Over the past three years, the Los Cabos real estate market has experienced a significant rise in prices, leading many sellers to anticipate substantial gains. However, they have often been taken aback by the impact on their profits when they become aware of their Capital Gains Tax liability. Some high-end property sellers have faced Capital Gains taxes in the hundreds of thousands.
Nevertheless, there are strategies to navigate this process and reduce tax liabilities, such as obtaining your RFC (Mexican tax ID) number “Do I need an RFC?”. Another useful tool is keeping a close eye on the MXN/USD exchange rate.
The exchange rate between the U.S. dollar (USD) and the Mexican peso (MXN) determines the number of pesos you can obtain in exchange for one USD. Changes in the exchange rate can have various effects on the Mexican peso. A weaker peso can make traveling to Mexico more affordable for U.S. tourists, while a stronger peso may make Mexico relatively more expensive for U.S. travelers.
The same applies to real estate purchases. Although some homes in Los Cabos are listed in USD, it is important to note that we are in Mexico, and official prices are recorded in Mexican pesos. Let’s examine an example of how the value in MXN has changed and how it can assist with capital gains.
For instance, consider a property in Cabo with a purchase price of $1,000,000 USD. Over the past few years, the exchange rate sometimes reached as high as 22 MXN/USD. For this example, let’s say that the exchange rate at the time of purchase was 21 MXN/USD, resulting in an original purchase price in Mexican pesos of 21,000,000 MXN.
With the new exchange rate of 17 MXN/USD, the equivalent cost of the house in Mexican pesos now is 17,000,000 MXN. The difference between the initial purchase price of 21 million MXN and the current value of 17 million MXN represents a loss of 4,000,000 MXN.
Let’s now suppose you bought the property for $1,000,000 USD at 21 MXN/USD and are selling it for $1,100,000 USD at 17 MXN/USD. To calculate the capital gains, we subtract the original purchase price in Mexican Pesos from the selling price in Mexican pesos.
The original purchase price in Mexican pesos would be 21,000,000 MXN, while the selling price of $1,100,000 USD would amount to 18,700,000 MXN. Consequently, the capital gain would be calculated as the selling price in MXN (18,700,000 MXN) minus the purchase price in MXN (21,000,000 MXN), resulting in a capital gain of -2,300,000 MXN (a negative value indicating a loss). A loss will potentially lower your tax liability!
Do you know what the exchange rate was when you purchased? If not, you can locate it on your deed (fideicomiso).
What does all this mean for you? Well, if you purchased a property within the past four years and are considering selling now, you may be able to sell at a significantly higher price and receive a favorable reduction in the capital gains you must pay. This makes the current time an exceptional opportunity to sell.
Naturally, every situation is unique. If you are contemplating selling your property, we at FINN Real Estate Group would be delighted to meet with you and discuss the value of your property as well as the projected implications for your capital gains. Feel free to reach out to us to schedule a meeting.