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Here’s How to Build
Your Case for a Mexican Homestead Tax Exemption!
By Raoul Rodríguez-Walters,
CFP ®
“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.
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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.
What Constitutes
“Legal Residency” in Mexico?
Legal permanent residence
is granted pursuant to Article 48 of the General Population Law and is
evidenced by possession of an FM-2 visa. Temporary visitors on an FM-3
visa pursuant to Article 42, or on a tourist visa, are not considered
permanent legal residents. In fact, the FM-3 document specifically states
that the holder does not automatically acquire residency by merely holding
the visa.
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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 Notarios Decide is
Critical
Under Mexican Income Tax
Law, Notarios 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 Notario did not calculate these taxes
correctly, the Notario 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, Notarios 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 Notario
who decides who meets the requirements of tax residence. To make this
determination, 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 |
Building a Case for the
Exemption
Your Notario will
carefully examine a “fact pattern” before deciding if you qualify for a
homestead tax exemption when you sell your Mexican residence. By complying
with as many of the points below, you can greatly increase your chance of
obtaining a homestead exemption on your Mexican property:
1. Obtain an FM-2 visa to
establish legal and permanent residence. There are some
Notarios in Mexico who
will indeed grant holders of an FM-3 visa a homestead exemption to the
extent that the seller qualifies under the tax laws. However, you will
gain more credibility as a legal resident with the FM-2. Most Notarios
will allow the tax exemption if you hold an FM-2.
2. Obtain a Mexican tax
identification number, known as “RFC”, to show that you take your tax
responsibilities seriously. Remember: the homestead exemption is available
to “taxpayers” per Article 109 of the Mexican Income Tax Law. What better
way to prove that you are a taxpayer than by showing that you have a
Mexican tax ID?
3. Open a Mexican bank
account that pays interest. The bank will withhold income taxes on your
behalf, making you a taxpayer.
4. Live in your home for
at least six months. While there is now no time requirement to establish
tax residence, often Notarios will want to see at least six months of
continued residence at the house.
5. Make sure that your
utility bills are in the name of the person who holds title to the
property. If the property is owned jointly, try to obtain at least one
utility bill in the names of both persons. Gather at least six months of
these utility bills as documentation for your Notario.
5. Make sure that the
address of the property is exactly the same as the address listed on your
FM-3 or FM-2.
If you meet most of the
requirements above, and you have been told that you do not qualify for a
homestead exemption, you owe it to yourself to get a second opinion and
possibly save yourself thousands of dollars in taxes. There are Notarios
who follow the tax laws -- and who will grant you the homestead exemption,
even if you only have an FM-3. You just need to make the effort to find
one!
Raoul Rodríguez-Walters, CFP ® is the founding
partner of Mexico Advisor, the only company in Mexico offering financial
management, legal, tax and title services sunder one roof, to
English-speaking foreigners wanting to live, retire or set up a small
business in Mexico. Read more about the comprehensive, integrated services
provided by Mexico Advisor at:
http://www.mexadv.com. Or, contact Raoul at his San Miguel de Allende
office: Correo #24, CP 37700 tel.: 415-152-0586; e-mail: info@mexadv.com.
Also see another great article on
Taxes, What are you up Against? from The
Mexico Advisor
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