Capital Gains Tax Exemption for Temporary Residents

Seven Chapala area notaries are in the process of elaborating a joint statement recognizing the right of residentes temporales (temporary residents status) to avoid paying capital gains tax when they sell their Mexican homes, says Chapala  lawyer, Spencer McMullen.

Following recent changes to Mexican immigration law with no corresponding change in the tax law, some notaries interpreted the law to mean that only foreigners with residente permanente (permanent residency) status were eligible to qualify for the home owners’ capital gains tax exemption.  Mexican law provides exemption to paying capital gains taxes to most people who sell a “primary residence”.

McMillan says that careful study of a March 13th update to Mexico’s Miscellaneous Tax Regulations” now shows a presumption of residency in Mexico for tax purposes in favor of foreigners with any residency status, thereby allowing them en exemption from capital gains tax as long as they comply with certain conditions that allows them to be classified as “residents of Mexico for tax purposes.”

This means that foreigners must be registered with Mexico’s tax authority (SAT) , and have a RFC (Registro Federal de Contribuyentes) number and a “tax address” to receive notifications that is not the same as the home they are selling.

Visitantes (tourists) who come and go on six-month visas would be unable to obtain the exemption since getting and RFC, McMullen says, requires having a CURP (Clave Unica de Registro de Poblacion) or personal identification number, which is only available to resident foreigners with a temporary or permanent document.

McMullen adds that the federal tax code (article 9) states that foreigners living here are considered resident if they have no other home.  If they have another home outside Mexico they must demonstrate that this country is “the center of their vital interests” and that 50 percent of their income comes from here.

The lawyer calls the recent update “a loosening to the law that gives notaries more latitude”.

However, he notes that some notaries in Mexico ma still prefer to act “conservatively” because they are “individually liable if they make a mistake in the application or the interpretation of the law or the retention of the tax”.

The good news is that Chapala area notaries seen to be on the save wavelength over the rules but sellers are advised to check with them to ensure they are willing to approve application for primary residency exemptions from capital gains, which runs at around 25-30 percent.

Reprinted from Guadalajara Reporter Page 3 Personal Finance March 29-April 4, 2014.