Manifesting Your Construction

Man­i­fest­ing Your Con­struc­tion
Record­ing the Cost of Your New Construction

WHAT IS MANIFESTING?

Man­i­fest­ing is sim­ply record­ing the amount you spent on your con­struc­tion, or remodel, in order to add this to your cost basis. Adding to your cost basis is the key to reduc­ing your Cap­i­tal Gains Tax. Proper doc­u­men­ta­tion and Man­i­fest­ing Your Con­struc­tion is a vital part of build­ing your new home.

WHY DO I NEED TO MANIFEST MY CONSRTUCTION?

When you sell your home, the Man­i­fested cost plus the cost of your lot stated in your Trust (Title), will be used to deter­mine the basis for Cap­i­tal Gains tax.

If you have not Man­i­fested Your Con­struc­tion, Mex­i­can Tax Law will not rec­og­nize your con­struc­tion costs and you will not be able to use them as a deductible expense. All your receipts, can­celled checks and bank state­ments will not help, unless you have com­pleted your Manifestation.

Before Your Begin Construction…

Decide how to struc­ture your finan­cial arrange­ments with your con­trac­tor. The two main choices are Cost Plus and a Fixed Bid.

COST PLUS

With Cost Plus, you pay the con­trac­tor for the cost of mate­ri­als, plus a fee of 12% to 20%. Using this method, you will need to keep excel­lent records in order to prove all your expenses. With Cost Plus, you are respon­si­ble for pay­ing the Social Secu­rity tax for every per­son work­ing on your home… your con­trac­tor is not.

Each time you pay the con­trac­tor, he must pro­vide you with a legal Mex­i­can Invoice called a Fac­tura. Each Fac­tura must be in your name and will include a 10% sales tax call IVA Tax. With­out the Fac­turas, noth­ing you spend is deductible as an expense in Mexico.

FIXED BID

With a fixed-bid con­tract, the con­trac­tor quotes you a flat fee to build your home. A fixed bid will include all labor, mate­ri­als, Social Secu­rity, etc. It is all-inclusive. When using the Fixed Bid process, you put the bur­den of record keep­ing on the con­trac­tor and you do not have to pay the 10% Mex­i­can IVA Tax each time you make a pay­ment. You will still need to receive a Mex­i­can Invoice, Fac­tura, from the con­trac­tor for each pay­ment; how­ever, the Fac­tura should reflect the amount of the pay­ment due with no 10% sales tax (IVA Tax).

IVA Tax is basi­cally a sales tax and Mex­i­can Tax Law states there is no IVA Tax for the con­struc­tion of a per­sonal res­i­dence, pro­vided the con­trac­tor is pro­vid­ing an all-inclusive bid. Again, the fixed bid process is much less labor-intensive for you and puts the major­ity of the record keep­ing on the contractor.

TIP:When using Fixed Bid, make cer­tain the con­trac­tor is in agree­ment to pro­vide you with a Fac­tura for each pay­ment with no 10% sales tax added. Have this in writ­ing in your con­struc­tion contract.

PULLING A BUILDING PERMIT

The build­ing per­mit is the first step to Man­i­fest­ing Your Prop­erty cor­rectly. You will need the per­mit both to start con­struc­tion AND to fin­ish the con­struc­tion. The per­mit is pulled from the gov­ern­ment office called Obras Pub­li­cas, mean­ing Pub­lic Works. Nor­mally, the con­trac­tor will pull this per­mit and there are two things you need to watch for.

1. Make sure the Build­ing Per­mit is pulled in the same name as the Ben­e­fi­ciary named in your Trust.

2. Make sure the Build­ing Per­mit rep­re­sents the approx­i­mate amount of the con­struc­tion the con­trac­tor has pro­posed to do the work.

The fee for the Build­ing Per­mit is based on the esti­mated value of your con­struc­tion. In and effort to reduce this fee, some con­trac­tors will report a lower con­struc­tion amount when pulling the per­mit. This is a huge mis­take! You will want your con­struc­tion costs recorded accu­rately, so your cost basis will be accu­rate for cap­i­tal gains. Never report a lower con­struc­tion value to save some money on the per­mit fee, because it will cost you much more in the long run!

