Exchange Rates and Capital Gains on Your Mexican Home

One of the ‘hidden’ costs of selling your Mexican home might lay in the ‘exchange rate effect,’ because tax liabilities when you sell are calculated in Mexican pesos and don’t take into account any shifts in foreign currency exchange rates between the date you purchased and date you sell.

Prices may be agreed in US dollars, but official amounts are documented in Mexican pesos

In many towns and cities across Mexico, house prices are quoted in Mexican pesos when they are offered to the market for sale. However, in a few places —and most notably in Los Cabos, Puerto Vallarta, San Miguel de Allende, Ajijic/Chapala, and Cancun/Riviera Maya— home prices can often be seen quoted in US dollars.

Even though the sales transaction may be marketed (and agreed between the parties) in US dollars —or some other foreign currency— the amount to pay to close the transaction will be documented in Mexican pesos and the title deed will express that amount at the exchange rate prevalent on the date of the closing.

When you sell the property, any capital gains are calculated only in Mexican pesos and therefore shifts in the exchange rate can influence your tax liability as expressed in a foreign currency.

The ‘exchange rate effect’ when you sell

The best way to understand the ‘exchange rate effect’ is through an example.

Suppose you agreed to purchase a home in Mexico for a peso-equivalent value of US$500,000 dollars years ago, when there were $10 pesos to the dollar:

• your title deed shows a sale value of $5 million pesos;
• if you agree to sell the home today for the same US$500,000 dollars (with around 20 Mexican pesos to the US dollar), the peso value sales equivalent is close to $10 million—creating an effective $5 million pesos ‘capital gain’ on the property;
• so in this situation, even though you have realized zero gain in US dollar terms, you have realized a capital gain in Mexican peso terms, and you’re liable to pay capital gains tax on that peso gain when you sell.

If your home’s market value has doubled over that same time period, and you agree to sell for one million dollars:

• your sale price would be calculated and documented at about $20 million pesos creating a capital gain of around $15 million pesos ($20m less $5m pesos);
• in this situation, your gain in US dollar terms is US$500,000 (10 million pesos, at $20 pesos to US$1); however,
• your capital gain is calculated in pesos, on around $15 million pesos—equivalent to ~US$750,000 dollars;
• which means your capital gain is calculated on a sum that’s about 50% higher than your capital gain in US dollar terms.

Worthwhile tax allowances are available for residents

If you’re resident in Mexico and have a tax ID here, you may be able to avail yourself of some worthwhile tax exemptions and deductions that may reduce or eliminate any capital gain tax liabilities, but you cannot avoid the effect of the ‘capital gain’ expressed in pesos brought about through the exchange rate effect when the sales value was based in US dollars.

Keep this in mind when you are ready to sell if you purchased a home in Mexico negotiated using a US dollar value, because your tax liabilities are always calculated on the amounts documented on the title deeds in Mexican pesos, not any foreign currency equivalent.

Learn more about property in Mexico

We publish a range of free eBook guides about property and real estate in Mexico:

• View the latest articles about real estate in Mexico
• Free eBook: Comprehensive guide to buying and selling real estate and renting property in Mexico
• Free eBook: Guide to finding and working with a realty agent in Mexico
• More: browse all our Mexico real estate-related eBooks, available for free download.