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Preconstruction assignment tax implications

I have a preconstruction project in mexico that i bought into 2 years ago that should be completed in october. i have the option to sell for a nice profit and i'm wondering how this assignment would be taxed

 

is it capital gains or ordinary income? i think that if it's capital gains it should be long term unless there are special rules

 

any penalties or other rules with this type of sale?

 

also, i think i'm only paying taxes in the US in this example as i'll have never owned property in mexico, i.e. never had the title. and roughly speaking i think you do not typically pay double tax in two countries so this is a question about implications on my US taxes. Thanks!

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6 Replies
pk
Level 14
Level 14

Preconstruction assignment tax implications

@mdrecht ,  Just wanted to be sure I am understanding the situation here :

1. Two years go there was a preconstruction sale of units to be built in MX

2. You bought one of these units i.e. paid MX Pesos to own a unit when the project completes

3. Now that the project is complete ( or about to ), you want to sell this unit at a healthy profit

The question now is , how to treat this gain since what you had was a promissory note to deliver a unit to you  for a fixed price.  ( fully prepaid or % prepaid? )

There is also the question whether MX can tax you on this gain -- I suspect you signed a fideicommisso document, especially if you are not a Mexican citizen and neither is your spouse.

 

Please confirm  or correct my assumptions and I will circle back once I hear from  you 

 

pk

Preconstruction assignment tax implications

@mdrecht - as you address @pk 's questions, for #2...... describe the transaction.  Did you simply put down a deposit, giving your the right to purchase the unit upon completion? When did you take title to this property? 

 

it's important, because the way I am reading this, if you take title after completion of the unit and flip it in a sale, then that is short term capital gains - you did not own the asset for a year.  

pk
Level 14
Level 14

Preconstruction assignment tax implications

@NCperson , agreeing with your request for additional information from the user, I was  just wondering  ( and really depending on the agreement ) whether the promisory note was for a specific condo/aprtmentr ( as in preconstruction deposits in India amongst quite a few other countries ) or just  " a" condo/aprtmnt" -- because the latter could be looked upon as a loan to the  builder --- very uncommon I would think -- and therefore  could be either an investment ( shares ) or interest earnings . I do not believe so.  There is also the requirement of IVA collected at each transaction ( kind of value added tax in MX ).  So we need a lot more details .

Happy July 4th and the recovery thereafter

 

pk

Preconstruction assignment tax implications

The general principles are:

1. As a US citizen, you report and pay US tax on all your worldwide income, regardless of where you are living at the time or where the income comes from.

 

2. You may also be required to pay tax to Mexico for this income, since the property is located in Mexico, and Mexico has the legal right to charge income tax on income that comes from Mexico.  If you do pay tax to Mexico, you can claim a deduction or credit on your US tax return for the amount of foreign tax you paid.  (You may find that as a non-citizen of Mexico, your transaction is subject to mandatory tax withholding, forcing you to file a return to calculate your actual tax and get a refund of excess tax withheld.  That's often what happens if a foreign citizen sells property in the US.)

 

3. If you buy property, and sell for a profit, you have a short term capital gain if the property was held one year or less, and a long term capital gain if the property was held more than one year. "Property" in this case includes real estate, stocks, bonds, and other investments, precious metals, or almost anything else you can invest in.

 

It's unclear if you invested in real estate, or an "option" to buy, or something else.  You say you don't have title to real estate in Mexico, does that mean you were a share investor and you owned a share of the project, instead of owning an individual unit of real property? I would think your profit would still be a long term capital gain. 

Preconstruction assignment tax implications

Thanks for all of the feedback and requests for clarification. One thing we did find out was the due to money laundering issues common in Mexico, the Mexican government would (probably) tax us at their standard 35% on our gains. We had hoped that since we actually never owned the property in Mexico and simply had the rights to buy, there would be no official taxable event in Mexico, but not the case. This ended up being a deal breaker so we will wait at least a year and can avoid Mexican taxes (again probably) by making it our permanent home for at least six months with residency we've been approved for, and would only pay LT capital gains in the US.

 

For those who asked, we had not and still have not received title on the unit, so the confusing part was how it would be taxed in selling just the rights to buy. I never found a definitive answer but saw a few things indicating it would be taxed as ordinary income. Anyways, thanks again, not moving forward with this option.

pk
Level 14
Level 14

Preconstruction assignment tax implications

@mdrecht , generally agreeing with your conclusions and suggesting that  (a) read the linked page -->The Costs and Taxes of Selling Property in Mexico (mexperience.com)  as a starting point ,  (b) consult a local  NOTARIO  ( they interpret the law, do all the paperwork for a transfer and each town has a number of these legal people based on the population size) before and during any transaction of real property.

My wife  ( a mexican citizen ) has properties in MX and so I am slightly familiar with the process.  You DO NOT need to have a realestate agent  , if you can find your own buyer but you do need a tax id.

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