Taxes payable on the purchase and sale of land

Due to the modifications made in 2019 to the Income Tax Law (ISR), investors who would allocate their capital to the purchase of land projected some uncertainty because they did not know how this would affect when declaring land.

If you are thinking of buying land in Blue World City, in addition to important factors such as price and location, you should consider the taxes that are generated for both the buyer and the seller and the corresponding tax obligations.

In the event that the land is for industrial or commercial purposes, it is necessary to verify that it has the permits for commercial use of the sector, and that it is not only for residential use. This will avoid future complications for the establishment of a business.

The same applies if you are planning to sell a property. It seems simple but to determine the correct amount it is required —in most cases— to hire professionals in the matter in addition to the services of a notary public.

Because it is important? In this way you will be able to plan a correct budget – according to your financial capacity – and reduce unforeseen expenses that may harm the buying and selling process.

Taking into account the above, we will explain in detail what are the types of taxes that both parties must pay during the sale of land.

Tax obligations in the sale of real estate

The income obtained from the sale or disposal of a property, generate tax obligations that the selling party must comply with before the SAT, through a series of taxes that are calculated, withheld and notified to said instance by a notary on behalf of the taxpayer.

ISR payment

Income Tax is a payment that individuals and legal entities must make at the time of selling a property, whether for residential or commercial use.

When transferring a property to a third person, it will be located in the assumption of the sale of goods foreseen by the CFF (Fiscal Code of the Federation), therefore, the corresponding ISR must be paid. 

For this type of operations, the notary is responsible for determining and calculating the payment corresponding to the withholding of the transferor.

In the sale of a property, the ISR can be exempted once every three years if the value of the property does not exceed 700,000 UDIs. 

The foregoing will only be applicable if the taxpayer within a period of three years – prior to the date of sale – has not carried out another transaction for the sale of real estate.

How to calculate income tax?

The amount to be paid for ISR will be determined by a notary public who will determine the corresponding payment, as well as the tax exemption if applicable.

The first thing that takes place is the determination of the profit. As established in the Income Tax Law, the amount of the resulting consideration —even through a credit— is considered income obtained due to the sale.

Once determined, the deductions are subtracted, for example:

  • The verified and updated acquisition cost, which cannot be less than 10% of the sale amount.
  • The amount of the interventions carried out in buildings, such as remodeling, improvements and extensions.
  • Notary fees, taxes and duties. For example, local taxes, deeds, even payments made on appraisal matters.
  • Commissions and mediations generated – and paid – by the seller, either on the occasion of the purchase or sale of the property.

After this, it is up to the notary to calculate the provisional payment that will be withheld by applying the annual ISR fee.

How is this calculation done?

The profit is divided by the number of years that have elapsed since the purchase was made to the date of sale. This is done that way in order to obtain a proportional profit.

As a third step, the local tax must be taken into account, which must be applied and withheld at a rate of 5% of the profit obtained. 

For this entire process it is vitally important to have trained personnel, or if you acquire through a company —as is the case with BMF— you can count on professional advice for this process.

Income Tax Law (ISR)

Now that we have talked to you about the ISR, it is worth mentioning that the laws are always in constant change, some are updated and others are repealed, as is the case of the IETU (Business Flat Tax) which was only in force from 2008 to 2014.

Because of this we will tell you about the latest changes of the Law on income tax and how it affects the sale of land or buildings.

The modifications made in 2019 to the Income Tax (ISR) law, generated uncertainty among investors who had contemplated allocating capital to the purchase and sale of land.

What concerns arose from this? The doubts about what would be the effects at the time of declaring the land did not wait.

In order to increase tax collection, the Tax Administration Service (SAT) announced in 2019 that the verification of tax invoices would be a fundamental part of lawsuits for real estate leasing.

The main fear of entrepreneurs is that due to this the prices of rents will increase, so that the rental of real estate would no longer be profitable, which represents 40% while the sale of 60% of the real estate movement.

However, these fears were founded due to poor dissemination of information.

The issuance of invoices for the lease of real estate is intended to reduce the tax evasion rate, but it does not mean that by not having the invoices the judgment (if required) is considered lost.

This change was made to article 118 of the Income Tax Law and, despite not being a determining factor in the resolution of the trial, the authority will notify the SAT when such information is not presented.

