Monday, February 22, 2010

When You Buyer or Sell Mexican Real Estate Consider Adding an Arbitration Clause to Your Contract

Linda Neil, a Mexican real estate expert, recently pointed out in her article in the Gringo Gazette that Mexico has changed it laws to allow for arbitration and mediation of disputes between parties to a contract for the purchase of real estate in Mexico.  Articles 1415 to 1463 of the Mexican Commercial Code provides guidelines. It is now possible to avoid the uncertainties of the Mexican Courts.  This will allow parties to a contract to resolve their disputes with much greater speed than ever possible in the Mexican Courts and perhaps with more certainty in the final decision, not to mentioned significantly lower costs in legal fees, etc.  If both  the Buyer and Seller are US residents, it may be possible to agree that the mediation or arbitration will be held in the United States using the American Arbitration Association or another recognized arbitration organization.

Next time you buy or sell, tell your agent you need an arbitration and mediation provision put in the contract.  Since so many real estate transactions in Mexico often  result in problems, it is a good decision. Agents who tell you that you must follow their standard contract are not correct. You can always make changes or add additional provisions.

Friday, February 19, 2010

Sale of Primary Residence in Mexico -US and Mexican Tax Rules

For US tax purposes, if you home in Mexico is your primary residence (this is subject to documentary proof on audit) for 2 out of the 5 past years (from date of sale) up to $500,000 in gain is not subject to taxes if you file a joint return, and $250,000 is tax free if you file as single.  Any gain above those amounts are subject to taxes at capital gains rates.  You can claim a credit for any Mexican capital gains taxes you paid on the sale against any US tax you pay as a result of the sale.

For Mexican taxes, to claim the unlimited exemption from taxes on the sale of your  personal residence you first must have lived as your primary residence it for five years prior to the date of sale and be a Mexican citizen or hold an FM2 visa.  You must also have documentary proof that it was your primary residence for that period of time. Such proof would include phone bills and utility bills; passports showing entry and exit dates from Mexico, etc.  You cannot have two primary residences for either Mexican or US tax purposes.

You cannot get the exclusion from Mexican tax if you only hold an FM3, even though you have lived in your home full time for the 5 years.  You must convince the Mexican Notary that your really did live in the property being sold as your primary residence for at least five years. The Notary makes the final decision whether to exempt you from taxes or not.

You should consult with a Mexican accountant, contadore (CPA) or tax abagado (attorney) if you wish to take advantage of the personal residence tax exemption to learn the steps required to qualify. Do not wait until the last minute when it is too late!

Therefore, it is possible to qualify for the gain exclusion on your US tax return though you may not qualify for Mexican tax purposes.