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Confusion on Real Estate Terms in Mexico
By Harriet Cochran Murrray • Cochran Real Estate - December 2010

Confusion on Currencies?

The purchase price of real estate in Puerto Vallarta and the Bay of Banderas (which includes parts of the states of Jalisco and Nayarit) is usually in US dollars. Buyers’ closing costs are in pesos. The actual peso charge will be computed the day of closing when the property is transferred to the new owner. The buyer usually pays 50% of the estimate of the closing costs upon removal of contingencies in the offer. The balance of the closing costs will be paid at closing. The total amount of closing costs will be recomputed using the closing date peso rate. The buyer will receive credit for the payment he made prior, and either wire or pay by check the balance in either pesos or the equivalent in US or Canadian dollars.

When a buyer sells, any capital gains tax due will be in pesos. If a buyer buys at 10 pesos to the US dollar, and sells at 13 pesos, he can have a gain on paper. Conversely, if the peso is 10 when selling after buying at 13, the seller can have a loss. UDI’s are units used to adjust the difference in currencies to be less disproportionate from each other.

If a buyer is purchasing a property more than 10% below the original purchase price or the tax value, calculations are done in pesos to computer an acquisition tax owed by the buyer. What is this tax? It is the difference in what the buyer is actually paying for the real estate, and its higher value. Why the tax? When buyers and sellers abuse the law and declare a false lower purchase price thinking they are saving on closing costs, they also corrupt the system. The Mexican government is aware of artificial “low deeds” being declared, therefore: when a lower purchase price is reported of more than 10%, there is a tax for the buyer to pay in return for the discounted price he is receiving. The closing costs for the buyer will be computed on the higher value. The buyer then has a higher basis in the property than what he has paid as a purchase price. Paying his extra tax allows him to use the higher basis.

Confusion on Default and Contingencies in regard to Earnest Money ?

Earnest money or a deposit is put up in most transactions, whether through a third party escrow or not.  In most resales with foreigners, an escrow company holds the deposit and the balance of the purchase funds. An escrow contract has been signed, separate and apart from the Purchase Contract.

The Purchase Contract may have contingencies for the buyer, which must be solved or accepted before a deposit is put into escrow. Usually the agreement is written for the escrow contract to be signed by both parties and sent to the escrow company in order for the file number to be issued to identify the future deposits.

Escrow is actually opened when the buyer sends in the deposit, after removal of contingencies. Sometimes the earnest money is sent in before due diligence is conducted on the contingencies. If the buyer does not accept the property because the contingencies have not been resolved, he is not in default of the offer. Although both parties normally have to sign a release of earnest money, it should not be unreasonably withheld, if the buyer is not in default. If either party is in default and not met an obligation of the agreement, the wronged party can receive the deposit according to the terms and procedures of the escrow.

Some people confuse the receipt of a file number with the opening of escrow. Escrow is exists when funds are received by the third party.

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Harriet C. Murray
E-mail: harriet@casasandvillas.com.

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