According to the Ministry of Finance and Public Credit (SHCP), tax evasion for leasing is equivalent to 0.1% of the national GDP.

Despite being a reform that only affects the rental of real estate, the parties involved in land sale transactions must also comply with certain tax obligations that provide legal certainty for the property and thus guarantee protection both to your person and to the property.

It should be noted that the reform does not violate property rights and that the landlord’s rights remain intact.

Declare the sale of land

At the end of the sale of a property, the notary public must deliver to the selling party a proof of compliance with tax obligations through the withholding of taxes with which the seller can make his annual declaration when applicable.

With this information, the taxpayer may declare the land (s) that he has sold, based on the amounts indicated in the certificate in order to subtract the withholding from the tax that results in said fiscal year. 

In 2020, during the month of April, natural persons had to make their annual declaration, while legal entities had from January to March to present it.

Tax obligations in the purchase of real estate

For its part, within the points to consider to invest in a commercial land, the buyer must consider the taxes that the acquisition of said property will generate.

Like the selling party, tax obligations are met through withholdings made by the notary public.

VAT payment

The payment of VAT (Value Added Tax) is paid by the buyer when it comes to real estate not intended for residential use, such as land for commercial purposes.

The VAT came into force on January 1, 1980, and to date the applicable rate is 16%, consolidating itself as the second most important tax for collection in our country.

Who is obliged to pay VAT?

The LIVA (Law of Value Added Tax), in its article 1, classifies it as the indirect tax that must be paid by natural and legal persons who carry out the following activities within Mexican territory:

  • Alienation of movable and immovable property.
  • Provision of independent services.
  • Grant the temporary use or enjoyment of goods.
  • Import of goods or services.

In the case of the sale of goods, VAT can be exempted when it comes to property transfers through donations and due to death, with the exception that it is made by companies whose donation is not deductible for income tax purposes. . Mention of this is made in article 8 of the LIVA.

In short, any natural or legal person who acquires, consumes or buys goods or services pays the seller VAT, and this in turn will send it to the state.

Based on the foregoing, we emphasize the importance of having specialized advice. Through the directory of notaries affiliated with the Colegio del Notaria do Mexican, you will be able to answer questions and hire the services of a professional in the matter.

ISAI payment

The Property Acquisition Tax —or Property Transfer Tax— is an amount that the buyer pays at the time of contracting a property (house, apartment, land or premises), whether new or used.

The payment of this tax allows you to register as an owner with the Ministry of Finance and Public Credit (SHCP). The corresponding percentage may vary in each state — federal or autonomous communities — with an average of approximately 2%.

Like the ISR, it is calculated by the notary public depending on state regulations. For example, to deed a property in Yucatán, the rate is 0.025% —one of the states with the lowest percentage — and in Quintana Roo it is 2%.

At what time do you pay?

When the notary executes the deed and registration of the property before the Public Property Registry (RPP) in the name of the new owner. This is a requirement for the transfer of the domain and formalize the sale.

When property is acquired through donation or cause of death, the payment of this tax is also exempt.

  • Public deed of the property in process of purchase.
  • Document that stipulates the cadastral value for notarial procedures.
  • Tax declaration note signed by the taxpayer or the notary public.
  • Official identification of the seller, or, where appropriate, receipts from federal entities that include the address of the property and the name of the transferor.

Commercial land, the best investment

Now that you know the types of taxes that both parties pay during the sale of a property, you can prepare a budget with less margin for error, and focus your attention on finding the ideal land to invest or start a business.

The real estate boom has a strong presence in the Mexican southeast, and there are excellent opportunities both for the residential sector and for acquiring commercial lots at competitive prices. 

As we tell you in our article Investing in times of crisis: a wise decision? Buying real estate such as land is a sure way to protect and grow your money regardless of the time or situation.

Our recommendation will always be that you approach the experts on the subject, who will know how to advise you on the best location, and especially the most appropriate one for your business.

Buying and selling a property with the support of a professional will ensure your investment and help you to have everything in order to carry out any transaction and declaration of land, in case you decide to sell your property in the future. 

If you want to know more about the subject, we invite you to visit our blog and read articles such as Why do large investors buy several commercial lands? o Invest in Playa del Carmen: the best bet to expand your business.