IVA.
Rather than trying to navigate the complicated tax laws yourself you should have a qualified professional work with you to assess your personal situation. These are only the tip of the iceberg of techniques that can be used in order to legally lower your tax burden.