IVA Tax as it applies to Fiscal Residency of the Seller of Mexican Residential Real Estate
DEFINING FISCAL RESIDENCY
How exactly is tax residence defined? Most countries include a legal definition in their tax code, or authorities use a variety of criteria for handling it on a case-by-case basis. Commonly fiscal residency is determined to be in:
- the country where a “center of vital interests” lies or
- the place that is the “habitual abode” or
Foreigners shall be deemed to be fiscal residents in Mexico when more than 50% of their total revenue within a calendar year is from sources within the country or their main center of professional activities are located in Mexico. (center of vital interests)
Using the definition above: individuals who temporarily use real estate for touristic purposes shall NOT be considered to have established their permanent home in Mexico.
In this case, a non-fiscal resident of Mexico may sell his property in Mexico without having to pay IVA on the commission if:
- The sales agent is a fiscal resident (paying taxes) of Mexico.
- The funds for the sales price will be in foreign banks or financial
institutions in the account of the escrow company. Purchase funds will NOT BE IN MEXICO.
- The seller will have to prove to the notary, that he is a fiscal resident abroad and not a fiscal resident of Mexico.
IVA SALES TAX
The main indirect tax of Mexico is the Value Added Tax (locally known as IVA), which generally applies to all imports, supplies of goods, and the provision of services by a taxable person unless specifically exempted by a particular law.
This tax is imposed by the federal government of Mexico and ordinarily applies to each level of the commercialization chain. This tax has been applied in Mexico since 1980.
Mexico applies a single standard rate of 16% across the country. However, there is also a 0% rate applicable to exports and the local supply of certain goods and services. Sales of ice, fresh water, machinery and raw materials for manufacturers, books, newspapers, magazines by their editors, medicines, as well as the supply of services to eligible manufacturers, are subject to the 0% rate.
As mentioned before, the Mexican IVA applies to all goods and services unless specifically exempted by the law. There is a wide variety of goods and services exempt from the tax, including sales of houses except those to be used for commercial purposes.
ISR OR CAPITAL GAINS TAX
If a property sale is deemed taxable, you may pay up to 35% on the NET profit after deductions. All property is subject to seller ISR, regardless if the owner is a national or foreign. Some exemptions may apply.
For US Citizens: IRS at this time allows you to report ISR tax paid in Mexico to offset other taxable income on gains from other property sales.
You may not use it to reduce business or employment income tax.
This article is based upon Flex MLS reporting, legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review. If you have any other questions, contact me through my website.Harriet Murray