Getting Started – The Necessary Steps…
Foreign investors should always focus on attractive investment opportunities that offer significant gains. This is one of the main reasons why they should consider investing in Cabo San Lucas (Cabo), BCS. Mexico and specifically Cabo is presently undergoing tremendous economic growth and significant improvements. Mexico introduced solid changes in its economy in order to move in the direction of an open economy with improved foreign investing. Mexican officials and the local community knew these changes would help service the country’s increasing foreign debt.
Here are the dramatic changes that have taken place:
- Encouragement of tourism development.
- A government interested in working with the International Monetary Fund and other outfits to reduce the country’s foreign debt.
- Liberalization of policies concerning foreign ownership of Mexican companies.
- Mexico’s accession to the General Agreement on Trade and Tariffs
To protect the natives, Mexico was well-known for restricting foreign investment in the past. Foreign ownership of Mexican companies was limited to forty nine percent. However, Mexico has recently implemented new regulations that lower the restriction on foreign investment while still protecting the land rights of the natives. These regulations are in place to promote foreign investment. This includes real estate investment. Foreign investors are permitted to own up to 100 percent of a large number of businesses. This includes development companies and hotel companies. Foreign investors are not required to get authorization from the Foreign Investment Commission. This change has leveled the playing field for all investors.
The Mexican Federal Corporate Income Tax ranges from twenty five to thirty eight percent. Provisions in the income tax code have also been created to offset the negative effects of inflation on monetary assets and inventories.
Mexico will continue to give foreign investors an opportunity to participate in a large market that includes low labor costs, ample supplies of energy, and a solid communications infrastructure. Foreign investors will also get a chance to tap into a highly skilled and trainable labor resource. The changes in the foreign investment rules indicate that the government has a favorable attitude towards foreign investment.
The Mexican government has disclosed that it aims to increase the number of foreign tourist arrivals into the country. This could help secure five billion dollars of foreign exchange revenue every year. Developing new tourist destinations with modern facilities and infrastructure is the key to achieving the government’s goal of getting ten million visitors a year. The Los Cabos region plays a critical role in this projection.
WHAT IS A MEXICAN PROPERTY TRUST?
Foreign citizens are required to obtain a “Fideicomiso” (fee-day-co-me-so) before they can purchase property within designated regions of Mexico. The Fideicomiso functions as a Mexican Property Trust.
Amendments to the Constitution in 1994 permitted foreigners to buy and own Real Estate in Mexico located within the restricted zone. The restricted zone is all land within sixty miles of a national border and within thirty miles of the Mexican Coast. This includes all Real Estate in Los Cabos. This new law permitted ownership through a property trust.
Under the Fideicomiso, the Mexican Government issues a special permit to a reputable Mexican Bank of your preference. This allows the bank to act as a buyer for the property. The bank acts as the “Trustee” for the Trust and you are the “Beneficiary” of the Trust. The “Beneficiary” rights are similar to Estate Trusts or Living Wills in Canada and the United States.
As a trustee, the bank abides by the instructions given by the beneficiary of the trust (the foreign buyer). The beneficiary has the exclusive right to occupy, possess, and occupy the property. This includes the right to build on it or make improvements. The beneficiary is permitted to sell the exclusive rights and instruct the trustee to transfer title to a new owner.
Many people are under the impression that a trust arrangement in Mexico is the same as a lease agreement. However, they are not the same. The property or home that you purchase will be put into a trust under your name – you will be the beneficiary of the trust! You will not be a lessee. You will have the same exclusive rights that can be found in Canada and the United States which includes the right to sell the property, enjoy the property, and make improvements. You will also have the right to rent the property without any penalties.
The original term of the trust is fifty years, but the home owner or investor can choose to renew the trust for another period of fifty years if renewed within the last year of each fifty year period. This process can contractually be repeated indefinitely and passed on to a family member in a position to have long-term control of the asset via a Will
HOW MUCH ARE CAPITAL GAINS IN MEXICO?
Capital gains tax in Mexico states is owed on the profit you receive after selling your property or home. Under the law, you have two choices when it comes to capital gains:
- You pay twenty eight percent* of the net profit. (Multiple deductions are included with this choice.)
- OR you can pay twenty five percent* of the gross sales amount with no deductions.
The twenty eight percent capital gains tax may seem high, but Mexico has procedures and several laws that will assist you in optimizing your cost basis. This will reduce your net profit and lower your capital gains. It is critical that you understand these laws before you purchase Real Estate in Cabo San Lucas by hiring a good attorney and bookkeeper.
*Percentages are a reflection of the 2007 Tax Code.
