What is Capital Gains Tax (ISR en México)?
Capital Gains Tax (ISR)
/ee-ESS-AIR-ay en MEH-hee-koh/
Quick Definition: Capital Gains Tax in Mexico (Impuesto Sobre la Renta or ISR) is the federal tax on profit realized from selling real estate. The tax applies to the difference between purchase price and sale price, with rates up to 35% for individuals and 30% for corporations, though various deductions and exemptions can significantly reduce actual tax liability.
Understanding Mexico's Property Sale Tax
When you sell property in Mexico, the profit you make is subject to federal income tax known as ISR (Impuesto Sobre la Renta). This tax applies to both Mexican citizens and foreign property owners, calculated on the gain between your adjusted purchase price (including improvements and transaction costs) and your sale price. Unlike some countries where capital gains receive preferential tax treatment, Mexico taxes property sale profits as regular income, meaning the rate depends on the amount of gain and your tax residency status.
The capital gains tax system in Mexico is more complex than many foreign buyers anticipate, involving multiple calculation methods, various deductible expenses, potential exemptions, and different treatment for residents versus non-residents. Understanding these nuances before selling can save tens of thousands of dollars in taxes through proper planning, documentation, and timing. For international owners in the Bajío region who may not be Mexican tax residents, the implications differ significantly from Mexican nationals, making professional tax guidance essential.
Why Capital Gains Tax Matters for Bajío Sellers
Properties in San Miguel de Allende, Querétaro, and throughout the Bajío have appreciated significantly over the past decade, with some areas seeing 50-100% value increases. While this creates excellent investment returns, it also means substantial capital gains tax liability when selling. A property purchased for $200,000 USD and sold for $350,000 could generate $50,000+ in taxes without proper planning. Understanding deductions, exemptions, and calculation methods can dramatically reduce this liability - potentially saving 30-50% of the tax bill through legitimate strategies like the primary residence exemption or proper documentation of improvements.
How Capital Gains Tax is Calculated
Mexican capital gains tax calculation follows this basic formula, though the details become complex:
The adjusted cost basis is critical because it reduces taxable gain. You can add to your original purchase price: notario público fees from purchase, property transfer taxes paid at purchase, major improvements and renovations (with invoices), real estate agent commissions on sale, notario público fees on sale, appraisal costs, and certain legal fees. Maintaining detailed records of all property-related expenses from purchase through sale is essential for maximizing deductions.
Example: Capital Gains Calculation for San Miguel Property
David, a US citizen and non-resident of Mexico, sells his San Miguel de Allende investment property:
Purchase (2018): $250,000 USD
Purchase Expenses: $12,500 (notario, taxes, agent)
Documented Improvements: $45,000 (kitchen, bathrooms, roof - with invoices)
Adjusted Cost Basis: $307,500
Sale (2025): $425,000 USD
Sale Expenses: $25,500 (notario, agent commission)
Net Sale Price: $399,500
Taxable Gain: $399,500 - $307,500 = $92,000
Tax Calculation (Non-Resident):
35% rate on gain = $32,200 ISR tax due
With Primary Residence Exemption (if David had lived there):
If David had used the property as his primary residence for at least 5 years and the gain was under 700,000 UDIS (approximately $4.7 million pesos or $235,000 USD in 2025), he would owe $0 in capital gains tax - a savings of $32,200.
Tax Rates for Different Sellers
Capital gains tax rates in Mexico vary based on seller's tax residency and entity type:
- Mexican Tax Residents (Individuals): Progressive rates from 1.92% to 35% based on total annual income
- Non-Resident Foreigners: Flat 25% withholding rate on gross sale price OR 35% on calculated net gain (can choose lower)
- Mexican Corporations: Flat 30% corporate tax rate on gains
- Fideicomiso (Bank Trust): Trust pays tax on behalf of beneficiary at their applicable rate
- Primary Residence Exemption: 0% if qualifying conditions met (see below)
Primary Residence Exemption
Mexico's most valuable capital gains tax benefit is the primary residence exemption, which can completely eliminate tax liability for qualifying sellers:
- Occupancy Requirement: Property must be your primary residence (casa habitación)
- Time Requirement: Must have occupied as primary residence for at least 5 years total (doesn't need to be continuous)
- Gain Limit: Exemption applies to gains up to 700,000 UDIS (approximately $4.7 million pesos or $235,000 USD in 2025, adjusted annually for inflation)
- Frequency Limit: Can only use exemption once every 3 years
- Documentation: Must prove primary residence through utility bills, voter registration, or other official records
For many American and Canadian expats who live full-time in the Bajío, this exemption provides enormous tax savings. However, proving primary residence status requires careful documentation throughout ownership. Keep utility bills in your name, register for local services, maintain voter registration (if eligible), file annual Mexican tax returns showing the property address, and avoid renting the property on platforms like Airbnb (which indicates investment use, not primary residence).
