Record the cost of your new
construction. Receipts alone aren't enough.
Manifesting is simply recording the amount you spend on your
construction, or remodel, in order to add it to your cost basis. Adding to your
cost basis is the key to reducing your capital gains tax. Proper documentation
and manifesting your construction are vital parts of building your new
Why do I need to manifest my construction?
When you sell your
home, the manifested cost plus the cost of your lot stated in your trust
(title), will be used to determine the basis for capital gains tax.
you have not manifested your construction, Mexican tax law will not recognize
your construction costs and you will not be able to use them as a deductible
expense. All your receipts, cancelled checks and bank statements will not help
unless you have completed your manifestation.
Before your begin
Decide how to structure your financial arrangements with your
contractor. The two main choices are cost plus and a fixed bid.
With cost plus, you pay the contractor for the cost of materials, plus a
fee of 12 to 20 percent. Using this method, you will need to keep excellent
records in order to prove all your expenses. With cost plus, you (not your
contractor) are responsible for paying the Social Security tax for every person
working on your home.
Each time you pay the contractor, he must provide
you with a legal Mexican invoice called a Factura. Each Factura must be in your
name and will include a 10 percent sales tax called IVA. Without the Facturas,
nothing you spend is deductible as an expense in Mexico.
fixed-bid contract, the contractor quotes you a flat fee to build your home. A
fixed bid will include all labor, materials, Social Security, etc. It is
all-inclusive. When using the fixed-bid process, you put the burden of record
keeping on the contractor, and you do not have to pay the 10 percent Mexican IVA
tax each time you make a payment. You will still need to receive a Factura
(Mexican invoice) from the contractor for each payment. However, the Factura
should reflect the amount of the payment due with no 10 percent sales tax (IVA
IVA tax is basically a sales tax, and Mexican tax law states there
is no IVA tax for the construction of a personal residence, provided the
contractor is providing an all-inclusive bid. Again, the fixed-bid process is
much less labor-intensive for you and puts the majority of the record keeping on
Helpful hint: When using fixed bid, make certain the
contractor is in agreement to provide you with a Factura for each payment, with
no 10 percent sales tax added. Have this in writing in your construction
Pulling a building permit
The building permit is the first
step to manifesting your property correctly. You will need the permit both to
start construction AND to finish the construction. The permit is pulled from the
government office called Obras Publicas, meaning Public Works. Normally, the
contractor will pull this permit, and there are two things you need to watch
1. Make sure the building permit is pulled in the same name as the
beneficiary named in your trust.
2. Make sure the building permit
represents the approximate amount of the construction the contractor has
proposed to do the work.
The fee for the building permit is based on the
estimated value of your construction. In an effort to reduce this fee, some
contractors will report a lower construction amount when pulling the permit.
This is a huge mistake. You want your construction costs recorded accurately, so
your cost basis will be accurate for capital gains.
Helpful hint: Never
report a lower construction value to save some money on the permit fee, because
it will cost you much more in the long run.
Letter of termination of
When construction is finished, and you are ready to manifest your
construction, you will need to take your building permit to the Obras Publicas
office with a letter stating the amount you spent and that you have finished
your construction. You or your contractor can write the letter. With this
letter, you will request an official statement of completion called an "Adviso
de Terminación de Obra," which is a “letter of termination of
This letter will state the amount you spent on your construction,
which should be in accordance with the amount stated on the building permit.
Important: This letter is the document that actually establishes your
construction cost basis for the tax office.
Security is very serious issue in Mexico, and your home can actually be
liened or sold to force payment if these taxes are not paid. This can even
happen years after you finish your construction.
When you receive your
“letter of termination of works,” Obras Publicas will send a copy to the Social
Security office. They will compare this amount with what you or your contractor
has paid to Social Security during construction. (If you are using cost plus,
you are responsible for paying the taxes; and if you are using fixed bid, the
contractor is responsible.)
If the amount of Social Security taxes paid
corresponds to the amount of your construction, you will receive a letter from
Social Security called a “Carta de Razonabilidad de Pago,” which means a “letter
of reasonability of payment.” This letter is very important, as it is your
protection to prevent any future claims for non-payment of Social Security
Manifesting your construction
Once you have your “letter of
termination of works” and your letter from Social Security, you simply take them
to the tax office, called the Catastro office. They will record the value and
add it to the cost reflected on your trust document. Once completed, you have
successfully manifested your construction and established an accurate tax basis
for your property.
Fact: If you do not have a trust, you should not begin
construction. Without the trust document, you cannot pull a building permit in
your name and you run the risk of not being allowed to deduct your land cost or
construction cost when you sell.
Fact: Annual property taxes are
relatively low in Mexico, but capital gains taxes are
not. Registering an artificially low number will cost you much, much more in the
I will work with you to make certain that all your documents
are in order and that your actual costs are recorded properly. There are no
shortcuts and no legal ways around taxes here, any more than there are in the
United States or
Canada. Your home is a large
investment, and following proper legal steps will ensure a safe and enjoyable
experience in Mexico.
If you are
considering on buying land for construction, let me know and I can assist you in
the search for your perfect lot, finding a good architect and a trusted