Sunday, January 17, 2016


By Don D. Nelson,  US International Tax Attorney

1. If you have lived in and occupied your US primary residence for at least 2 years out of the five years prior to the date it is sold, under US tax law $500,000 of any gain on sale ($250,000 if filing as single or married filing separately) is exempt from US taxation. This is one of the last big tax breaks left in the US tax code which can allow you to take the equity from your house tax free and purchase a property in Los Cabos.

This same rule applies to US taxes on the sale of your primary residence in Mexico.

2. Though there are limits on the amounts of interest you can deduct for personal  taxes on your personal residence mortgage (which is generally limited by the interest payable on  the current amount of the morgage you used to purchase the property plus the amount of  funds borrowed for improvements), you can always with a second mortgage or a  line of credit borrow an additional $100,000 and still have the right to deduct all interest paid on this loan on your tax return. You can use this $100,000 as part of the purchase price of your new property in Los Cabos.

 An additional limitation on the tax  deduction of mortgage interest on personal real property  is that the  total amount of mortgage loans on your personal residence, line of credit and perhaps a mortgage on your vacation home cannot exceed $1.1 million dollars.  If the mortgages on these properties exceed the limits set forth above the interest on any mortgages above $1.1 million cannot be deducted for tax purposes.

The tax deductible interest rules of personal real estate loans are complex. See IRS Publication  936  at for a full explanation of the limitations.

3. Though there are limits on the amount of interest you can deduct on your US tax return on your personal  real property mortgages,  if you convert your residence to a rental property you can then refinance  the property to pull out the  equity  you have built up  to purchase property in Los Cabos . Most  often you can deduct all of that interest on your new mortgage as a rental expense on your tax return.  Unlike the limits on deductible interest which exist for personal real estate, there is no limit on deductible interest on rental properties.  And if allowed, you can use any tax losses produced by your rental property of offset other taxable income on your return.

So long as your modified adjusted gross inome does not exceed   $100,000 on a joint US tax return you can deduct up to $25,000 of rental property losses on your tax return to offset your other income if you actively manage your rental real estate.  If you  modified adjusted gross income  exceeds that amount the amount of losses you can use to offset other income is reduced.  Any disallowed rental losses (called passive losses) carry over and can be used in the future. Read IRS Publications 527  and 925 at to learn the important details of this limit.

As a side note, if you purchase property in Mexico ( whether personal or rental) and use a mortgage for part of the purchase price, the same US tax rules previously discussed apply to your property in Baja Sur.

Don Nelson is a US Tax Attorney (and a retired CPA) who has assisted Americans with their US taxes  and returns in Baja Sur  for over 25 years.  He can be reached by email at or at his US phone 949-480-1235  He is also in Cabo for about six months a year.

His website is at :  Blogs with the latest news on US expat and international tax developments are at  and .