Everyone selling real estate in México is subject to Impuesto Sobre la Renta ISR (Income Tax) also known as Capital Gains Tax. The Notario Publico in charge of the purchase/sale transaction is the one responsible to calculate and report the gain and the tax generated from it to SAT “Sistema de Administracion Tributaria” (IRS).
The gains will be taxed at a rate of 30% of the gain. ISR Impuesto Sobre la Renta (income Tax) allows deductions from the taxable amount, and in some cases the individual can be exempt from such tax. Some of the deductions allowed are for example taxes paid for the acquisition of the property, the commissions and expenses generated from the sale and improvements made to the property.
There are different ways to demonstrate the improvements made to the property. One is to present invoices for the cost of the improvements, which is difficult because these improvements are not necessarily done at the same time, or for any other reason that the invoice does not meet the requirements from SAT. The most efficient way to demonstrate these improvements is by making an IMPROVEMENT APPRAISAL (AVALUO DE MEJORAS). This is an instrument recognized in the Article 192 of the law that regulates ISR in this particular matter. This appraisal can only be done by a Licensed Appraiser, if not such appraisal has no official value. This appraisal will itemize and put value on every improvement, according to the official values and rates published by the SAT.
The cost of this appraisal might be up to 20% of the value given to the improvements, but it can helps dramatically the deduction amounts allowed to minimized the ISR tax. This appraisal must be presented to the Notario to make the final calculation for the tax. One quick example: on a $60.000.00 USD Tax, after the $120.000.00 USD appraisal the Capital Gain Tax was reduced to $12.000.00 plus the cost of the appraisal.
It is very important to ask your Real Estate Agent more details about ISR and its deductions. It can make a big difference in maximizing investment values.
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