By Mike Stoltz
I’ve been sufficiently informed by readers that you enjoy the offbeat, colorful, sometimes irreverent, or racy prose in these columns. Some subject matter, however, is a little more complex to endear your attention.
This week’s column tackles some dry business stuff as it relates to real estate and taxation. But don’t tune me out so fast because if you are contemplating buying real estate in the Beverly Hills of Mexico (San Miguel de Allende), you might be as pleasantly surprised as I was from what I unearthed, and I consider myself a pretty informed guy about international real estate, with properties in four countries and growing up in the California real estate culture. Moreover, this was the hardest column I’ve written since the inception of San Miguel Con Mike, so humor me.
My principal source is Martin Martinez, a local and respected real estate attorney, born in San Miguel with 35 years of experience in real estate and tax law in Mexico City, Guanajuato, and currently practicing here in San Miguel.
He has the added distinction of holding a coveted notary license (notario auxiliar), which is an essential role in the real estate transaction, similar to an “escrow” in the U.S. This column will compare the advantages and disadvantages of real estate acquisitions in Mexico to what U.S. citizens are accustomed to since that is where I am from and where my knowledge base is. However, if nothing else, Canadians as well as other expats should find the information of use since there are naturally relative questions any informed buyer or seller of real estate should want to know. I’ve spoken to several sources, but I find this information and sources the most reliable.
Capital Gains: Advantage Mexico
In the U.S. you must be an owner occupant two of the past five years. In Mexico, it’s six months! PROVISO: This means you must show proof of owner-occupancy via a utility bill like a Telcel or electricity account with your name on it for at least six months. An escritura/grantdeed alone is insufficient. Each owner who satisfies the test and is also registered in the federal taxpayers’ registry where one would obtain an Registro Federal Contribuyentes (RFC), which is the equivalent of the Tax Identification Number (TIN) in the U.S., are eligible for a hefty exemption. Moreover, like the U.S., there is no limit to the number of “qualifying owners,”as long as you have either permanent or temporary residency status. However, the exemption as of this column, according to Martinez, is approximately $302,000 per owner. This is an additional advantage over the $250,000 exemption in the U.S. But with the fluctuation in the currencies, this has to be as difficult as identifying the cost of a Taylor Swift concert ticket, right? But according to Martinez, as a safeguard to currency fluctuations the Mexican government in 1995 introduced a relatively speaking, stable Mexican currency index called the Unidad de Inversion (UDI), which was the result of the Mexican economic blowout from the unrest in 1994, when foreign investors fled the country with their capital, depleting the central bank’s reserves. The peso was permitted to float against the dollar, catapulting inflation to as high as 32% for short term borrowing. Mexican banks were failing faster than you can scramble an egg on a sizzling skillet. Also known as the “tequila crisis,” the UDI was intended to be a safeguard against future fluctuations in currencies because it is linked to the consumer price index, as in the U.S., and not hamstrung by currency fluctuations. The index is currently at 7.11 pesos and is published on the 10th and 25th day of each month.
Nevertheless, the relative stability of the UDI index has made borrowing by Mexican consumers who apply for real estate loans easier, and the tax allowances an expat gains from reselling their primary residence are expressed in this, more favorable, unitary value, according to Mexperience, an international consulting company for expats in Mexico.
Buyers Closing Costs: Advantage U.S.
I was stunned at the nearly additional 5% to close a deal without a loan! In California, excluding a loan and recurring closing costs, the bill would be under 1%.
Property Taxes: Advantage Mexico
While the tax rate varies from 2% to 4.5% depending on the Mexican state, there is what’s called a catastro value determined by an officer of each county so the real estate taxes are calculated on what we might know as “assessed values,” and those assessed values are a fraction of the median effective property tax of 1.12% that is paid in the U.S., according to Motley Fool in 2022.
Mortgage Interest Deduction: TIE!
If you are able to get a Mexican bank loan or perhaps have a seller carry back the financing, then you can deduct your total interest paid when you file your annual declaration (tax return in the U.S.). Note: you still need an RFC!
My Fun Fact
If by chance you were in Mexico and so overwhelmed as to how to pay your electricity bill and getting your car out of impound from parking missteps and neglected to get a factura (receipt) for real estate improvements on your construction project, which of course would increase your tax basis and lower your capital gain, Martinez says, “ it is possible to hire a commercial appraiser in which the amount of your investment will be determined.” There is a god.
Trusts—No Idea Who Wins this: Tie?
There is no advantage to putting the property in a trust, according to Martin, but I’ve found the process to be identical to that of my experience in France. A will must be prepared by a notario in the respective country where the property is located, and the successor trustee(s) must only show a copy of the death certificate of the legator. Seems fairly straight forward, but I’ll report back when I return from France next month—on verra/veremos/we shall see!
