Property taxes are one of the biggest concerns Californian expats have when considering buying or selling property in Mexico. That’s because Mexico’s tax system is very different than what they might be accustomed to back home. With a little know-how, however, it can be navigated to your benefit.
We always advise clients to reach out to a Notary Public (known as a Notario Público) and/or tax accountant in Mexico for customized assistance to their circumstances. Please note, too, that you may need the services of a specialist tax accountant in your location.
When you buy in Huatulco (Mexico in general), expect to pay the sale price of the property and its closing costs, which is about 5–10% of the sale price.
When you buy in California, expect to pay the sale price of the property and its closing costs, which is about 1.07% and 1.25% of the sale price (higher than the national average).
Predial is the local property tax on Mexican real estate and is often paid on a quarterly basis. It averages about 0.1% of the assessed value of the property at the point of sale. Thankfully, the property assessment can be quite lower than the market value of the home, which could be 30–40% of the sale price.
In California, residents voted to freeze a portion of the property tax rate at 1% of the assessed property value. That does not vary much within the state but could change with voter approval. State and local assessments may apply. The state’s property tax rate includes three levies: general tax levy (already mentioned), voter-approved bond indebtedness repayment (a voter-approved repayment of state/local bonds), and special district assessments (voter-approved assessments for school and fire districts).
Homeowner’s insurance, flood certification, HOA/condo fees, mortgage insurance and possibly private mortgage insurance, may also apply.
As a buyer of a Mexico-based property, you can expect to pay closing costs between 6–7% of the cost of the property. An estimate of all pertinent fees can be provided by the notary and/or real estate agent once you make an offer. Costs and fees will likely include:
- Acquisition tax
- Clerical fees
- Notary’s fee
- Property-appraisal fee
- Property-registration fee
- Tax certificate fee
- Title-search fee
- Value-added tax on professional services (i.e., notary and appraiser)
As a buyer of a property in California, you can expect to pay the down payment on the mortgages. Closing costs — approximately 1–3% of the total cost — will also have to be paid. California’s closing costs are among the highest in the United States. Also claiming top spots are Delaware, Maryland, New York, Pennsylvania and Washington DC.
- Application fee
- Appraisal fee
- Archive and courier fee
- Attorney fee
- Escrow fee
- Inspection fee
- Loan origination fee
- Recording fee
- Title insurance
- Title search
While the buyer pays most of the closing costs in Mexico, the seller can expect to pay 6–10% of the sale price. This amount is typically drawn from the funds kept by the real estate agent in the escrow account. Upon the sale of residential property, a Notary Public will calculate the taxes owed. He or she will also withhold the amount, which is directly transferred to the Mexican Treasury. There is no way to get around this as the tax law considers the notary to be liable for the owed taxes and verify your exemptions and deductions when claiming tax relief.
While the buyer pays a majority of the closing costs in California, sellers can expect to pay approximately 5–9% in closing costs when they sell a property. These costs can include the broker’s commission (approximately 6% of the sales price), the escrow fee and an attorney fee. Additional fees (i.e., home warranty fees) may apply, depending on negotiations between the buyer and seller.
Capital Gains Tax
Once you sell your residential property, you’ll owe what’s known as capital gains tax. In Mexico, there are two ways to figure out this tax:
- You can either pay 25% on the gross sale value of the transaction without any deductions.
- You can pay 1.92–35% of the net value, which is the calculated difference between the assessed values at the point of original purchase and sale, as well as the improvements made, commissions paid and any other allowable expenses.
For optimum outcomes, we recommend that you:
- Collect receipts and invoices called facturas that allow you to claim deductions on materials and services. Official facturas are published and note the tax ID number (also known as an RFC number) of the individual or company issuing the receipt. Deductions can be made for capital improvements, such as installations of pools and building extensions. General home improvements and maintenance matters, such as a remodeled bathroom, does not apply as a capital improvement.
- Connect with an accountant or notario to figure out which scenario gives you a lower capital gains tax.
- Hire a reputable attorney to help you navigate Mexico’s changing laws. Keep in mind that interpretations of laws can vary, especially since property purchases are long-term investments and what is applicable today may not be applicable in the future. That said, if you’re not sure about your attorney’s take on the matter (or you don’t like it), seek the assistance of another attorney.
If you have an investment property for more than a year and decide to sell it, you will be charged capital gains tax. The rate can vary, depending on factors such as profit amount, the property type and how long you’ve held it. The rate can be at 0%, 15% and 20%, your taxable income and filing status will determine which rate is assessed.
Mexico’s One-Off Exemption
Mexico offers a one-off exemption (under Article 92, Fraction XIX a) which reduces the tax liability for a family property. It is a flat-rate exemption, but isn’t automatic. Eligibility must be verified — talk with your Notary Public for help — and depends on the following criteria:
- As an expat selling a property, you must be a resident in Mexico. While the tax law doesn’t specify temporary residence (known as residente temporal) or permanent residency (known as residente permanente), it does note that the seller is required to sell a primary residence to qualify for tax exemptions on capital gains. In this case, the interpretation is often left up to the Notary Public, so choose wisely.
- As a resident, you will have to show proof of your Mexican tax ID, also known as a Registro Federal de Contribuyentes (RFC). The property that you’re putting up for sale must be your primary residence, and the land that it’s on cannot exceed three times the size (in square meters) of the construction on that land.
- This exemption can only be claimed once every three years.
You could be eligible to save more if you have a co-title on the home you’re selling. This could be shared with a spouse or family member who is a resident in Mexico, allowing you to make deductions in their name. This person will need to consider the property to be their primary residence and have a Mexican tax ID.
Estate or Inheritance Tax – Both Mexico and California do not impose an estate or inheritance tax.
Gift Tax – While gifts between spouses and immediate family members are not taxed, Mexico does tax certain gifts that involve real estate. This is made payable by the recipient. In California, a git tax is not enforced. The U.S. federal government, however, does charge a gift tax and it can reach up to 40%.
Rental Income Tax – If you live in Mexico and receive rental income, you will be taxed at the regular income tax rates. If you live outside Mexico and rent out a property based in Mexico, your rental income will be subject to withholding tax at a 21% rate. If you have rental property in California, you will also have to pay rental tax. However, you are entitled to deductions, including the costs of advertising, cleaning, depreciation, HOA fees, insurance premiums, maintenance, pest control.
Transfer Tax – When a property changes owners in Mexico, a 2% acquisition tax is made payable by the buyer. California is subject to transfer taxes, which is around $1.10 per $1,000 of the purchase price.
For additional help with navigating taxes in Huatulco and Mexico — or even referrals of top-notch professionals in the area — contact us today!