Mexican Tax Laws have provided tax exemptions to owners/residents at the time of selling property in Mexico. Over the years the rules to prove residency have changed and evolved. A couple of years ago the seller of a property was only required to show utility bills in his/her name plus a statement sworn under oath affirming that the property was his/her residence and also that no other operation similar as the current sale had been done within the past five years. In addition, proof of migratory status was required (first the formerly document known as FM3s and later, the FM2s). With the new rules effective as of January this year, none of the above applies.
Article 93, Section IXI, subsection a) of the Income Tax Law (known in Spanish as Ley del ISR) provides the exemption by which owners of property in Mexico and residents will not pay capital gains for a single transaction over a 5-year period for the sale of their home.
Article 9 of the Federal Tax Code describes who are considered residents in the Country.
In January 2014, the provisions of how foreign nationals living in Mexico can prove their residency in order to be exempted from capital gains tax changed and are now as follows:
a) Affirm under oath to be a resident of Mexico, that over 50% of the income received generates in Mexico and that the primary business activities are in Mexico.
b) Have a Tax ID Number, or “cédula de identificación fiscal”
c) Prove that the business address is different than the property being sold.
The above statements will have legal consequences in the foreign nationals’ home country. In case of capital gains tax exemption, the taxpayer has the obligation to report the sale of the property in his/her annual tax return filed before the SAT and inform that he/she availed himself/herself of the tax exemption , otherwise shall be subject to a fine. Notaries will, accordingly, require different documents to meet the residency criteria. For the time being, the migratory document to prove residency status is not mentioned, however it could be further added to the requirements or requested by Notaries handling closings.
My advice is that before signing any agreement in order to buy or sell real property, to bear in mind the changing rules. We are a team of professionals who can help you. Contact us.
Attorney at Law