This article will help you as the seller of Baja real estate to sell your home capital gains free. In Spanish, capital gains is called “Impuesto Sobre la Renta” and can be extremely costly. However, there are some basic strategies you can use to avoid paying these capital gains. These strategies apply to anyone selling a single-family home or condo, not to vacant lots or land. Here are several factors you must consider in order to sell capital gains free.
First, you need to maintain your status as a legal resident of Mexico. This is done by maintaining either an FM2 or FM3. These Mexican immigration documents are obtained through the Instituto Nacional de Migración (INM), and must be issued in the same name that is listed on your bank trust and title. In case of a name change for marriage or other reasons, proper documentation would have to be provided proving that you are the same person.
Second, you must be able to claim the home as your primary residence. In most cases, this is done simply by maintaining the property title and all major utilities in your name including water and electricity. Be sure that the name listed on all of your documents is the same, including your title, bank trust, immigration documents, ID, and utility bills. Also, be sure to keep all of your bills (not the paid receipts, but the actual invoices) as they must be provided as proof of residence when you sell your home. Here in Rosarito, providing 6 months of electric bills is the minimum requirement, but 1 year or more is often requested.
The next part of this strategy has to do with your property taxes, or “prediales.” In order to sell capital gains free, your predial must be in your name, as it appears on all of your other documents. While the name on this account is fairly simple to change, you want to have it in your name for as long as possible before selling your home to avoid potential questions. If you need to change the name on the account, take your ID, immigration documents, and your escritura or bank trust to the municipality where you pay these taxes. Once proven that the bill should be in your name, the change is usually made in less than one month.
With recent changes in tax laws, you can be exempted from paying capital gains on the sale of your home once every 5 years if you can prove 2 or more years of residence in that home using the proofs described above. Occasionally, you will find a notario who is more lenient and will allow you an exemption for less than 2 years of residence, but remember that you can only be exempted from paying capital gains once every 5 years. If you want to assure capital gains exemptions, it is best to prove at least 2 years of residence and not plan on selling more than one home every 5 years.
If you are planning to sell capital gains free, you do not have to worry about which price to record on the transaction at closing. You may recall that upon the purchase of your home, you had to choose whether to record the transaction at the appraised value of your home or the selling price in order to get certain tax advantages. When selling capital gains free, this does not apply as long as you can prove that the home was your primary residence. Even if you only occupy the home part of the year or rent it out part of the year, maintaining all utility bills in your name and retaining all of those invoices can still be used as proof of residence. This is an excellent tax strategy when it comes to selling your home, and one that many people use here in Baja, especially when selling on a gain.
One more factor that you may need to consider is the physical size of your home. If the actual dwelling occupies less than 2/3 of your lot, the property cannot be sold capital gains free. In such cases, part of the land will be taxed, and these figures can be in the $1,000’s. An appraiser may be able to help you evaluate the situation, or you may consider adding on to the dwelling. Either of these scenarios may be useful to you to help lower or eliminate capital gains.