A Happy Exchange
It's actually misleading, although no one intended it to be. For years real estate in Los Cabos has been dollar-based. Our Multi-List system quotes prices in dollars, our offers are written in dollars, we hold dollars in escrow in the U.S., every step in the process and every paper the client sees is based on the dollar. BUT! The absolute fact is that, this being Mexico, the deal officially happens in Mexican pesos. The price you pay for your home or lot is recorded in your trust and in the public records in pesos at the exchange rate on the day of closing. The Notario Publico (a government-appointed lawyer/magistrate who presides over the closing and computes all taxes) makes the conversion. It's all very routine and not really worth mentioning-- unless the exchange rate starts to fluctuate. Which has been the case recently; the peso had been very stable, hovering around 10 per dollar for many years. But the global economic crisis has caused it to fluctuate between 10 and 13 recently which can be significant when you're dealing in real estate-sized numbers. If it weren't already the most advantageous time to buy in Cabo, the world economy is now helping out.
Here's how the momentarily weaker peso helps buyers: your price will be recorded at a higher number of pesos even though the dollar amount didn't change. That recorded sales price is your basis for computing capital gains tax when you eventually sell. So when the peso re-stabilizes at near 10-1, which is where it has been for years, you will have built in a higher tax basis. It is true the amount on which you will pay the 2% acquisition tax is a bit higher with the weaker peso. However that increased acquisition tax is nominal compared to the savings on capital gains: this year the capital gains tax rate is approximately 27%. So if you're a buyer this is a great opportunity and you should press for an early closing to lock in a favorable exchange rate.
Sorry Sellers
On the other hand, for sellers just the opposite is true. Their tax basis was recorded at about 10-1, but the current sale will be artificially inflated by the global financial status. As a result they will pay more capital gains tax. This is when thinking in dollars, as we often do, can be especially dangerous. If, just for example, you consider a $100,000 lot purchased in 2007 and sold this week for $100,000. No capital gain, so no tax, right? Wrong. The purchase would have been recorded at $1,000,000 pesos and the sale at $1,300,000 pesos, with tax due on the three hundred thousand peso gain. So in this economy sellers should, knowing that the Mexican government is already taking action to bolster the peso on the world currency market, push closings as far into the future as possible.
The table here shows the tax implications of a 2.5 point change in the exchange rate for three scenarios: a stable exchange rate, selling at a higher rate, or the current buying opportunity with a weak peso and selling when it regains strength. Bottom line: with increased inventory, reduced prices and now the power of the peso there has never been a better time to invest in property in Los Cabos.
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This table illustrates the effect of currency exchange rate fluctuations on the taxes paid on a real estate transaction. Our example is a home purchased for $500,000 and sold for $1,000,000 U.S. Dollars. |
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Exchange rate fluctuation |
Buy at 10%/Sell at 10% |
Buy at 10%/Sell at 12.5% |
Buy at 12.5%/Sell at 10% |
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Sell price in pesos
|
10,000,000 |
12,500,000 |
10,000,000 |
|
Basis (what was paid) in pesos |
5,000,000 |
5,000,000 |
6,250,000 |
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Gain in pesos
|
5,000,000 |
7,500,000 |
3,750,000 |
|
Capital Gain Tax Due in pesos |
1,350,000 |
2,025,000 |
1,012,500 |
|
Tax amount converted to dollars |
135,000 |
162,000 |
101,250 |
|
Savings/Loss Due to Exchange rate fluctuation |
|
Overpaid taxes of $27,000 USD |
Tax Savings of $33,750 |
Reader Question:
Can I put my Mexico property into my Family Trust in the US?
Yes, and no. You can certainly name the Family Trust as the beneficiary of your Mexican trust, but you can't use it to bypass setting up a trust with a Mexican bank to hold title to land in Mexico (unless that land is more than 50 km from the ocean). The language of the Mexican trust, or Fideicomiso, is very specific and sets forth conditions mandated by Article 27 of the Mexican constitution in which you are given all the rights, benefits, and privileges of a Mexican citizen as pertains to the property and in return you agree to abide by Mexican law in regards to the real estate you own. However you designate as the beneficiary of that trust any legitimate trust or corporation. There may be tax implications that should be discussed with your financial advisor. You should also seek legal advice if putting the property into the name of an off-shore corporation, particularly those countries considered tax havens.
New Website For Cabo Fans
The new interactive website www.lovecabo.net for Cabo aficionados offers news, weather, games, classified ads, business and dining directories and in-depth information on our community. Missing your daily crossword or sudoku? Got that covered, too. You can even post your favorite Cabo photos and participate in discussion groups. Membership is free, everyone welcome. When registering you may insert any US state for a Mexican state or Canadian province until the web designers work out the bugs.
Carol Billups is a Certified Home Marketing Specialist and Elite Executive. She and her team were recently awarded Realty Executives International's Circle of Excellence Award for Best Business Practices. She can be reached by phone from Cabo at 044-624-147-7541 or via email at loscabos@realtyexecutives.com. She and husband Bob are the proud 'parents' of Boston Terriers Daisy Fay and Betsey Ross Billups.
© 2008 Carol S. Billups
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