Protect your investment. Record the cost of your new construction. Cash register receipts alone
won’t cut it.
The following is an overview regarding the manifestation regulations currently in place for individuals. Please note that the information is intended for individuals, not corporations. Over time these regulations may change, therefore it is important to make sure that the process outlined here is still in effect by contacting a certified accountant or Mexican Notario.
Q. What is manifesting?
A. Manifesting is simply recording the amount of money spent on a home’s construction or remodel, in order to add it to the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax. Proper documentation and manifesting your construction are vital to building your new home.
Q. Why do I need to manifest my construction?
A. 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 of your receipts, cancelled checks and bank statements will not help unless you have completed your manifestation. Before you begin construction, decide how to structure your financial arrangements with your contractor. The two main choices are Cost Plus and a Fixed Bid.
Q. What is a cost plus contract?
A. With a Cost Plus contract, the Owner pays the contractor for the cost of materials, plus a fee of 12 to 20 percent. Using this method, it is necessary to keep excellent records in order to prove all expenses. Each time you pay the contractor, he must provide you with a legal Mexican invoice called a “factura.” Each factura must be in the name of the Beneficiary named in the trust and will include a 16 percent sales tax called IVA. Without facturas, nothing you spend is deductible as an expense in Mexico. Also, with Cost Plus, you (not the contractor) are responsible for paying the Social Security tax for each person working on your home.
Q. What is a fixed bid contract?
A. With a Fixed Bid contract, the contractor quotes you a flat fee to build your home. A fixed bid includes all labor, materials, Social Security, etc. It is all-inclusive. When using the Fixed Bid process, the burden of record keeping is on the contractor, and you do not have to pay the 16 percent IVA sales tax each time you make a payment. It is, however, still necessary to receive a factura (Mexican invoice) from the contractor for each payment. The factura should reflect the amount of the payment due sans the 16 percent IVA sales tax. Mexican tax law states there is no IVA 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 burden on the contractor.
By CONNIE MEYERHOFF, ENGEL & VÖLKERS SNELL REAL ESTATE. Contact Connie
by calling 480-393-0639 US, or MX cell.: (011-521) 624-122-2237 or writing