Strategies to Minimize Capital Gains Tax
Legal strategies can significantly reduce ISR liability when selling Bajío properties:
Non-Resident Seller Considerations
Foreign property owners who are not Mexican tax residents face unique considerations:
- Withholding Method: Notario withholds either 25% of gross sale price OR allows calculation showing 35% of net gain (usually the calculation method is better)
- Immediate Withholding: Tax is withheld at closing and remitted to SAT (Mexican tax authority)
- No Refunds Without Filing: To claim deductions or refunds, must file Mexican tax return within specific timeframe
- RFC Requirement: Must have Mexican tax ID (RFC) to complete transaction
- Exit Tax Issues: Some countries treat property sales by non-residents as triggering additional exit taxes
- Treaty Benefits: US-Mexico and Canada-Mexico tax treaties may affect double taxation
- Documentation Burden: Non-residents need more extensive documentation to prove cost basis and deductions
Capital Gains Tax vs. Property Transfer Tax
Understanding the difference between these two taxes prevents confusion during property sales:
Capital Gains Tax (ISR)
Federal tax on profit from property sale. Paid by seller based on gain realized. Rate varies by residency and gain amount (25-35% typically). Calculated on difference between adjusted purchase price and sale price. Paid at closing or through annual tax return. Exemptions available for primary residence.
Property Transfer Tax (Impuesto de Transmisión Patrimonial)
State/municipal tax on property transfer. Typically paid by buyer (though negotiable). Fixed percentage of property value (2-5% depending on location). Based on cadastral value or sale price (whichever higher). Paid at closing through notario público. No exemptions for primary residence. Separate from and in addition to capital gains tax.
Frequently Asked Questions
Yes, both Mexico and the US will tax the gain. Mexico taxes you as a non-resident (typically 25% of gross sales price or 35% of net gain), and the US taxes your worldwide income including Mexican property gains. However, the US-Mexico tax treaty allows you to claim foreign tax credits for Mexican taxes paid, preventing most double taxation. Work with tax professionals in both countries to optimize your position.
No - attempting to hide the sale is illegal and virtually impossible. The notario público is legally required to withhold capital gains tax at closing and report the transaction to Mexican tax authorities (SAT). Additionally, the property transfer is publicly recorded. Tax evasion in Mexico carries serious penalties including fines, criminal prosecution, and problems with future visa renewals or property transactions.
Without proper invoices (facturas) from licensed contractors, you cannot include improvement costs in your adjusted cost basis, significantly increasing your taxable gain. This is why maintaining detailed records throughout ownership is critical. If you made improvements without invoices, you may be able to use before/after appraisals or contractor affidavits, but these are less reliable. Always get proper invoices with RFC numbers for any significant property work.
Non-residents generally have 5 years from the date of sale to file a Mexican tax return claiming refunds for over-withheld ISR. However, the process can take 6-18 months and requires working with a Mexican tax accountant. Many sellers choose to calculate and pay the correct amount at closing rather than dealing with refund claims later.
Yes, foreign property owners can qualify for the primary residence exemption if they meet all requirements: used property as primary residence for at least 5 years total, can document primary residence status through utility bills and other records, gain is under the 700,000 UDI limit (approximately $235,000 USD), and haven't used the exemption in the past 3 years. Many American and Canadian expats living full-time in the Bajío successfully claim this exemption.
Mexico doesn't distinguish between short-term and long-term capital gains like the US does. The same ISR rates apply regardless of holding period. However, selling quickly means fewer opportunities to accumulate deductible improvements and expenses, potentially resulting in higher taxable gains. Additionally, rapid sale may raise tax authority questions about whether you're operating as a dealer rather than an investor.
Related Terms
RFC (Registro Federal de Contribuyentes)
Mexican tax identification number required for transactions
SAT (Servicio de Administración Tributaria)
Mexico's tax authority equivalent to IRS
UDIS
Inflation-adjusted units used for tax calculations
Contador
Mexican tax accountant or CPA
Factura
Official tax invoice required for deductions
Casa Habitación
Primary residence for tax purposes
Planning to Sell Property in Mexico?
Navigate capital gains tax obligations with expert guidance. Our network includes bilingual tax professionals and accountants who specialize in helping international property owners minimize tax liability and ensure compliance when selling real estate in the Bajío region.