Capital Gains, Maritime Zone and Ejido Property
Published Nov 1, 2010 - (Updated Aug 30, 2013)
The following article contains excerpts from three articles about real estate in Mexico written by David Connell and his team at David Connell and Associates, a law firm located in Puerto Vallarta, as well as Ixtapa and Mexico City. Their website is an excellent source for articles dealing with legal and fiscal issues regarding real estate in Mexico. For the full articles and others featured, visit his website at www.mexicolaw.com.mx.
Capital Gains Tax on the Sale of Homes in Mexico
In 2007 the Mexican government modified the rules pertaining to the exemption of income tax obtained in the sale of primary residences. The main reason they did this was to close loopholes that allowed the upper class to avoid paying taxes on any homes they owned.
In order to understand how the tax authority views a sale, we must go through a few definitions.
For tax purposes, a sale of real property occurs in the following situations.
- A transfer of property, including a sale where the selling party “reserves ownership rights” (or what is known as reserva de dominio).
- A transfer of trust (fideicomiso) rights, changing the beneficial rights of the trust.
You are considered a fiscal resident of Mexico when you have established your home in Mexico. However, when you have a home in another country, you will be considered a tax resident in Mexico if Mexico is where you have your “center of vital interests.”
Center of Vital Interests
You will be considered to have a center of vital interests in Mexico when more than 50 percent of your total income comes from Mexico or when you have set up the “main center of your professional activities” in Mexico.
Note: Tax rule I.2.1.3 states that you do not have a primary residence in Mexico when you temporarily inhabit a home with tourist, vacation or recreational ends.
Those are the three definitions and one rule you need to understand before we can talk about taxes on the sales of homes and allowable exemptions.
Exemptions on the Sale of a Home for Fiscal Residents
When the amount of the sale does not exceed 1.5 million investment units (approximately $550,000 USD as of February 2008), the sale is exempt from income tax if you are a fiscal resident of that property (see definitions above).
If you are a fiscal resident and the amount of the sale exceeds the above amount, you will pay tax on the amount that exceeds the exemption ($550,000 USD) “proportional to the amount that results from dividing the amount that exceeds by the total amount of the sale.”
If you are a fiscal resident of a home for more than five years, the sale of the home is exempt.
Who Calculates the Tax, How Is it Paid and What Documents Are Required to Prove Fiscal Residence?
The notary is responsible for calculating, withholding and paying the tax on the sale of homes that belong to physical persons (not corporate entities). In our experience, most notaries have “tax advisers” assist them with the calculation of taxes. We strongly advise that you get an independent adviser to do your own calculation of this tax. While notaries have very competent advisers, other experienced counsel can sometimes save you tens of thousands of dollars in taxes.
Federal Maritime Zone
The Federal Maritime Zone is the 20-meter-wide strip of firm and passable land that borders beaches or natural deposits of marine water. The “Land Gained from the Sea” is a fraction of land that may exist between the Federal Maritime Zone and the adjacent private property (beachfront lot).
Both Federal Maritime Zone and Land Gained from the Sea are considered public property, which means that the government is the owner. While Federal Maritime Zone usage can only be “acquired” through a concession that grants the licensee only rights to “use and enjoy” such Federal Maritime Zone in an exclusive manner, the Land Gained from the Sea can be “acquired” through either a concession or public sale (auction), giving the purchaser direct title over such land and converting it into private property. No further fee or tax should be payable to the government after the price for the (public) sale is paid. The price payable for the sale will be estimated based on an official appraisal.
The process for acquiring the concession over Land Gained from the Sea is similar to acquiring a Federal Maritime Zone concession. Acquiring the Land Gained from the Sea via public auction could certainly represent a larger and more annoying process, requiring several phases that must be carried out correctly, and could take as long as two years to complete. However, the outcome is that this land will be converted into private property and thus will be totally salable.
An important point to consider is that the owners of lots who have acquired the concession title for the adjacent Federal Maritime Zone have the right of preference for acquiring adjacent Land Gained from the Sea via direct sale, thus completely avoiding a public auction.
A large part of Mexican real estate is classified as ejido land. Ejido land is not private property and cannot be bought and sold as if it were. However, since the constitutional reforms of 1992, ejido land can be converted to private property and sold to third parties, including foreigners. The following section briefly describes what an ejido is, how ejido land is classified and the ways ejido land can be converted to private property.
In general terms, an ejido is a collective group of people who live and work on a determined piece of property as a community. While the concept of the ejido in Mexico is pre-Hispanic, most of the fundamental concepts that created what an ejido is today stem from the theories of democratic communism. Understanding this is very important when dealing with ejidos. Most people reading this article have grown up in a society based on democratic capitalism, in which the individual and not the community determines what is going to be done. In a communistic society, the community determines what it is going to do, including agreeing on how the land they hold is to be used.
Taking the above into consideration, it is not hard to imagine the confusion that could exist when discussing ownership of ejido land. Most foreigners associate the word ownership with terms such as fee simple, private property and Adam Smith, while the ejidatarios’ idea would be more along the lines of community rights, right to use and enjoy and governmental concession. Until ejido land is converted to private property, foreigners cannot acquire ownership of ejido land in accordance with their understanding of the word ownership.
- Ejido land cannot be sold to non-ejido members until it is converted to private property. There are exceptions where non-ejido members can acquire “posessionary” rights to ejido land; however, the rules governing posessionary rights are not very secure, especially for foreigners.
- Foreigners cannot legally become ejidatarios.
- What an ejidatario understands as ownership is often different than your understanding of ownership.