Q: Has the Capital Gain tax law exemption for foreigners changed?

A: The law has not changed, but the interpretation and enforcement have. It is very important to remember that the intent of the exemption granted for Capital Gain tax on the sale of a primary residence is supposed to be just that; Your Primary Residence. That means you can't have your primary residence in the US and exempt your capital gain tax there and do the same here in Mexico.

The SAT (Servicio de Administracion Tributaria), also known as "Hacienda", is the federal tax collector. They collect all federal taxes such as the ISR (Income or Capital Gains) tax, the IVA (Added Value) tax and the IDE (Tax on Cash Deposits.)

Recently, the director of Hacienda has issued a memorandum stating, "The foreigner who does not have a valid immigrant status before the proper Mexican authority is assumed to NOT be a resident of the country and is subject to the capital gain tax."

A valid immigrant status is considered an FM-2. So tourist visas and FM-3's are no longer acceptable as valid immigrant status for the purpose of proving your residence. So if you DO NOT have an FM-2 visa, the sale of your property is considered VACATION OR SECOND HOME OR A RENTAL PROPERTY and no exemptions are permitted.

The tax on non-exempted transactions is 30% of the difference between the value declared in the deed (in pesos) and the value of the new sale, less allowable deductions or 20% of the entire amount of the transaction, whichever is less. Therefore, when you buy your property in PV, you must insist upon having the full amount of the sale declared in the deed, in order to avoid overpaying taxes upon sale.

It is also vitally important to ask for a "factura" (official tax receipt) when doing any capital improvement on your property. In the event you have not done this, it is possible to have your property re-appraised by an authorized appraiser and this increased amount can be credited towards your tax basis. So if you do not have an FM-2, be prepared to get one prior to the sale of your property, or be prepared to pay your Capital Gains Tax here in Mexico.

Now some good news: There is no "double-taxation" on the sale of your property here. So if you pay your Capital Gain tax here in Mexico, you will not be subject to another tax in the US and you can re-patriot the funds legally.

Please remember that your friends who may have avoided the Cap Gain tax here previously are STILL subject to audit here in Mexico (for up to five years) and Cap Gain Tax in the U.S.! So nobody gets off for free, legally.

The tax authorities in the U.S., Canada and Mexico work together and share information. Everyday there is more cooperation between the countries due to tax treaties. It is no longer possible to own a property in one country, enjoy income from that property, and not report it in BOTH the country where the property is located, and the country where the owner lives.

Failure to comply means the owner is subject to double taxation and heavy penalties when the omission to file and declare is discovered. So if you are considering selling your property here in PV, you should consult with a tax expert here and also your accountant in the US in order to determine the best way to file your taxes.

Here is something else to ponder; paying Capital Gains tax implies you have made a gain on the sale of your property. Congratulations! Would you rather have lost money, so you would not have to pay tax?

Do you have a question about Real Estate in Puerto Vallarta? Just ask!