If you are selling your home in Mexico, it is essential to know, before you sign an agreement or offer to sell, how much you will pay in Capital Gains Tax (ISR) because this amount will be withheld as part of the closing. Before agreeing to an offer, ensure you have a WRITTEN calculation of the Capital Gains Tax from your tax consultant or notary. You need to review the calculation and confirm with your consultant that there are no other ways to reduce the amount of Capital Gains Tax. In many cases, we have seen that with a good tax consultant experienced in dealing with Capital Gains Tax, the Capital Gains Tax could be significantly reduced.
Do not wait until the closing day to review the calculation of the Capital Gains Tax, as it will be too late to provide information to look to reduce. From the moment that you agree to put your home up for sale, you should be very clear on how much the Capital Gains withholding will be.
This article is a summary of how Capital Gains Tax is calculated on the sale of a home if you are:
- A Mexican Tax Resident, or
- A Foreign Tax Resident (person or entity).
First, you need to determine whether you are a Mexican Tax Resident or a Foreign Tax Resident, as different rules apply to each.
When you set up your home in Mexico, you are considered a tax resident in Mexico. However, when you have a home in another country, you´re considered a tax resident in Mexico if Mexico is where your “center of vital interests” is. You are deemed to have your “center of vital interests” in Mexico when more than 50% of your total income comes from Mexico or when you have established Mexico as your “main center of professional activities.”
You are not considered a Mexican Tax Resident if you only temporarily use your home for tourist purposes and most of your income is produced outside of Mexico.
Also, Mexican Tax Residents must declare taxes in Mexico on worldwide income. Simply getting a tax number (RFC) does not qualify as a Mexican tax resident. Furthermore, having a Temporary or Permanent Residence Visa does NOT mean you are classified as a Mexican Tax Resident.
I. Calculation of Capital Gains (ISR) when sold by a Mexican Tax Resident.
The formula for calculating this tax is:
♠ Income – Cost – Deductions = Capital Gains
Income – The income is the amount of the sale.
Cost – The cost is the amount set out in the seller’s deed of purchase, which can be adjusted for inflation. Costs can also include improvements done to the property per special rules, including:
- When your deed (escritura) does not mention the value of the construction, you can use 80% of the total deed value as the construction value or the percentage used by the appraisal reflected in your deed
- Construction costs depreciate 3% annually and must be at least 20% below the initial cost. The resulting cost will be adjusted for inflation.
- Improvements to the property will be subject to the same depreciation rules as set above and must have the proper supporting documents (registered invoices or “facturas”).
- Maintenance is not a deductible cost.
- Suppose the seller cannot verify the cost of improvements made after the purchase. In that case, the seller can use 80% of the value of an appraisal of such improvements, provided that such appraisal is appropriately registered and allowed by the notary. The registry of this appraisal must conform to municipal registry requirements. Some other rules apply to determine the construction cost, and we recommend that you check with a consultant on which may apply to your case. Adjusting cost basis for improvements does require a procedure, and many notaries will not allow for this adjustment in basis.
- Your Cost is always calculated in pesos, per Mexican tax law. Although many properties in Mexico are listed with dollar sales values, all taxes are calculated by converting dollars into pesos.
Deductions – Deductions include:
- Expenses and fees of the notary paid for the purchase and sale.
- The seller pays local tax on the sale of property.
- Payments are made based on the property’s appraisal.
- Real estate commissions paid.
The above deductions must have the appropriate supporting documentation (factura) and should be adjusted for inflation.
Capital Gains – Once you subtract the Costs and Deductions from the Income, you will have your Capital Gain. Over that amount, you will apply a tax rate of between 1.92% and 35%, depending on the amount of the Capital Gain. We use 35% as the general rule, as any gain over 250,000 dollars pays 35%.
Exemptions are only given to Mexican Tax Residents (Not Foreign Tax Residents)
Physical persons (not Mexican corporations) that are Mexican Tax Residents can exempt the first 700,000 “UDIS” (in November 2025, this amounts to approximately 313,000 dollars) of the Capital Gain on the sale. The following is an example of how this works.
When the sale amount does not exceed 700,000 “UDIS” (approximately 313,000 dollars in November 2025), it is fully exempt from Capital Gains Tax.
If the sale exceeds 700,000 UDIS, tax is paid on the amount exceeding 700,000 UDIS (USD 313,000) in a manner proportional to the excess gain. An example of this is as follows:
For purposes of simplicity, the calculation is made using the US dollar when, in fact, all calculations will be done in Mexican pesos.
