From Harriet’s VIEWPOINT® articles in the PV Mirror, check her blog for more articles like this..
YOU HAVE YOUR PROPERTY LISTED FOR SALE: DO YOU KNOW IF YOU OWE ISR TAX?
If you have listed your property for sale here, I recommend strongly that you be sure to have an analysis by a notary of any capital gains tax which you may owe upon sale. If you think you are exempt, you still want to have the notary do an analysis of your exemption to be sure it is applicable for your eventual sale.
It is not clear to me why this very important detail can be overlooked or ignored by the seller or his listing agent.
- Does the seller not care how much tax he will pay at closing?
- Does he not want an estimate of his net proceeds before he commits to sell?
- Does the seller know that a standard offer written here will include a paragraph where he states that he has been made aware if this tax obligation, and he accepts that he will pay the tax due at closing?
- Did the seller and his listing agent discuss the section in the exclusive listing agreement that he has been made aware of the ISR tax obligation in Mexico?
- He understands it and knows how it will impact him?
The language in the listing agreement and sales offer address this tax issue. The wording is not meant to be a vague awareness of a tax, but for the seller to know exactly if he is exempt or not, or to know what he will owe if the property sells for a certain price.
Why did the real estate agent not cover the tax issue and obtain the correct tax information with the seller as part of the listing process? Is the agent not educated in this subject and its importance? Is the agent afraid he will not get the listing if he coves this tax subject? Is he afraid the seller will decide not to sell when he realizes he has a tax to pay? How does putting this off make things better? Is the agent then lazy, or dishonest? Why wait until an offer to purchase is signed by the seller and buyer for the truth to come out? Does it matter that the gorilla in the room (ISR) was ignored until the very end when it was too late for the seller to do anything but pay the amount charged? Does it matter he lost options he could have had earlier to reduce the tax or be exempt?
What options has the seller lost by not taking on the ISR issue up front at the very beginning of listing and marketing the real estate for sale?
Here are some choices lost be the seller by his own ignorance or the unprofessional listing agent:
- If the seller has reason to believe he is eligible to be exempt or partially exempt (this is a category, also) from ISR capital gains tax, he needs to have his papers, including utility bills, yearly property tax bill, and his deed (escritura) reviewed by a notary. Sometimes, certain utility bills or documents do not give the notary what he requires. It will take time on the part of the seller to make all these corrections to get the exemption. The time to get it all straightened out is not when the offer is accepted. It can take longer than the closing date established, and the buyer may not be willing to extend the offer (to be legally binding).
- If the seller made permanent improvements of which he has no official receipts (facturas), the ability to save on taxes is not totally lost. The notary may be able to get a city approved appraisal which will reduce the overall ISR tax.
- If the seller realizes he is going to get a lower offer, particularly in this buyer’s market, why would he risk losing his buyer because he doesn’t know that he can pay less ISR tax by giving the buyer a better price?
- Why would any seller want to give up these business options? He doesn’t need the extra money, he doesn’t want to take the time to do this analysis, or he doesn’t want to think about it at all?
- Why would any seller want to find out that he owes 35,000usd at closing for ISR, when the listing agent tell him it was going to be $3,500usd?
- What makes the real estate agent capable of saying this if no paperwork has been submitted to a notary for tax analysis?
- When a seller hears from a potential listing agent that the agent can fix the sale so the seller does not pay tax, he should finish the interview and escort the agent out the door.
The seller and the listing agent have responsibility, when listing a property for sale, to find out about the capital gains tax for the seller and buyer (yes, the buyer can owe ISR also). Why lose the sale by not knowing what a best price can be for the seller and the buyer? The first offer was the best offer.
This article is based upon legal opinions, current practices and my personal experiences. I recommend that each potential buyer or seller of real estate conduct his own due diligence and review.