Getting the Shaft on REAL ESTATE in MEXICO

My thought is the poster meant to say "sales price" instead of listed price, as states above the actual sales price is what should be reflected on the deed. The new ground rules are meant to eliminate the old method of the Notary entering a low ball value to reduce the buyers taxes. Having purchased 2 houses I can attest that the price reflected on the deeds is the purchase price.

Seems everybody thinks the previously accepted practice of lowballing the price paid was to relieve the purchaser of future property taxes.  That may have been the case for some.  It was not the case for me.  I arrived at the Notarios to complete the purchase; the paperwork was all typed up and ready to sign (with NO input/consultation with me); it was translated to me by the broker (with lots of "blah,blah,blahs" for addresses, DOB's, etc (& I now think there was a blah for the price pd also)); I trusted; I signed.  Everyone was Sooo nice, smiles & hugs all around.  I went on my merry way.  
It was only years later, when the topic came up about the lowballing on deeds, that I actually pulled it out and read it - my Spanish having improved considerably by that time.  To my dismay, the purchase price shown was almost 50% of what I really paid.  I have bought & sold many houses in my life and I understand how Basis affects you down the line, and it's not to your benefit to have a low one when it comes time to pay Capital Gains (which is a heck of a lot more than MX property taxes)!!  I, of course, have proof of the $$ actually paid (which will save me for U.S. tax purposes), but I am totally screwed as far as MX taxes.
Since the Broker & Sellers were close friends (only found out afterward that Broker stayed at the house when the owners were up in San Fran, to avoid driving into Guad daily), we can safely assume that the"Lowball" was done for the benefit of the sellers.  They avoided both U.S. Capital Gains and MX Capital Gains on that sale and now, I WILL HAVE TO PAY THEIR TAXES.

I don't think was done to reduce property taxes. It was to reduce the purchase taxes and possibly some of the other closing costs. A one time savings.

Property taxes are based on municipal assessments not RE selling prices.

Under reporting the sales price makes the apparent commission lower and the tax upon that commission lower to the seller. It may benefit everyone but the buyer and the government. Certainly not above board.

RVGRINGO wrote:Under reporting the sales price makes the apparent commission lower and the tax upon that commission lower to the seller.  It may benefit everyone but the buyer and the government. Certainly not above board.

Do you really believe a real estate person is going to profer a false sales contract in order  to help a seller avoid the IVA on the commission?
I don't care what the value is in the escritura, the real estate people will want what ever commission pct. was agreed to at the time of listing, or for sure at the time of the sale, based on the sale price.

You're right, of course. I was too quick in writing the post, that I didn't think about the lowering of sales/transfer taxes, closing costs and commissions. However, I don't understand why a RE company would go along with lowering a stated commission, unless it was made up for "under the table" And that begs the question, Why would a seller go along with that if it gains them nothing. Where I do see the lure for some to avoid higher 1 time closing costs, I think that approach is pretty short-sighted. Especially since I think most people believe that their investment will return more $$ down the line. I'm sticking with the belief that "lowballing" was done with the collusion of Real Estate Co's/Sellers/Notarios to avoid US/Can/MX Capital gains with a "bite" passing among them.

I don't think it had anything at all to do with commissions. I think it was all to reduce sales/transfer tax and that's all. People were not thinking of capital gains down the road. You can be pretty certain that the RE companies have the actual sales price listed on their records and had collected the commissions as such. In Canada people would do the same thing with used car transactions so they could reduce the sales/transfer taxes.

The comission were not based on the escritura value..get serious folks..

I don't have my paperwork in front of me to refer to, but I believe the closing statements in MX (and for that matter the US) do not show the breakdown of costs for both parties - solely your breakdown.  So, it makes sense that the buyer would not see the $$ paid in commissions by the seller.  However, the closing costs are not made part of the escritura  So, now we have to ask how does the seller "settle up" with the MX government as far as Cap Gains,(recognizing the sellers wish to present all sales costs to reduce possible taxes)?  That says to me that there is an offical record, somewhere,  that was used to justify Any/None Cap Gain taxes.
Since we all seem to agree that RE companies are not going to short their commissions, seems as if it should be simple enough to request copies of that paperwork which would show (in my case ~14% of a Notarized sales price).  
I don't know how Gains are treated in Can. but, in the US, we're looking at 20% tax.  Let's say I sell for exactly what I paid and  the"lowball" on the Deed was only -100,000USD -- that's $20,000. due the IRS.  Don't bother mudding the water w/5yr exemptions because I don't know whether the sellers had used that in either the US or MX. I do know that it will affect me. You do the math 100K=20Ktax/200K=40K/300K=60K/400K=80K.  That's not small change.  Where I can prove NoGain in the US, it appears without Legal help$$, I will not be able to prove it in MX and with the aforementiioned exchange rate bugaboo, I will probably be paying the 80KUSD to Mexico.

