Evaluation of Property

The value of your property is what you pay for it.  Clear and simple.  Do not allow your title to be registered with a value other than what you paid.  It is common practice to do so but the practice is illegal (i.e. fraudulent) and not in the buyers best interest.

Sellers must pay capital gains tax on properties they sell unless they are Mexicans or foreigners with resident immigrant status (FM2) and the property has been their home for a number of years.  The tax is substantial amounting to 30% of the increase in value while they owned it.

The buyer must pay 2% acquisition tax on the value of the property when he buys it.

An example: You by a property for $300,000.  The transaction was registered at its assessed value for tax purposes $100,000.  I call this “playing the game”. You have the property for 3 years and sells it for 350,000.  You have to pay capital gains on the increase in value which is $250,000.  After paying your capital gains of $75,000 you have lost $25,000 plus your real estate and legal fees.  If you had refused to play the game you would have had a profit of $35,000 less your  fees. Of course if you can find a buyer who is also willing to “play the game” then you will have a profit.

The rub is that this type of activity will come to an end as soon as the government decides to prosecute a few cases for fraud.  I would not want to be the test case.  If the government decides to prosecute the case for fraud you may argue that it was not you who perpetrated the fraud.  That is just wishful thinking.  If you read the documents you are signing you will find that the Notario’s defence will be that he was lied to about the actual cost of the transaction.  You will be signing a document that clearly states that the value at which the transaction is registered is what you paid for it and no other compensation of any kind was given to the seller.  Not only did you lie but you did it in writing.

So who has profited from this game.  Clearly the seller.   If he bought the property for $50,000 then his capital gains is only $15,000.  It would have been $75,000 if you had refused to play the game.  You have assumed the sellers capital gains liability.  How did you get into this?  Probably because people advising you told you that everyone does it and that you will save on the acquisition tax.  You did save on the tax but only 2% of the amount of the lie. i.e  $4,000.  You have turned a $4,000 saving today into a $75,000 liability in the future.  Even if you can find a buyer who is as naive as you were you will once again be committing a fraud when you sell.  The seller also signs the documents that the Notario can use to claim he was lied to.

I have seen deals fall through because the buyer was not willing to play the game.  You do not want that to happen after you have found a qualified buyer for your property.   This is the reason I recommend you have a notario separate from the one the seller will use.  Then the notario does not have to deal with these conflicting interests.  I wish I had done that when I bought my first house.   That would be mandatory practice in Canada but in Mexico it is common for the same notario to act for both sides.

Here is what happened.  I was buying direct for the owner using his lawyer in Guadalajara.  I insisted that the transaction be registered at the actual sale price because I did not want to start my life in my new community by perpetrating a blatant fraud.  After many emails the legal secretary agreed that it would be done as I requested.  When I arrived to sign the documents they were drawn up with the lesser assessed value.  I got very angry and took no pains to hide the fact.  I said they had better get a translator in the room immediately and change the documents or there would be no deal.  The notario knew that my emails would disprove any claim of his that he was lied to and he could lose his license.  The documents were changed and signed without further problems.  I still have a copy of the original.  It reminds me not to trust even notarios.

The practice seems to be slowly changing.  I have seen comments that it is not much practised except in our area around Puerto Vallarta but I cannot verify that.  Obviously it was still current practise in Guadalajara just three years ago (2007).  I am told by a friend in the business that it is now common practice to shop for a Notario based on their assessment of closing costs which include capital gains to be paid.   A lawyer with good connections may still feel that he/she could survive a case brought on these grounds.

Please add any personal experiences or contrary opinions below.

Mustn’t forget the disclaimer

The author is not a lawyer or a realtor and is not qualified to give legal advice.  The above is offered as a set of experiences and personal opinions which the reader may use as he sees fit.  Consult a lawyer for legal advice.   The writer accepts no liability.