Real Estate Tax in Mexico

Taxes are usu­ally paid in cash and all peo­ple are oblig­ated, as pro­vided by law, to pay them to the Mex­i­can gov­ern­ment. The Con­sti­tu­tion estab­lishes the rights and oblig­a­tions of all cit­i­zens and one of these oblig­a­tions is pre­cisely the pay­ment of taxes. 

Taxes are one of the prin­ci­pal ways by which the gov­ern­ment earns rev­enue to cover the needs of soci­ety, such as pro­vid­ing a judi­cial sys­tem, pub­lic safety, edu­ca­tion, infra­struc­ture (hos­pi­tals, streets, roads, pub­lic build­ings, etc.) and welfare.

In recent years, Mex­ico has reformed its tax laws due to glob­al­iza­tion and inter­na­tional trade, how­ever real estate tax has not under­gone major changes because these assets are not sub­ject to inter­na­tional trade and can not be trans­ported from one place to another, in light of this, the tax bur­den for buy­ing and sell­ing real estate remains basi­cally the same as it has been for many years.
 
The Mex­i­can Gov­ern­ment con­sists of three lev­els; fed­eral, state and munic­i­pal, peo­ple must pay taxes on all three lev­els when buy­ing and sell­ing real estate. Hav­ing briefly explained why we pay taxes, we will now detail each of the taxes that are due when pur­chas­ing real estate.

TAXES ON THE PURCHASE OF PROPERTY

In Mex­ico, the for­mal­iza­tion of the sale of any piece of real estate will cause fed­eral, state and munic­i­pal taxes, which must be paid by the seller or buyer depend­ing on the tax we are talk­ing about. 
 
At the moment we buy prop­erty, we are oblig­ated to pay var­i­ous taxes:

Fed­eral: 

- Income Tax for acqui­si­tion of prop­erty. It is gen­er­ated by the increase to a per­sons wealth and it is caused when we pur­chase an asset at a lower price than an offi­cial appraisal sets for that asset, pro­vided that the dif­fer­ence is greater than 10%, in this case we have to pay income tax on a rate of 20% cal­cu­lated on the dif­fer­ence.
 
- Value Added Tax, VAT. A so called indi­rect tax due to the fact that it is not the gov­ern­ment that col­lects it but rather the per­son sell­ing the piece of real prop­erty. It is only caused in non hous­ing prop­erty and has a rate of 15% of said con­struc­tions. Con­struc­tions and land on hous­ing prop­er­ties are exempt of this tax.
 
- Rights. Rights are taxes that are caused in the 3 lev­els of gov­ern­ment already men­tioned. They must be paid in exchange for the ser­vices pro­vided by every level of gov­ern­ment. For example:

• Fed­eral - The license granted by the For­eign Sec­re­tary for an alien to acquire prop­erty in Mex­i­can soil.
• State - Reg­is­tra­tion of title.
• Munic­i­pal - Issu­ing a cer­tifi­cate of good standing.

State (State of Jalisco): 

- Busi­ness and Legal Instru­ments Tax. This tax is reg­u­lated by the Law of Finance of the State of Jalisco and the Rev­enue Act of the State of Jalisco, stip­u­lat­ing a charge in 2008 for the trans­fer of prop­erty for the amount of $ 100.00 (one hun­dred pesos).

It is worth men­tion­ing that this tax is caused by a vari­ety of acts and con­tracts, not­ing a per­cent­age accord­ing to the type of act or con­tract of no less than 0.5% and no higher than 1.0% of the value recorded in the act or contract.

Munic­i­pal: 

Asset trans­fer Tax. (ITP) (also known as Acqui­si­tion of Build­ings Tax, ISAI), is caused by the trans­fer of own­er­ship of prop­erty, that is, the buyer of a prop­erty must pay this tax when chang­ing the record of own­er­ship before the munic­i­pal­ity. This tax is reg­u­lated by the Munic­i­pal Finance Law of the State of Jalisco as well as by the Munic­i­pal Income Law in which the prop­erty is located, this cal­cu­la­tion is car­ried out accord­ing to a rate applied to the value of the appraised prop­erty, said appraisal must be approved by the munic­i­pal coun­cil, the high­est rate in each munic­i­pal­ity of Jalisco is cur­rently 2.5%.

TAXES ON THE SALE OF PROPERTY

Hav­ing stated the taxes caused when acquir­ing a piece of real prop­erty, we will now men­tion those caused when selling.

The only tax a seller is sub­ject to is income tax. This tax is caused in view of an increase in wealth of the seller when the home was sold at a greater price than it was pur­chased expressed in Mex­i­can pesos, infla­tion rates are applied to all amounts in order to be coher­ent. To said profit, the rate estab­lished by law will be applied. The fol­low­ing deduc­tions are authorized

• The updated orig­i­nal cost of acqui­si­tion of the prop­erty. 
• The updated amount of invest­ment in con­struc­tion, improve­ments and exten­sions. 
• Notary fees, taxes and rights paid in the acqui­si­tion and sale. 
• Pay­ments for appraisals. 
• Com­mis­sions and medi­a­tions paid by the seller in con­nec­tion with the sale.

How­ever, there are cases where the per­son who has sold his res­i­dence lives abroad, mean­ing that per­son has no per­ma­nent res­i­dence in Mex­ico. This cre­ates dif­fer­ent sce­nar­ios, for example:

• Income deriv­ing from the sale of real estate found in Mex­ico is con­sid­ered income to have orig­i­nated in Mex­ico regard­less of the place of residence.

• A rate of 25% is applied with no pos­si­ble deductions.

• When sell­ing real estate through a proxy in Mex­ico, the seller can apply a max­i­mum rate of 28% if and when the sale is doc­u­mented through a pub­lic instrument. 

• The gain will be deter­mined by sub­tract­ing from the total income of the sale apply­ing the same deduc­tions men­tioned above.

• For this pur­pose, the rep­re­sen­ta­tive shall inform the Notary of any cor­re­spond­ing deductions.

• In this case the Notary must cal­cu­late the cor­re­spond­ing tax and report it to the authorities.

Excep­tions to income tax: Under the fed­eral income tax law, indi­vid­u­als who sell their place of res­i­dence are exempt from pay­ing this tax; such exemp­tion applies only if the pur­chase price is not higher than 1,500,000 UDIS (invest­ment units), which cur­rently is equiv­a­lent to approx­i­mately 6,260,000 Mex­i­can pesos. If the pur­chase price is higher, seller must pay income tax on the excess, with cer­tain deduc­tions. If the seller is a for­eigner, in cer­tain cases this exemp­tion applies. This must be con­sulted with a tax expert and dis­cussed with the Notary Pub­lic involved.

Finally we would like to point out that you need not worry over tax bur­dens con­cern­ing real estate trans­ac­tions. Notary Public’s are legal experts with broad knowl­edge of both the law and tax issues. They will advise you on what taxes must be paid and it will be the Notary who actu­ally reports the tax to the author­i­ties; how­ever, as expressed above, in cer­tain cases an inde­pen­dent tax con­sul­tant should involved. 

Rob­les, Lazo y Gal­lardo — Law Firm 
E-mail: jgallardo@rlg.com.mx

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