The real estate commissions will have official facturas that will support same and that had better correspond to bank deposits for audit purposes by Hacienda.  Hacienda can assume a lot just the like the IRS in the US for levying taxes they think are due, if they believe things don't add up.  Of course, if money is paid "under the table" in cash for devious or illegal tax reporting purposes, then you  better have a good mattress to hide same.  I can't believe any Notario Publico is willing to risk a lucrative appointment by messing around like this with bogus numbers; and infrequent buyers and sellers of real estate are no match for trained government auditors.

Vandre said

Since the Broker & Sellers were close friends (only found out afterward that Broker stayed at the house when the owners were up in San Fran, to avoid driving into Guad daily), we can safely assume that the"Lowball" was done for the benefit of the sellers. They avoided both U.S. Capital Gains and MX Capital Gains on that sale and now, I WILL HAVE TO PAY THEIR TAXES

According to the US/MEXICO Tax Treaty Capital gains for a house sold in Mexico are only payable to Mexico, not in the US also.

Lady Otter Latté wrote:Yes. And remember that when asked about owning property in another country honesty may be the best policy but it is not the cheapest!

Lady O, in my usual fashion I failed to explain properly! I asked my realtor if I could get a POA in the USA, he checked with the Notaria clerk......he said no problem........wrong!

Probably material for a new thread..........Where does one go? How does one get info regarding ownership of property outside of Mexico, before or after becoming Permanente?

TIA,

Jim

Slaint -- It's been mentioned here & in other threads, that in times past, it was not uncommon for Notarios to record "lowball" purchase price numbers in an escritura.  It's also said that, now, they enter the "real" numbers.  Can anyone explain the "Incentives" for Notarios  to have falsified these numbers in the past ......  weren't they risking their "lucrative appointment" by defrauding various entities of higher taxes/fees?  Surely, there was some kind of crack-down that forced this change-of-practice, AND wouldn't that, in itself, be a defense against 10yr old falsified escrituras?

DaveP -- I'm not aware of that Treaty.  But I'm finding that rather hard-to-believe .......  in that the IRS (w/FATCA) is sure making it difficult to avoid their taxing my meager MX bank account % (of maybe $750), but that they'd forgive tax.on 100-400K income.  Can you refer me to an official reference to that Treaty & how it is interpreted by the IRS?

I think that sellers simply entered whatever amount they had paid originally, to avoid paying capital gains. Especially here, with a foreign buyer, the money never even entered Mexico. It would go from a foreigner's account to the seller's account in the U.S.
I guess the Mexican government finally decided to clamp down on this and other schemes that were being used for money laundering. Still, a big problem for those who bought under the old 'system'.

Pete

In the past it was "legal" to record the catastro avaluo as the sale price in the escritura, so there wasn't any jeopardy for the Notario.  You could always get way with using the actual purchase price if you wanted to, as everyone involved, including the government would be making more money, except for real estate companies, who wanted their commission based on  the actual sale price.
 As I understand it, that practice has been stopped, so now entering false numbers would indeed be a violation.
The fact that escrituras carried one value and real estate companies charged commission on another value (set of numbers), bothered no one......it was common practice, but buyers got screwed down the line, often, on ISR (so-called capital gains) tax, even though they were being convinced at the time,"what a good deal this is for you; saving money on the closing costs".
Temporary relief for a future headache.

peteben wrote:I think that sellers simply entered whatever amount they had paid originally, to avoid paying capital gains. Especially here, with a foreign buyer, the money never even entered Mexico. It would go from a foreigner's account to the seller's account in the U.S.
I guess the Mexican government finally decided to clamp down on this and other schemes that were being used for money laundering. Still, a big problem for those who bought under the old 'system'.

Pete

I don't understand your first sentence.
 They ( the sellers), probably didn't record  in the escritura "whatever amount they had paid originally", but used the legal catastro avaluo as the purchase price, to avoid paying ISR.....more than likely.

In those days, all Mexicans, would have sold at a loss, if you know what I mean, to avoid the tax.     
soooo, the government set the arbitrary values at  various time increments to end the tax avoidance.


Forgot to add....
Believe it or not folks, I can remember when there was a time when there wasn't any ISR (capital gains) tax here in Mexico.  
New taxes breeds new loopholes and the back and forth battle just continues.

Just thinking here but since this is a longstanding real estate practice I would look to the benefits of keeping property low on the escriteria as benefiting mexican families moving the ownership of property within the family as its paper value is needed for collateral on other purchases or death issues.