LETTER OF TERMINATION OF WORKS

When con­struc­tion is fin­ished, and you are ready to Man­i­fest Your Con­struc­tion, you will need to take your Build­ing Per­mit to the Obras Pub­li­cas office with a let­ter stat­ing the amount you spent and that you have fin­ished your con­struc­tion. You or your con­trac­tor can write the let­ter. With this let­ter, you will request an offi­cial state­ment of com­ple­tion called an “Adviso de Ter­mi­na­cion de Obra”, which means a “Let­ter of Ter­mi­na­tion of Works”.

This let­ter will state the amount you spent on your con­struc­tion, which should be in accor­dance with the amount stated on the Build­ing Per­mit. THIS LETTER IS THE DOCUMENT THAT ACTUALLY ESTABLISHES YOUR CONSTRUCTION COST BASIS FOR THE TAX OFFICE.
SOCIAL SECURITY

Social Secu­rity is very seri­ous issue in Mex­ico and your home can actu­ally be liened or sold to force pay­ment if these taxes are not paid. This can even hap­pen years after you fin­ish your construction.

When you receive your “Let­ter of Ter­mi­na­tion of Works”, Obras Pub­li­cas will send a copy to the Social Secu­rity office. They will com­pare this amount with what you or your con­trac­tor has paid to Social Secu­rity dur­ing con­struc­tion. (If you are using Cost Plus, you are respon­si­ble for pay­ing the taxes and if you are using Fixed Bid, the con­trac­tor is responsible.)

If the amount of Social Secu­rity Taxes paid cor­re­sponds to the amount of your con­struc­tion, you will receive a let­ter from Social Secu­rity called a “Carta de Razon­abil­i­dad de Pago”, mean­ing a “Let­ter of Rea­son­abil­ity of Pay­ment”. This let­ter is very impor­tant, as it is your pro­tec­tion to pre­vent any future claims for non-payment of Social Secu­rity taxes.

MANIFESTING YOUR CONSTRUCTION

Once you have your “Let­ter of Ter­mi­na­tion of Works” and your let­ter from Social Secu­rity, you sim­ply take them to the Tax Office, called the Cat­a­stro Office. They will record the value and add it to the cost reflected on your Trust doc­u­ment. Once com­pleted, you have suc­cess­fully Man­i­fested Your Con­struc­tion and estab­lished an accu­rate tax basis for your property.

If you do not have a Trust, you should not begin con­struc­tion. With­out the Trust doc­u­ment, you can­not pull a build­ing per­mit in your name and you run the risk of not being allowed to deduct your land cost or con­struc­tion cost when you sell.

Remem­ber: Annual prop­erty taxes are rel­a­tively low in Mexico…capital gains taxes are not. Reg­is­ter­ing an arti­fi­cially low num­ber will cost you much, much more in the long run!

La Punta Realty will work with you to make cer­tain all your doc­u­ments are in order and your actual costs are recorded prop­erly. There are no short-cuts and no legal ways around taxes here, any more than there are in the United States or Canada. Your home is a large invest­ment, and fol­low­ing proper legal steps will ensure a safe and enjoy­able expe­ri­ence in Mex­ico. If some­one says, “This is Mex­ico and that’s the way we do it here” , they have just thrown up a red flag and you should seek another contractor.

Always get your Trust. Always record the real value of your pur­chase. Always pur­chase U.S. Title Insur­ance. Always man­i­fest your construction.

La Punta Realty is the rec­og­nized real estate leader in North Bay Puerto Val­larta. We use U.S. Title Poli­cies and U.S. third party escrows in Mex­ico for all our trans­ac­tions. We under­stand the local laws regard­ing own­er­ship of real estate in Mex­ico by for­eign investors, and we will put this knowl­edge to work for you to make cer­tain your invest­ment protected.

If you are con­sid­er­ing a real estate pur­chase in North Bay Puerto Val­larta, make sure every­thing is done right by allow­ing La Punta Realty to work for you. We are an inde­pen­dent bro­ker­age, assur­ing you that our only inter­est is rep­re­sent­ing you in a real estate trans­ac­tion that is safe, solid and secure.

Our strength is in our com­mit­ment to safe­guard­ing the inter­ests of our clients. We will offer no prop­er­ties that can­not secure a U.S. Title pol­icy with Stew­art Title Guar­anty. No other real estate firm in North Bay Puerto Val­larta is more ded­i­cated to pro­tect­ing your inter­ests and ensur­ing a safe, clean trans­ac­tion for both buyer and seller.

This arti­cle is taken from Snell Real Estate in Cabo San LucasMa