Living in Los Cabos: A Special Consideration for Sellers
One of the things we think about when placing a property on the market is what the seller is going to end up putting in their pockets when the deal is concluded. This is not my favorite part of my job because quite often I’m the first person to tell them they are going to owe a ton in capital gains tax. But, it’s necessary and better than having a nasty surprise at the closing table.
In reality there are at least four factors that could cause a big capital gains tax bill:
The seller actually did make a ton of bucks, in which case I really don’t want to hear any griping,
The registered price they bought it for, or what was spent to build it, is lower than reality (there are a number of possible reasons, only one of which involves dirty tricks),
The sale involves a corporation or business, and
The peso has shifted versus the dollar significantly since they bought.
It’s that last one that we tend to forget about; especially here in Cabo where we deal in dollars so often in our daily lives. Our real estate community speaks dollars almost 100%. Our prices are quoted in dollars, we negotiate prices in dollars, and we write contracts in dollars. Every piece of paper the buyer and seller see reference the price in dollars. Yet the truth is the actual transaction occurs in pesos. On the day of the closing the Notario Publico (see prior blogs, this is the magistrate-like official who presides over the transaction) will make the conversion from dollars to pesos and that is the amount that is registered as the sale price. Which is fine… as long as the peso is stable.
This morning I was working on the paperwork for a property we’re going to put up for sale. One of the reasons we ask for the trust is to check the values and make a rough (very) calculation of what their net proceeds will be in event of the sale. Taking the date of the trust, and the value recorded in pesos I can go onto the SAT website (SAT is the Mexican equivalent of the IRS) and consult their tables to see what the official exchange rate was on that day. The exercise caused me to draft the following email which I think is a good enough explanation to warrant blogging it.
“My major concern right now is capital gains tax. I've just taken a spin through the documents pertaining to the house. One of the big problems I see here is out of our control.... the exchange rate. We know that this is probably going to take a while to sell the house, average time on market right now is over one year, and we don't know what the exchange rate will be in the future. But, if we were to sell today we have an artificial gain in addition to the real gain. The day your purchase was recorded the exchange rate was 9.71 according to the tax agency. Today's is about 14.5. Since the sale is registered in pesos, and the gain in pesos is what is taxed, you can see that it's going to have a big impact. Looking at a hypothetical $100 house, if you paid 100 US in 2001 and sold for 100 US today you would think there is no gain and therefore no tax due. But to the tax agency it would look as if you bought for 97 and sold for 145. The tax on that 'gain' would be $16.80. So there is a built in artificial gain of about 17 percent just on the exchange rate. If the rate is higher on the day we sell the effect will be greater, if we inch back down close to 10/1 it will go away.”
Sellers need to be aware of this phenomenon and take it into consideration. There are several legal strategies to reduce the amount of capital gains tax due to some other factors, unfortunately there’s no cure I know for this effect.
Carol Billups is Broker/Owner of Cabo Realty Pros. She has enjoyed working with both buyers and sellers for over eleven years and still thinks hers is the best job on earth. She is also the real estate columnist for Los Cabos Magazine. You can read more of her articles on the website blog www.caborealtypros.com. You can reach her from the U.S. or Canada at 1-760-481-7694, or in Cabo at 044-624-147-7541. You can listen to our 24/7 broadcast on http://www.livecabo.net for a mix of happy music, weather reports and local information.
© 2015 Carol S. Billups