Record Your Purchase Price
Over the years, some Real Estate companies made the critical error of recording values lower than the actual purchase price in order to save taxes for their client. They were under the impression that they could save money on the two percent acquisition tax. You should never record a value that is lower than what you actually paid for the property. Calculating your capital gains begins by subtracting the value you have recorded in your trust from the sale price of your property.
Here is a prime example: You purchase a home site for one million dollars, but made a mistake of recording a value of $500,000. Your cost basis is now $500,000 under the Mexican tax law. If you sell your lot for $1.2 million, you will see a profit of approximately $200,000. In this case, according to your recorded cost basis, the Mexican government will see a profit of approximately $700,000. Your capital gains tax for Mexico will be twenty eight percent of $700,000. This is a difference of $140,000 in profit.
CaboProperties and our affiliates provide a special service that will protect you and your valuable investment. You can maximize your potential profits by recording your authentic purchase price with proper documentation. The bottom line revolves around securing your property trust for the true value of your purchase immediately.
Many novice real estate investors make the mistake of taking bad advice from sellers when it comes to purchasing in Cabo San Lucas. You should never allow anyone to convince you to record a value that is lower than the sales price of the property. Making this crucial mistake will put you in a position where you will have to deal with the Seller’s capital gains tax liability. Recording a lower value today can hurt you if you decide to sell in the future. Remember, Mexico tax laws are no different than everywhere else!
Here are three facts you should always keep in mind:
Fact: The purchase price has no direct impact on your annual property taxes.
Fact: The Capital Gains you paid in Mexico taxes can be attached to your United States or Canada taxes.
Fact: Recording the actual property value will benefit you in the long run as it will firmly establish your cost basis in the eyes of the Mexican government.
How will I know if my value is accurately recorded?
Our Real Estate’s closing officer / broker will facilitate the creation and completion of your trust. We review all the documents with you in order to make sure everything is accurate and correct. We will also be in attendance when it is time for you to sign your trust. You can verify the value by studying your trust and paying close attention to the amount written in text. The amount will be in Mexican pesos or U.S. dollars. It will also include the exchange rate. (We will furnish you with a certified translation of your Spanish trust.) You can divide the present exchange rate into the peso amount in order to make certain the result is a reflection of the actual dollar amount you have paid. Determining the peso rate for that day and year the trust was executed is the proper approach to take if you would like to review an old trust. You can find the exchange rate with our help, the Internet, or the bank.
How to Receive Additional Credit?
As a property owner, you may be eligible to get an inflationary credit from the Mexican government every year. You must first pay your two percent acquisition tax to receive your trust. This credit is promptly added to your cost basis when sell your house. The credit is related to consumer index adjustments. We have seen credits in excess of fifteen percent applied to a cost basis for property acquisitions in the past. For example, $150,000 could be added to your cost basis every year on a million-dollar property. This could reduce your capital gains tax significantly if you decide to sell in the future.
Fact: You must pay your two percent acquisition tax in order to be eligible for the inflationary credit.
Should I be concerned about the primary residence capital gains exclusion?
Mexico gives residents a capital gains tax incentive for their main residence. According to the tax incentive in Mexico, you are not required to pay a capital gains tax if you sell your primary residence. This law only applies to residents (Mexican foreigners or nationals) of Mexico. Several items are required from you if you are interested in establishing residency status. You must be able to prove that the property was your primary residence for a time period of five years. At closing, you will be asked to provide the Notary with a working permit (FM2) or residence visa. You will also be asked to provide proof of a bank account, utility statements, and trust information. All these documents must be in your name. In some cases, a tax ID number may be required. Please remember that this is just a guideline of the requirements. It is imperative for you to communicate with the Notary before the closing in order to know if you are eligible for exemption.
*Information based on the previous 2007 Tax Code still remains the same.
Fact: You are not allowed to have two primary residences at the same time. You must give up your residency in the U.S. in order to claim the home in Mexico as your primary residence.
Fact: The capital gains tax exclusion is only for residents of Mexico. It is not for people who own vacation homes or second homes.
Everyone knows that there are no shortcuts or legal ways around paying taxes in Canada or the United States. The same doctrine applies to paying taxes in Mexico. You should always take measures that can help protect your home. Taking heed to the following proper legal steps will ensure that purchasing in Cabo San Lucas turns out to be an enjoyable and safe experience. Beware when someone says, “You are in Mexico, and that’s the way we do it here.” Seek another broker or agent if you receive this type of advice!
Helpful Hint: Ask the Notary to write the exchange rate on the document when it comes time for you to you sign your new trust. This simple action will benefit you in the future.
If you are considering a Real Estate purchase in Cabo San Lucas, make certain everything is done right. Allow CaboProperties and our affiliates to put our knowledge and experience to work for you. We ONLY work with exceptional brokers that will assure YOU that our only interest is representing you in a safe, solid and secure Real Estate transaction.
Until WE meet in Cabo…