MANIFESTING YOUR CONSTRUCTION
Protect your investment. Record the cost of your new construction or any remodel to the current one. 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 is still in effect by contacting a certified accountant or Mexican Notario.
Q. What is manifesting?
A. Manifesting is recording before the Municipal Office of Catastro the characteristics, the surface, type of materials and the value of the construction. Manifesting the construction is the last document that is issued when you are building your new home.
Q. What is a letter of termination of works and why is it necessary?
A. When construction is finished and you are ready to manifest your construction, you will need to take your building permit to the Departamento de Obras Publicas (Public Works Office) with a letter stating the total amount you spent on your construction and confirmation that construction is finished. You or your contractor can write the letter. With this letter, you will request an official statement of completion called “Aviso de Terminación de Obra,” which is a “Letter of Termination of Works.” This letter will state the amount of money you spent on your construction, which should be in accordance with the amount stated on the “building permit”. Such amount is taken in order to determine the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax.
The Letter of Termination of Works is the document that actually establishes your construction cost basis for the tax office.
Q. Why do I need to manifest my construction?
A. When you sell your home, the value stated in the Letter of Termination of Works plus the cost of your lot stated in your trust (title), will be used to determine the basis for capital gains tax, otherwise the 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 the “Letter of Termination of Works” and the proper “Manifestation” sheet. Also, when you sell your home if you have not manifested the construction, the closing process cannot be completed properly. The Manifestation will allow to issue the appraisal required by the law.
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 plus 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.
Q. How do I pull a building permit?
A. The building permit is the first step to manifesting your property correctly. You will need the permit to start the construction. The permit is pulled from the “Departamento de Obras Publicas,” the government Public Works office. Normally, the contractor will pull this permit. Be advised that 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 quoted.
The fee for the building permit is based on the estimated value of your construction. In an effort to reduce this fee, some contractors will report a lower construction amount when pulling the permit. This is a huge mistake. You want your construction costs recorded accurately so that your cost basis will be accurate for capital gains.
Hint: When using Fixed Bid, make certain the contractor is in agreement to provide you with a Factura with no 16 percent sales tax added for each payment. Remember to have this in writing in your construction contract.
Hint: Never report a lower construction value to save some money on the permit fee — it will cost you much more in the long run.
- See more at: http://www.snellrealestate.com/property-in-mexico/buyers-guide#sthash.J6nRR1Qb.dpuf. For more information contact Janet Jensen, Broker of Snell Rea Estate at (624) 141-6726, Toll Free - +1(866) 398-4466, firstname.lastname@example.org