The Costs and Taxes of Selling Property in Mexico

When you buy a property in Mexico, you’ll be presented with a range of ‘closing costs’ in addition to the property price; these costs usually range between 5% and 10% of the property’s sale price.  When you eventually come to sell your Mexican property, the buyer will pay most of the closing costs, but there are some selling costs and taxes you will need to account for.

There are three main types of costs when you’re the seller:

• Selling fees
• Professional service fees
• Taxes

Selling Fees

It’s possible to market and sell your property without the services of a local realty agent; however, as we explain in our Guide to Realty Agents in Mexico, the fee you pay the agent is usually worth the money: in addition to the risk-free marketing you’re given, agents provide a valuable conduit between the negotiations, and undertake considerable paperwork and project management to bring a property sale to successful completion.  Realty agents in Mexico typically charge up to 8% of the sale price in commission—and you need to add Mexican sales tax (IVA) to this (16%), so if your fee is 8%, your real fee is 9.28% taking into account the sales tax on the commission.

Professional Fees

In Mexico, the role of the Notary Public is paramount in property transactions.  As we explain in our Mexico Real Estate Guide, a Mexican Notary Public is a legal professional with very important statutory roles.  The fees for the Notary Public are paid for by the buyer.  Some buyers also choose to hire a lawyer, which can add several thousand US dollars to their fees, but this is not necessary for most transactions. If the property you are selling is held in a Bank Trust (fideicomiso), then you will also need to budget for a ‘trust cancellation fee’ that is levied by the bank; the amount varies, but you should budget for around US$1,000 to cover this.

Taxes

Taxation on residential property sales is a complex area of Mexican tax law and every case will be slightly different depending on the circumstances.  Also, keep in mind that tax laws are subject to reform and because house purchases tend to be long-term investments, the tax laws which apply today might apply entirely, in-part, or not at all when you come to sell your property years from now.

These are the key principles of residential property taxation in Mexico as of the date of this article, and guidelines here are intended to help you compose an estimate of the taxes you will be expected to account for when you sell a residential property in Mexico (different rules apply for commercial property).  You should seek professional advice from a Notary Public and/or tax accountant in Mexico to get a detailed appraisal of your situation. Note also that if you are not a Mexican National then you might also be liable to taxes in your home country and you should seek advice from a tax accountant there, too.

Tax Calculations

Taxes due on the sale of residential property are calculated by the Notary Public, who also withholds these amounts for direct transfer to the Mexican Treasury.  The tax law makes each Notary Public fully liable for taxes due, so they will absolutely ensure that the rules have been followed and certify that sellers qualify for any exemptions and deductions they are claiming for tax relief.

Capital Gains Tax: 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): the percentage is calculated on a sliding scale in relation to the gain and we recommend you assume 35% as residential property sales with a gain above $250,000 pesos (c.$13,000 US dollars) will be subject to this rate.

One-Off Exemption: If you are a permanent resident in Mexico with a Mexican tax ID (known as a RFC, or Registro Federal de Contribuyentes), and the property you’re selling is your primary residence, you can offset a one-off exemption in addition to some other allowances against the sale price before the capital gain tax rate is applied.  The flat-rate exemption is the peso equivalent of 700,000 UDIs. Learn more about UDIs here. At the present exchange rate, this equates to approximately $3.99 million Mexican pesos and you can deduct this amount from the sales price if you qualify (see above).  If the home is properly co-titled with your spouse or other family member and they are permanent residents with a Mexican tax ID and the house is their primary residence too, you can deduce an additional 700,000 UDIs in their name.  The exemption is not automatic: you must qualify, and you must prove the qualification.  You can only claim this exemption once every three years.  Talk to your Notary Public about how to arrange this and what you need to do to present the necessary records for proof.

Deductions for Capital Improvements: You can 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 Notary Public on how to account for these—and follow it. 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, 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. Any capital gains are calculated only in Mexican pesos and therefore, shifts in the exchange rate can influence your tax liability.

Example of the Effect of Exchange Rates on Capital Gains

You purchased a home for US$500,000 dollars years ago, when there were 10 pesos to the dollar.  Your deed shows a sale value of $5 million pesos.  If you sell the home today for the same US$500,000 dollars (with nearly 20 Mexican pesos to the US dollar), the peso value equivalent is $10 million – an effective $5 million pesos gain on paper, upon which taxes may be due after exemptions and deductions.  Keep this in mind when you are ready to sell if you purchased a home based on the dollar value and expect to sell it using a dollar value because your tax liabilities are calculated in pesos, not dollars.

Non-Residents

If you are not a permanent 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 Notary Public is Key

The Notary Public (in Spanish, Notario Público) 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 them about what you need to do to plan your estate efficiently, how to structure your arrangements, and how to keep the 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.

The information on this article is provided for general information in good faith and is not intended as legal, financial or investment advice.