Which are the applicable taxes in a real estate transaction? What is a "resident" and a "non-resident" for Tax purposes? Which are the percentages of applicable taxes? And how Income Tax exemptions can benefit you in a real estate transaction?
 Every time I provide services for acquiring or selling properties in Mexico, my clients always ask me the same questions: Which taxes do I need to pay? Who pays the taxes? Moreover, what is the amount to be paid?
Taxes to be paid
In relation to this, please be informed that such taxes may be the following:
▪ Real estate acquisition tax
▪ Income tax
▪ Value added tax
The real estate acquisition tax is a tax paid by the buyer. It is a local tax provided for in the Local Income Tax Law that is published every year and its percentage depends on the value of the property to be acquired; for this tax there are no tax exemptions and therefore, just be resigned to pay!
The Income tax is a tax paid by the seller over the capital gain, resulting from the price of the buy-sell transaction. Please consider that under certain circumstances, the taxpayer (seller) can be exempted from the payment of this tax or be subjected to a withholding, depending on the type of taxpayer. I will try to explain that later on.
The Value Added Tax to be paid by the buyer and it is only applicable for commercial constructions.
For Real Estate transactions related to houses, condos or lots, the taxes to be paid are: 1) Real estate acquisition tax, or 2) Income Tax (may be exempted).
For Real estate transactions related to commercial construction, please consider that in addition to the Real Estate Acquisition Tax and Income Tax, it is necessary to pay the Value Added Tax (only over the commercial construction, not the land).
• Resident and Non-resident Tax Payers
In order to know the amounts of taxes to be paid and the applicable exemptions in a real estate transaction, it is also necessary to determine whether the taxpayer is a resident or a non-resident for tax purposes.
To clarify this concept, please be aware that residency has nothing to do with citizenship. The Tax Code on a general basis provides that a resident "is an individual who has established her/his home in Mexico", a concept that is provided by the International Treaty to Avoid Double Taxation signed between USA and Mexico.
Before, the Tax Code of 2003 provided that, if you spent 183 days (consecutive or not) out of Mexico, you were not considered a resident for tax purposes: This rule is not longer applicable, but is now the one taken from the above-mentioned international treaty.
 I know you may be thinking that we have lots of migratory birds in Mexico (generally on a 6-month basis). For these friends, the law clarifies that if a person has dwelling places in both countries, then he/she has to consider the following:
"If an individual has another dwelling place in another country, he/she may be considered a tax resident in Mexico, if she/he has a "vital interest center" in Mexico.
A vital interest center in our country is defined as follows:
If 50.01% of her/his total income for the corresponding year is generated in Mexico, and If the principal place of performance of her/his professional activities is established in Mexico
Companies incorporated in Mexico and foreign companies that have established the principal management of its business or place of effective administration in Mexico are considered as tax residents.
I hope that now you are able to know if you are a resident or non-resident in Mexico for tax purposes! Your status determines the amount of tax to be paid, as well as the withholdings and exemptions applicable, so I will try to explain to you the different scenarios.
• Percentage of Taxes
Real estate acquisition Tax, as I told you before, this tax is up to 2% of the value of the property and there is no tax exemption for tax residents or non-tax residents.
Income Tax is imposed over the capital gain of the price of the property based on a progressive tariff, depending on the amount of the capital gain from the income earned (price).
If the seller is a resident for tax purposes, the income tax to be paid is from 3% to 33% over the capital gain with the possibility of being entitled to certain deductions.
If the seller is a non-resident, for tax purposes the income tax to be paid is from 3% to a 33% over the capital gain with the possibility of applying certain deductions, only if this transaction is validated before a notary public; otherwise, the amount of income tax applicable is 25% with no deductions.
- In both cases, the notary public who validated this transaction is liable for withholding the Income Tax, but if the seller is a Mexican company or an individual (tax resident) with entrepreneurial activities, then, there is no withholding, but the seller needs to consider the capital gain for the total income to be declared for the taxable year.
 Regarding property for living purposes (such as a house or a condo), the seller can be exempted from income tax, if she/he is a resident taxpayer individual, and can provide the notary public with any of the following documents in her/his name, in order to prove that she/he has lived in the property:
▪ Telephone bill
▪ Gas bill
▪ Voters badge (this is applicable only to Mexicans)
▪ Bank statement
Previously, in order to apply for this exemption, the taxpayer was required to prove by means of these documents that they had lived in the property for two (2) years. Now this rule no longer applies. In accordance with the Income Tax Law and its regulations, in order to obtain such benefit it is only necessary to provide any of those documents to the notary public.
Unfortunately, a non-resident can only benefit from this provision be proving that he/she is a resident and that he/she meets the requirements of the Income Tax Law and its regulations to be entitled to this exemption.
Regarding lots or land, this tax exemption is not applicable and therefore, the Income Tax will be paid in accordance with the percentages established for residents and non-residents.
In any case, regarding donation between spouses, ascendants to descendants and vice-versa, there is a tax exemption for residents and non-residents in accordance with the Income Tax Law.
Value Added Tax It is a 15% over the value of the commercial construction of the property based on appraisal. If the seller is an individual, either resident or non-resident, the Value Added Tax is withheld by a notary public.
If the seller is a company or an individual with entrepreneurial activities (tax residents), then, the amount of the Value Added Tax is given to the company in order that the Ministry of Finance (Hacienda or Mexican IRS) receives such amount from them.
Please consider that in addition to certain exemptions for individual tax residents, there are always options provided by the Tax Law to avoid paying Income Tax or Value Added Tax, such as share acquisitions, ventures and spin offs, in case a company is involved in a real estate transaction.
If you are looking to transfer or acquire property, please get the opinion of an accountant and a lawyer, so that you can understand in advance the amount of applicable taxes to be paid and the corresponding percentages, and as well as some tax benefits you may be entitled to.
Agustin Galindo
E-mail: agustingalindo@prodigy.net.mx
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