death and taxes

by linda neil 

AFTER THE PURCHASE IS COMPLETED - PART II

Miscellaneous information for new property owners   

The Baja Peninsula is a place of incredible natural beauty; wonderful mountains, delightful beaches, lots of good activities.  
You have wonderful properties to select from and capable real estate professionals to guide you.
It is Easy to fall in love!!

Once the ink is dry on the deed, you may have some questions and concerns.  Let’s talk about those questions and concerns.

DEATH and TAXES…………….both are inevitable!
The Tax Collector for the Mexican government is known as SAT, in English the Secretariat for Administration of Taxpayers.   It collects all federal taxes such as the ISR (income tax), the IVA (added value) tax and other special taxes.   

The IVA tax is 16% of the amount of goods and services, medicine and food is exempt.  There is no IVA tax on the sale of vacant land or residential dwellings, but there is IVA on commercial buildings.   VERY IMPORTANT:    There is an IVA tax on furnished rentals. Under the law this tax is paid by the TENANT, not the landlord.     In reality total rental amount is generally stated by the landlord with IVA included in the rental amount.

The ISR , literally the tax on rents is both an income tax and a capital gain tax when a property is sold

Any income generated from sources within Mexico is taxable.   If from a business or a salary the rates are variable depending upon the amount of income received

 On the sale of a primary residence PROVIDED THE tax resident has lived in the home for five years, and is a tax resident, the tax paid is the excess of 1,500. UDIS. Currently about 15 pesos per UDI or 225,000 USD.   UDIS are unidades de inversion    -investment units and were established in times of high inflation but remain today and are the key to the exemption.

The Tax resident has a taxpayer identification number, known as RFC and makes annual declarations on worldwide income.

A vacation or second home has no exemptions.   The tax on these transactions is 30% of the difference between the amount declared in the deed and the new value in the deed at time of sale, less allowable deductions.

The amount declared in the deed is the tax basis.   Back in the old days, many prided themselves on putting the LOWEST value possible in the deed since this helped minimize closing costs and in keeping property taxes low- This has all changed now it is virtually impossible to put an artificially low value on a purchase.   

Notaries do not take responsibility for the money exchanging hands but the new buyers almost always INSIST upon having full value declared so that they have a level playing field when they sell and the new buyer INSISTS upon having HIS/HER purchase price declared in the deed.

Since there are no tax breaks available for those who sell their vacation homes, what can we deduct?   A sales commission, certain legal services,   remodeling projects, construction and improvements to the property.    These expenses must be well documented however with FACTURAS (invoices) for services and purchases.  

And DO IT YOURSELF PROJECTS; painting, replacing plumbing, flooring these will NOT be deductible.   Hire a contractor and make a written agreement for the work to be done.    After all, if you go t Home Depot and buy a can of paint who is to say that it will be used for a specific project in a specific property?   Mexico’s tax people say a big NO!

This is the case for construction, modifications that raise the tax basis upon sale.  It is NOT the same for rental properties however.   Repairs and modifications and do it yourself projects can be deducted from rental income if you are registered with SAT as a resident and have an RFC.









about the author:

LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers, escrows,and consultations.  Just added as a new service, Settlement will now prepare monthly tax declarations on rental properties, file them and perform additional essential landlord accounting services.

For reprints of this article or for further information on tax paying services, please contact The Settlement Company® at info@settlement-co.com, and website: http://www.settlement-co.com