buying real estate in Mexico -

Subject:        buying real estate in Mexico
Expert:         [email protected]
Date:           Sunday April 20, 2008
Time:           08:56 PM -0000

QUESTION:

Is it safe to buy a not yet built condo in Mexicoalive.com  [Puerta Vallarta]. My Realtor is doing so and is very confident about the investment. What does one need to know before jumping in to such an investment?
Thanks

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david ingram replies:

I am not sure if you are a Canadian or an American.  I am answering this for both sides of the line.

If your Realtor is also selling the units, all he or she has to do is sell 20 units to others to get one free for himself or herself.  The fact that your Realtor has bought is possibly the last reason to buy. 

I am not making any observation about whether Mexico is a good or bad place to buy.  I have dozens of clients who have bought in Mexico and are happy.  Their sad day is when they get too old to continue to go down.  My ex wife of 20 years (who is sleeping on the couch behind me now) has spent five months a year in Mexico since she rode off into the sunset.  My next door neighbour of ten years who retired to Pender Harbour in the summer and Mexico in the winter two years ago at 50 just died in Cabo (obit in yesterday's Vancouver Sun) and my associate David Holroyd who works with me for five months a year moved to Guadalajara Mexico 14 years ago and even became a Mexican citizen.  He is sleeping downstairs right now as well.  Mexico is a marvelous place.  You have asked about pre-construction purchases and my answer below applies whether it is in Palm Springs, Whistler, downtown Vancouver OR Mexico.  You have to be very careful about what you buy.

I have not and will not at this time comment on the specific project you mention because it is tax time and I have no time or inclination to research a specific unit or project now.  HOWEVER,

It is NEVER safe to buy a pre-build if you are putting up a lot of resources and the outcome represents a lot of your net worth.  Anything in Mexico is dependent upon North American buyers and in particular US resident buyers. My experience is that US people are sellers, not buyers at the moment.    A lot of Americans are selling their BC properties now because they need the money to cover their US losses.

But, some general rules about buying prebuilds in general are: 

1. Buy in a start-up or emerging real estate market.

2. Look to see what other organizations are building in the area. Big names like Four Seasons, or Bosa, means that you probably have an increasing market.  It is NOT a guarantee however. 

3. Look at the developer's financials closely.  Several Vancouver projects have either collapsed or refunded the purchaser's down payment because the developers were unable to complete.  Although the purchasers did not lose their money, they lost the potential profit and if they had sold their old home to get in to the new development,  are now out of the market.   Get a local financial person who is unrelated to the project in any way to give you an opinion in writing about the project. 

4. If money is important, only buy in well known big resorts.

5. Stay away from phase 2 and phase 3 projects.   Buy Phase One of three phase pre-construction.  Wait until lots are sold.  You lose the best pick but have a better chance or the project going ahead.

6.   Walk the spot.  You are only buying what is already there for sure,.  If it is just a lot with a sign and a pretty mock up unit, you are buying pie in the sky.  - Remember those financials.  Is a real person behind it or only a couple of numbered or shell companies that have no assets.

Last, but not least.  It is easy to get excited about a sales presentation.  In 1967, I worked for Gulf American Land Corporation.  We sold some 5,500 lots in a place called Cape Coral Florida to Canadians from Winnipeg, Toronto and Montreal. Ii am pleased and even proud to say that today Cape Coral Florida is recognized as one of the prime retirement areas in the  world. We sent four Convair 990 jet planes full of Canadians to Florida for a 3 day and 2 night viewing of what they had bought at a presentation at the Four Seasons in Toronto, the Charterhouse in Winnipeg  or the Queen Elizabeth in Montreal.   We flew 132 people a plane load at the time and less than 3% of the purchasers backed out.  However, if they had escaped the captive sales pitch and viewing they could have bought twice as much ten miles down the road.

The same thing happened in Vancouver (in my opinion) when properties at Sudden Valley in  Whatcom County in Washington State were being sold to Vacouverites.  Even though it was only 30 miles away, people only looked at the Sudden Valley property.  If they had driven out of the gates, they could get two or three or four times as much two miles down the road.

This older question can help with the sale of the unit and IS specific to Mexico.

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david ingram replies:

Who knows?  You have not given me any figures to work with. So I will answer a couple of general questions.

Canadian and Mexican purchasers of Mexican homes are always being told not to worry about the sale because they can claim it as their personal residence.  In addition, because of notary and property transfer fees, it is not unusual for a purchaser to sign documents stating a lowered purchase price than actually paid to 'save' money on the purchase.

What happens with this is that the seller saved capital gains tax because of the lower stated sales price, but the purchaser pays more tax when they sell.

Although a Canadian or an American 'can' claim their personal residence in Mexico tax free, the rules are

1.    that it has to be the only house they own AND they have to have occupied it full time for at least two years

2.    they have to have an FM3 visa and

3.    they have to be filing their tax returns as a year round Mexican resident.

4.   They have to apply to Mexico’s Secretary of Hacienda and Public Credit (the Mexican CRA / IRS) and obtain its approval. Each one of these requests is determined on a case-by-case basis.  This is similar in concept to the T2062 filed in Canada.

So - back to your question. 

*   Your father likely owes tax on the disposal of the home to you unless he was a full time resident of Mexico with an FM3 visa, filed full Mexican tax returns as a resident, lived full time in the house for two years AND did not own a house in Canada or the US or Costa Rica or Spain or Italy, etc.

*   Depending upon what stated price he transferred it to you, you will likely have a Mexican Capital Gains tax to pay.

The tax on sale is (subject to change) 25% of the gross sale price OR 34% of the actual profit.  The cost price for this purpose is the purchase (or gift) price plus legal and any improvements made over the period of ownership.  Because this is a 'documented' ruling, you have to produce the receipts for the work done when presented to the Secretary of Hacienda and Public Credit. 

In a similar case involving a house in West Vancouver, I had to produce over $140,000 of actual receipts to the CRA for improvements to a new purchase made by a US citizen.  The CRA only accepted 50% of the receipts because the receipts clearly pointed out that much of the work was actually repairs due to previous water and insect damage. The CRA's ruling was that much of  the work had to be done anyway (I replaced the roof on my house this year and have discovered carpenter ants in a house I have lived in for 38 years) and the CRA only allowed the Improvement part of the bill and not the cost for the remedial work.  i.e the rotten deck was doubled in size, dormers were put in the roof, the downstairs bathroom was doubled in size.

Hope it helps.

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