When buying Baja real estate, you as the buyer have many things to consider in the way of tax strategies for your purchase. All of these strategies come into play when you come to closing before the notario and must decide whether to record the transaction using the appraised tax value of the home or the actual selling price of the home. Both are legal and common here in Baja, so the decision is yours to make.
The first thing you have to consider before purchasing is whether this purchase will be a long-term or a short-term hold, because each involves different tax strategies. A long-term hold refers to a property that you plan to use for long-term enjoyment. A short-term hold refers to an investment property or “flip” that you plan to resell in 2 years or less. Here are several strategies to consider.
If your goal is long-term, the best tax strategy is to choose the lesser amount of the appraised value or selling price when recording the transaction with the notario. This will lower your acquisition taxes, the 2% tax paid on the recorded transaction price. Since you will be keeping and using the property for more than two years, you will be able to claim the property as your primary residence and be exempt from paying capital gains upon the sale of your home.
If you want to hold the property long-term but use it for short-term rentals, different strategies may come into play, but with a little careful planning, you can still come out capital gains free. If you want to use the home in the summer months, for example, and rent it during the winter or vice-versa, you can still claim the property as your primary residence simply by maintaining the title and all utilities in your own name. In this way, the same tax strategy described above will work for you.
In the case of a short-term hold, different tax strategies come into play. First of all, you need to understand that a flip here in Baja is not the same as a flip in the U.S. or other countries. Short-term sellers in Baja are required to pay capital gains upon re-sale of their home. Assuming that you intend to hold the property for 2 years or less and sell it for a profit, you will want to have the transaction recorded at the higher of the two amounts. This will require you to pay a higher acquisition tax at the time of purchase but will lower the amount of capital gains to be paid upon re-sale of your home. Since acquisition taxes are only 2% of the recorded transaction value and capital gains range from 20-29%, you will come out paying a little bit more in the beginning, but much less in the end.
The next strategy is for those who plan to purchase two or more properties here in Baja. This is a very special circumstance, and you need to evaluate your options carefully before accumulating multiple properties in your name. The first thing you must do is look at each home individually and decide if you will want to sell it within 5 years. Five years is the key here in Baja, because each home owner is allowed only one capital gains exemption every 5 years. If you plan to sell more than one home within 5 years, the sale of these properties could become quite costly. Therefore, evaluate each property and choose the best tax strategy for each one individually, knowing that capital gains can be avoided on the first home sold, but will have to be paid on every other property sold within 5 years of that sale.
Finally, please note that the strategies above apply to the purchase of homes, not raw land or vacant lots. Upon the sale of vacant land, property without a dwelling, capital gains will always have to be paid. Therefore, unless you plan to build a home before selling the lot, you will want to have the higher price recorded on the transaction to lower your capital gains later. If you are certain that you will be building a home on the property and maintaining it for at least 2 years, it would be wiser to choose the lesser value for the transaction, knowing that upon sale of the property, you can claim it as your primary residence and sell capital gains free.
While these strategies will apply to just about everyone, each circumstance is unique. We encourage you to think and plan carefully before making your decision. You may also discuss your options with a knowledgeable Baja real estate agent who can help you make the best decision for your unique situation.