The new rate of Income Tax for 2007 will be 28 percent in accordance to prior amendments made to transitory articles of the Income Tax Law. During December 2006, certain additions and amendments to the Income Tax Law and its regulations respectively, were approved regarding Income Tax on the transfer of main residences.
In the specific case of Income Tax for the gains of transfers of real estate for non tax residents, consider the following possibilities:
1) A 25 percent rate over the total price without deductions, or
2) A rate of 28 percent over the gain with the possibility to apply the following deductions:
• Acquisition up dated cost
• Cost of construction, improvements and extensions
• Notary public fees, acquisition rights and taxes and appraisals expenses
• Commissions and mediation realtor fees
In order to be able to apply these deductions please be aware that you will need to get tax
invoices (Facturas) in accordance with the provisions of the Tax law and regulations.
The difference between the income for the transfer of the property and the deductions will be the gain over which the income tax is calculated, applying the 28 percent rate.
In the case of individual tax residents Income Tax Law provides that income from the transfer of a main residence is tax exempted, if the following conditions are met:
• That the value of the house is no higher than 1,500,000 UDIs (UDIs are Investment Units which are financial units created to renegotiate debts with banking and financial institutions). To the date I am writing this article, January 4, 2006, the value of the UDIs is 3.79 pesos. So please consider an approximate value of 5,685,000.00 pesos.
• That the transfer of a main residence occurs only once during the same calendar year.
• Individual can provide: the elector card (this is applicable only for Mexican citizens) and the corresponding receipts for electricity, telephone, bank statements or statements from non-banking credit cards, showing the address of the property and the name of the seller (may be in the name of the taxpayer his/her spouse or his/her parents or children).
• The exemption is only applicable for the house construction and the part of the property that does not exceed three times the size of the construction; the remaining part of the property will be taxed.
There is a specific rule about tax exemption for houses with a higher value than 1,500,000 UDIs, stating that this limit is not applicable if the tax payer is able to prove that he/she has lived in the house during the previous five years. In this specific case, if the exemption is not applicable, then the taxes and deductions are applied proportionally to the exceeding balance of the price.
Taxation in Mexico is based on residence and source of income and remember that the fact of being a foreigner has nothing to do with being a tax resident.
An individual tax resident is a person who:
Has his/her main residence in Mexico. In the event an individual has another dwelling place in another country, he/she may be considered a tax resident of 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 percent of his/her total income for the corresponding year is generated in Mexico, and
• If the principal place of performance of his/her professional activities is established in Mexico
Before entering into any real estate transaction, it is very important to know how you will be taxed and if there is a possibility to get a tax exemption within the legal frame.
Taxes can be complex but there are formulas provided by law and systems to know the amount of taxes to be paid in a real estate transaction; this is not magic and this is something that you are entitled to know in advance, so please get advice in this regard from your accountant, notary public or lawyer of preference.