I think slainte39 had it correctly with the catastro avaluo which must be the proper term for the appraised value. That's what was entered into our deed, and yes it was only about 60% of what we actually paid in 2006. I don't think anyone was "low-balling", it was simply the custom to use that number. The problem starts when the taxing authority changes the rules and starts requiring market value instead. Still, with enough paperwork, and five years, it's easy enough to avoid the taxes.

Prior to the nineties, foreigners did not "own" real estate in Mexico, but were merely the beneficiaries of trusts established by banks, who were the real owners of the properties.
As beneficiaries, they had broad rights, and banks, with their powerful lobbies were not about to be paying ISR (capital gains tax) every time a trust was established or dissolved.
Once it became legal for foreigners to own property in non restricted zones with a "direct deed" the tax code was established for the ISR, and everyone, Mexicans included, became subject to the tax, but with certain exemptions.
It has been modified over the years to close loopholes, such as putting a small construction on a large tract of land in order to get the "primary residence" exemption for the entire property.
That is why a good Notario is essential that knows the current law and how to navigate through all aspects of the transfer.
I say good, because once in a while a Notario is "sent to the woodshed"

I am thinking of buying a house and this is scaring me to death! How worried should I be? Right now the peso is 18:1 US. If I sell in ten years at 13:1 is that good or bad? What are facturas and finiquitos? Maybe I should rent...

Klutzy wrote:I am thinking of buying a house and this is scaring me to death! How worried should I be? Right now the peso is 18:1 US. If I sell in ten years at 13:1 is that good or bad? What are facturas and finiquitos? Maybe I should rent...

The best thing to be scared about at any time is the lack of mandated disclosure that NOB'ers are accustomed to.
You're totally on your own to discover any problems, defects, neighborhood nuisances, plumbing or electrical issues, etc.

I'd definitely rent for a while and get a reliable attorney involved with the transaction, along with a well thought of home inspector.  Re that, bear in mind that the owner won't let you tear out flooring or walls for inspection, and you would be amazed at some of the secrets not discoverable by a normal inspection.  How do I know this?  Learned the hard way.

Klutzy wrote:I am thinking of buying a house and this is scaring me to death! How worried should I be? Right now the peso is 18:1 US. If I sell in ten years at 13:1 is that good or bad? What are facturas and finiquitos? Maybe I should rent...

Most houses are listed in U.S. dollars.
If you sell in 10 years sell in U.S. dollars.

Klutzy wrote:I am thinking of buying a house and this is scaring me to death! How worried should I be? Right now the peso is 18:1 US. If I sell in ten years at 13:1 is that good or bad? What are facturas and finiquitos? Maybe I should rent...

If you're new here then rent for a while. A Factura is a legal receipt. A Finiquitos is a letter defining the terms of severance for an employee. You not knowing those terms indicates you need an attorney to assist you if you are going to buy. The exchange rate will have no affect on a real estate transaction done in $US.

Klutzy,  If you plan to legally own a home in Mexico, it will involve a Notario who will draw-up a deed (escritura) defining the deal.  It will include the price paid and it will be defined in pesos (since we are in MX), even though the prop might have been listed in U.S.$ (they will use the current exchange rate).  Let's say you buy a house listed at 200KUSD and the notario uses the exchange rate of 18>1, the escritura will show that you paid 3,600,000.pesos.  If you were to then sell it for exactly the same US amount you paid, in 10 years when the exchange rate is 13>1, the buyers escritura will show they paid 2,600,000.pesos.  In MX eyes, you have LOST 1,000,000.pesos (yeah!! no tax due).  You will have spent 200KUSD in the buy transaction and with the sell transaction you have received 200KUSD.  This is the reality, even if your original buy $$$ came out of a US Bank and went right into the sellers US Bank.
The reverse is FACT for those of us that bought @10-11-12-13>1 and now might want to sell at a exchange of 18>1.  It looks to MX as though you made potloads of taxable money - when in reality, you have broken even or ..... LESS (considering today's selling environment - a distinct possibility).  
Buy, Rent, Wait, Jump is a totally different topic and should have a separate thread.  Some people are just naturally  "Renters" and some are "Buyers".  Even though I will never recover my costs, I wouldn't/couldn't ever be a "Renter".  The above mentioned definitions of Finiquitos and Facturas are not totally valid either, so don't be intimidated about asking questions.  Lot's of people here like to appear as if they've been-there, done-that, seen-it-all.  I suspect the previous 2 posters are "Renters" and are pontificating on things they know very little about. Good luck ..... and I hope others weigh-in on-topic & with real experience.

I and one of the other posters above are homeowners. In my case, for over 10 years. The definitions of Factura and Finiquito are correct. The assertion that the future sale is taxable is NOT true if you are Residente Permanente.

Rent. What's the rush?
Rent in different pueblos, they are all different. After awhile you will know where you want to buy. There are a thousand different ways to live here and it takes a little bit to find where you fit.

If you buy, you can't move.