Example:
Original purchase price: USD 300,000. Sales price: USD 1,000,000
Capital Gain calculations $ 1,000,000 – USD 313,000 (UDIS exemption) = 687,000 dollars. $ 687,000 divided by $ 1,000,000 dollars = 68.7%. of your income will be taxed (USD 687,000 of USD 1,000,000). For your acquisition, you can apply for USD 206,100 or 68.7% of your purchase price (USD 300,000).
Gain of capital. – At USD 687,000 (Capital Gain), USD 206,100 (cost) is subtracted, giving a profit of USD 480,900, over which the tax will be assessed.
Exemptions notes:
- You can only use this exemption once every three years.
- You must report the sale on your annual return, or the exemption will be lost, as well as taxes and penalties owed.
- After December 31st, 2013, all purchases must contain the notary digital tax receipt or “CFDI.” If you do not have this, your cost basis will be zero. The deed alone now is not enough to prove your cost basis.
- To prove “tax residence,” you must provide the Public Notary with any of the following documents:
- Voter Identification (INE). Note – foreigners cannot acquire an INE.
- Electrical or phone receipt.
- Bank statement of any recognized bank or an investment fund.
Note: The documentation must be in the name of the taxpayer, spouse, mother, father, or child of the taxpayer.
II. Sale of a Home in Mexico by a Foreign Tax Resident.
If you are not a Mexican Tax Resident and you are selling your home in Mexico, you have two options for the Capital Gains Tax, these being:
Option 1.- General rule: You can pay 25% of the total sale amount (without subtracting any Costs or Deductions). We have seen 1 case in the last 20 years where someone opted to do this, so it is not used or
Option 2. Apply 35% to the Capital Gain, using the formula we saw for the Mexican Tax Resident above Income—cost—deductions = Capital Gain.
It is worth noting:
- Foreign Tax Residents cannot apply for the benefit of the exemption rules.
- Option 2 only applies when: a) The seller has a legal representative in Mexico, or b) the transaction is formalized through a public deed (before a notary).
- A “CFDI” must be part of the deed the notary issues, or there will be a “zero” cost basis. As of December 31st, 2013, the value in the deed is not proof enough of the costs basis, and you must also have the “CDFI.”
Some critical notes we would like to add include the following 2:
- Impact of not having a CFDI for the buyer: Buyers who have purchased property after December 31st, 2013, must have the deed to prove the cost of their property and the CDFI that shows such costs. If you bought the property after December 31st, 2013, and do not have the CDFI to prove what you paid for it, the notary handling the sale will not be able to deduct your purchase price (Cost) from the sales income, which will dramatically increase the Capital Gains Tax you will pay at the time of sale. The bottom line is if you buy property, the closing documents must include the CDFI that correctly states the value of your purchase.If you are a Foreign Tax Resident and do not have a tax ID in Mexico, called an “RFC,” which is required to issue a CDFI, the notary can use a “generic RFC” for you. Please note that some notaries do not agree on this point and will not generate a CDFI for a Foreign Tax Resident that does not have an RFC (which can take months to get sometimes). If the notary disagrees with issuing a CDFI to a Foreign Tax Resident with a “generic RFC,” we suggest you find a notary who will.Before you commit to selling your home by signing an agreement or offer, make sure you know what you will be paying in Capital Gains Tax. Also, make sure that the notary you will be using to close the sale has given you a tax calculation and that you have revised the tax calculation before agreeing to use the notary to withhold the Capital Gain amount from your sales price.
- Antimoney Laundering Law (AML)affects: Since 2012, Mexico has had strict AML rules in place. This impacts all sales of real estate and includes such obligations as:
- Identification of the Ultimate Beneficial Owner (UBO file), including giving tax identification numbers such as your Social Security number.
- Notification to the Financial Intelligence Unit.
- Documental evidence of the UBO has to be kept for five years.
When selling a home in Mexico, the notary must obtain all the necessary AML documentation and sign the corresponding forms and declarations filed with the AML authority.
Owning and selling a home in Mexico can be both a favorable lifestyle decision and an investment strategy. Understanding how the capital gains are calculated and withheld at closing will help clarify your decision to buy or sell. Some cases differ, so please let us know if you have any questions about your purchase or sale.
David W. Connell and Jorge A. Cadena wrote this article. You can find more articles and seminars at www.mexicolaw.com.mx and www.cadenaadvisors.com. This article is co-owned by Connell & Associates and Cadena Business Advisors, and its reproduction requires the written consent of Mr. Connell and Mr. Cadena, who have the rights to this work. Copyright 24. This article is a general overview of the topic at the time of publication. For each particular case, we recommend obtaining written consent for your specific case or situation.
