In this video, I cover the requirements to qualify for a tax exemption on the sale of your principal residence in Mexico, and I share our own story of how one small detail almost cost us $30,000 USD in taxes on the sale of our condo.
Hey everybody. Qroo Paul here. In today’s video I’m going to be talking about the recent sale of our condo and how one small detail almost cost us our capital gains exemption.
I have a lot to cover in this video. I know some viewers may be curious what the requirements are for a capital gains exemption on the sale of real estate, so I’ll cover that first.
I will be referring to this as capital gains throughout the video because that is a term most viewers will be familiar with. More specifically, The tax is called Impuesto Sobre la Renta, or ISR for short – it is an income tax. On the sale of real estate it can be calculated a couple of different ways.
- You can pay 25% of the “gross sales amount” , without any deductions.
- You can pay 35% of the “net value” and include deductions. Net value is the difference between the original recorded property value when you bought it and what you sold it for. You can deduct quite a few things, property improvements etc. but you will need to have official tax receipts called facturas.
Anyway, those taxes are pretty steep so getting an exemption is pretty important. So what are the qualifications?
- It’s your primary residence. This is not an investment property or one you rent out – you live here. Oh, and you didn’t buy it under a corporation, you either hold direct title in your name or if you’re in the restricted zone, you have a bank trust (or fideicomiso) in your name.
- You are a tax resident of Mexico.
There are a couple of ways to be deemed a tax resident. #1 You have established a place of residence in Mexico. We don’t own property in any other countries, so that one was easy. If you do own a home in Mexico and another country, you will be considered a tax resident of Mexico if your center of vital interests are in Mexico; or more than 50 percent of your total income is derived from Mexican sources; or your primary professional activities are carried out in Mexico.
- You have not taken the deduction within the last 3 years.
Those are the basics. If you qualify, you can get an exemption of up to 700,00 UDI.
UDI is an abbreviation for Unidades de Inversión. It’s a value established by the Bank of Mexico to determine financial debt, credits etc. The value of a UDI changes but as of today, 700,000 UDIs would be $ 4,869,316 pesos or $243,465 USD. And if both of your names on the property, you can both claim that deduction. Big savings.
In our case, we had owned our condo in Mexico for six years. It was our primary residence that entire time. We did not own any property in any other countries. My name was on all of the bills for condo for the last six years. Our Mexican bank account had listed this address as our primary address for the last six years. We were very careful to make sure this was all done correctly so we could get a capital gains exemption when we finally decided to sell.
You might be thinking, this sounds great Paul. So what’s the problem, what went wrong?
Now enters the unknown variable in all of these types of transactions. The Notary or notaría in Spanish.
It’s not a notary like we think of in the U.S. where someone verifies the ID of someone before they sign an important document. In Mexico, the notaries do much more and in real estate deals, they are solely responsible for interpreting the laws and withholding taxes due. The problem is that those interpretations of the law and how to apply it are not uniform across the board. One notary could look at some documents and determine the person qualified for a tax exemption and another notary down the road could look at the same documents and say they did not qualify.
For example, some notaries will only allow people with permanent residency and citizens to earn an exemption. Temporary residents are denied, but some notaries will allow temporary residents.
Some notaries will necessitate that the person lived at the property for at least three years prior to applying, while others will just look to see if the exemption was claimed within the last three years.
Those are some of the common issues that come up – but in my case, I discovered a new one I had never heard of.
Before I get into that, how do you avoid this being a problem. You do your homework and carefully choose the lawyer you will use for the transaction AND the notary office that will be handling the whole thing. If you choose wrong, it could be very, very expensive.
That has been my advice for over 6 years that I have been giving people advice about moving to Mexico. And you know what, I didn’t follow it when the time came to sell our condo.
Here’s what happened.
We have spent a lot more time in the U.S. this year helping Linda’s mother. We were in the U.S. when a realtor that we have known for years asked on a private Facebook group for our complex if anyone was interested in selling a corner condo unit. We love our place but I have been wanting to buy a house in Mexico. I just really want to have more space so we agreed to let the realtor show and see what happened. We set a fair price for the condo at a significant profit for us and we said if we told each other, if we don’t get that amount, we’re not taking it. We’re not negotiating, period. We don’t need to sell it. It’s very inexpensive to maintain.
Well, the first people who saw it via a video showing decided to buy it and agreed to the asking price. Next thing you know, we’re signing agreements via docusign and this thing is in motion.
I have been blogging about Mexico since 2015 and in that time I have met dozen of real estate lawyers and notary and I do have my favorites that I recommend to others. Yeah, I didn’t go with any of those.
We were still in the U.S. the realtor said that she already had a law firm that she did business with regularly and that they already had all of the buyers’ documents as well. At that time, we still thought we were going through a notary’s office that we were very familiar with but we later learned that the law firm had chosen to go through a different one for our transaction.
We flew down to Mexico to collect our personal belongings from the condo and get it ready for sale. We personally met with the lawyer handling the sale and two representatives from the notary’s office who were present for the signing of some documents. We presented all of the documents requested by the lawyer: copies of passports, permanent resident cards, bills in my name, and proof we paid the property taxes. He looked it over and said we would qualify for the capital gains exemption. No problema.
We hung around in Mexico for a couple of weeks and then headed back to Florida. Once we arrived in Florida, we received a breakdown of fees and there are a big tax bill attached. Linda immediately called the lawyer and asked what the problem was. He said that although our bills were in my name, they were not linked to my Mexican tax number called an RFC. There was a tax number on them, but it was the generic tax number assigned to foreigners when they don’t have one issued. When we set up these accounts and even opened our bank account we were residents of Mexico but we didn’t have RFCs. Which was pretty common at the time. After about 3 years in Mexico, I finally applied for RFCs for both of us because I knew we would need them one day when we sold the property but I never thought to add them to all my current accounts.
Why didn’t we think of this before? Because I had never heard of it and the law does not say it is necessary. It is one of the those “notary interpretations” I was telling you about.
So what does the law say?
Artículo 155 of the reglamento de la ley sobre la renta says that you can use the following to show proof that you reside at the property being sold:
- A Mexican voter ID card with that address. We can’t get that one because we’re not citizens but that would have been a lot easier.
- Fiscal proof (facturas) showing payment of electric bills or home phone, or
- Account status reports from financial institutions or credit card companies,
And this part is important, the law says that the preceding documents must be in the name of the contributor, the spouse or family members in direct line of descent.
It says in their name, it doesn’t say that it must include their RFC, but that’s where the interpretation part came in. The notary said that without an RFC there was no fiscal proof and thus we owed about $30K US in taxes.
I asked what could be done, and the lawyer said that I could have my RFC added to my electric bill and then use the next one that I received as fiscal proof. For you folks who don’t know this, the electric bill only comes out every two months and we would not get another one before our closing date.
So where is the RFC on the electric bill? It’s down here under the bar code at the bottom.
We were pretty screwed. The only way out of it was to request an extension from the buyers which involved signing amended contracts. Thank goodness the buyers turned out to be awesome and understanding people. The buyers were a couple from the U.S. and they said to take as much time as we needed. We actually ended up signing two extensions to get the fiscal proof necessary to get our 30K. The whole process took about three months to complete.
So, it’s all done now and we definitely learned a lot along the way. I hope that this video helps others avoid potential problems when the time comes to sell their properties.
If you liked the video, don’t forget to give it a like. Well, until next time. Hasta luego.