Real Estate Taxes in Mexico

"How can I obtain a capital gains, or homestead, tax exemption on the sale of my Mexican real estate?" is one of the most frequently asked questions by expatriate residents in Mexico when they contemplate selling their homes.

Residents may not be aware that the requirement that you live in your Mexican home for two years before it can be sold as a qualifying property under the homestead exemption was eliminated by tax reform in 2002. And, different interpretations by Notarios (the attorneys responsible for preparing and recording deeds of title and for calculating taxes on real estate transactions) may have sparked the current concern in the expatriate community about the so-called "capital gains" tax. A new awareness and sensitivity to how it's applied, especially to foreign sellers, seems to have created the confusion.

Answers differ depending on where in Mexico you are selling property. For instance, in Los Cabos, foreigners are almost never granted the homestead tax exemption by Notarios. In Mexico City, homestead exemptions are almost always granted to foreigners. And, in San Miguel, the homestead exemptions are granted on a case-by-case basis to the extent that the sellers comply with certain legal requirements.

What it boils down to is the tax status of the seller, not his or her residency status.

What Notary Publics Decide is Critical

Under Mexican Income Tax Law, "Notarios Publicos" are jointly liable with the seller for all taxes due on the sale of real property in Mexico. If Hacienda (the equivalent to the Treasury Department in the US) decides the notary did not calculate these taxes correctly, he or she may be required by the tax authorities to make up the difference. Obviously, when they are doing dozens of transactions each year, very possibly involving millions of U.S. dollars, they have to be very careful and will generally take a conservative approach.

The homestead tax exemption is still available to resident taxpayers in Mexico, and it is the notary who decides who meets the requirements of tax residence. To make this determination, "Notarios Publicos" or "notarios" can base their decision on two different sets of laws: Mexican tax laws and Mexican immigration laws.

Who is a "Tax Resident"?

How foreign nationals who reside in Mexico are taxed in this country depends, first of all, on the tax treaties Mexico has signed with other countries. Often, tax treaties override any national legislation. In the case of U.S. citizens, therefore, one must review the Mexico-U.S. Tax Treaty, as amended in November 2002.

Article 4 of this treaty states that a "tax resident means any person who, under the laws of that state, is liable for tax therein by reason of his domicile, place of incorporation, or any other criterion of similar nature." This article goes on to state that if the taxpayer is a resident of both states he or she will be considered a resident of the country where he or she has a permanent home.
A tax resident in Mexico is distinctly different from someone who is a legal resident, although often a legal resident generally is also a tax resident. Article 9 of the Fiscal Code of Mexico, amended for 2004, establishes that tax residents are those "who have established an abode in Mexico". If they have two homes available to them, one in Mexico and another one abroad, they will considered a tax resident of the country where the taxpayer has his or her center of vital interests. Mexico will consider that that the center of vital interests is Mexico if over 50% of the taxpayer's income is derived from sources inside of Mexico.

Expatriate tax residents have all the obligations and benefits of all other tax residents in the country, including the homestead exemption contained in Article 109 of Mexican Income Tax Law, which identifies that the transfer of certain properties are exempt from taxes, including: "Those resulting from the transfer of…the taxpayer's home…."

Where the current confusion arises is that some Notarios are of the opinion that the homestead exclusion is available only to legal permanent residents, and they make their tax liability determination on the basis of immigration law, not tax law.