Selling a house in Mexico means paying a capital gains tax. But then you can take a deduction on your U.S. return.
When you sell a Mexican property, the buyer will pay most of the closing costs. But you are responsible for selling and professional-service costs, fees, and taxes.
You must make sure that all property taxes, annual payments on a fideicomiso, and any corporate taxes are up to date. You are also responsible for capital gains taxes, commission fees, any lien on the property, and, if applicable, up-to-date documentation of your Mexican corporation.
One of the most important taxes you need to deal with is the capital gains tax.
What is a capital gains tax?
Nonresidents must pay Mexican taxes on property located in Mexico. The capital gains tax is 25 percent of the total gross income or 35 percent of the net gain minus expenses for improvements, commissions, and other allowable deductibles. The percentage is calculated on the basis of the exchange rate at the time of closing.
For sellers residing in the United States, the method of determining a capital gains tax depends on whether your property was an investment or actually your home. The Internal Revenue Code permits certain exclusions if the property has been your primary residence for at least 24 out of the last 60 months as of the date of the sale. If so, you can exclude $250,000 of capital gains from being taxed if you are single, and you can exclude $500,000 from being taxed if 1) you are married and 2) you and your spouse file a joint return. Tax rates are lower if you have owned the property for more than a year.
Because of the treaty between Mexico and the U.S., you do not necessarily have to pay U.S. taxes on a sale in Mexico if you claim the Mexican taxes on the sale as a foreign tax credit on your U.S. return. But you need to determine whether this is the case.
Also important to know:
- Other U.S. tax rules apply if your house is a rental property. The gains are calculated differently.
- Although the IRS permits no exclusion in the case of a rental property as it does in the case of a personal residence, you may still deduct costs like maintenance costs. You may also be able to claim depreciation.
- Corporations obey different tax rules than private real estate holders.
- Undeveloped land is taxed differently than developed properties.
The Role of the Notario Público (Mexican Notary Public)
A notario público doesn’t have quite the same job as the typical notary public in the United States. In Mexico, notary publics are attorneys who act on behalf of the state government and the federal government in relation to a transaction. The purchase of a property takes place at the office of the notary public. The notary essentially closes the sale.
Along with your Cabo real estate agent, the notary public is one of a your key contacts. He will help you to calculate the taxes that are now due, including the capital gains tax, and will clarify whether you qualify for any exemptions and deductions you hope to claim.
How can you reduce your capital gains tax?
When you sell a home in Mexico or any other foreign country, you must report the transaction on your U.S. tax return, just as you report any other income you receive that will be taxed by the United States government. Certain deductions are allowed that can lower the amount of capital gains tax that you owe and must report to the IRS.
The deductions and allowances may include certain maintenance costs and capital improvements like building extensions, new flooring, swimming pools, and new rooms. However, general maintenance, home improvements, and remodeling may not count as capital improvements. If you’ve made significant renovations and your expenses exceed 20 percent of the purchase price, you will need a new assessment from the property tax authority. The increase in value will reduce your capital gains in the future.
If you plan to use any capital improvements as deductions, make sure you keep the receipts for all services and building work. Without the receipts, you won’t be able to claim these allowances when you sell.
If you sell your principal residence at a loss, this amount may be divided by the number of years the home was owned, up to ten years. The loss may be used to offset other taxable income on gains from other property sales.
If the property is an inheritance or a donation, you are exempt from the capital gains tax.
Although we recommend that every seller conduct his own due diligence, we’re happy to answer any questions you may have. We also recommend that you talk to us about the estimated capital gains on the sale of your home so that there are no surprises.
If you’re ready to discuss selling your Los Cabos home, contact us to schedule a detailed consultation. We’re a small, experienced team of local real estate experts who have lived, owned businesses, and worked in the realty industry in Cabo for over ten years and can help you navigate even the most complex of transactions.