What is manifesting?
Manifesting is simply recording the amount of money spent on a home’s construction or remodel, in order to add it to the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax. Proper documentation and manifesting your construction are vital to building your new home.
Why do I need to manifest my construction?
When you sell your home, the manifested cost plus the cost of your lot stated in your trust (title), will be used to determine the basis for capital gains tax. If you have not manifested your construction, Mexican tax law will not recognize your construction costs and you will not be able to use them as a deductible expense. All of your receipts, cancelled checks and bank statements will not help unless you have completed your manifestation. Before you begin construction, decide how to structure your financial arrangements with your contractor. The two main choices are Cost Plus and a Fixed Bid.
Pulling a Buidling Permit
The building permit is the first step to manifesting your property correctly. You will need the permit both to start construction and finish construction. The permit is pulled from the “Departamento de Obras Publicas,” the government Public Works office. Normally, the contractor will pull this permit. Be advised that there are two things you need to watch for:
1. Make sure the building permit is pulled in the same name as the Beneficiary named in your trust.
2. Make sure the building permit represents the approximate amount of the construction the contractor has quoted.
The fee for the building permit is based on the estimated value of your construction. In an effort to reduce this fee, some contractors will report a lower construction amount when pulling the permit. This is a huge mistake. You want your construction costs recorded accurately so that your cost basis will be accurate for capital gains.
Helpful Hint: When using Fixed Bid, make certain the contractor is in agreement to provide you with a factura with no 11 percent sales tax added for each payment. Remember to have this in writing in your construction contract.
Helpful Hint: Never report a lower construction value to save some money on the permit fee — it will cost you much more in the long run.
Letter of Termination of Works
When construction is finished and you are ready to manifest your construction, you will need to take your building permit to the Departamento de Obras Publicas (Public Works) with a letter stating the total amount you spent on your construction and confirmation that construction is finished. You or your contractor can write the letter. With this letter, you will request an official statement of completion called an “aviso de terminación de obra,” which is a “Letter of Termination of Works.” This letter will state the amount you spent on your construction, which should be in accordance with the amount stated on the building permit.
Social Security is a very serious issue in Mexico. Your home can actually be liened or sold to force payment if taxes are not paid. Beware, this can happen even years after you finish your construction. If the amount of Social Security taxes paid corresponds to the amount of your construction, you will receive a letter from Social Security called “Carta de Razonabilidad de Pago,” which means “Letter of Reasonability of Payment.” This letter is very important, as it is your protection to prevent any future claims for non-payment of Social Security taxes. Before you can receive your Letter of Termination of Works, you will be required to have this letter from Social Security
Manifesting your construction
Once you have your Letter of Termination of Works and your letter from Social Security, you simply take them to the tax office (Oficina de Catastro). There, the value will be recorded and added to the cost reflected on your trust document. Once completed, you have successfully manifested your construction and established an accurate tax basis for your property.
Fact: If you do not have a trust, you should not begin construction. Without the trust document you cannot pull a building permit in your name and you run the risk of not being allowed to deduct your land cost or construction cost when you sell.
Fact: Annual property taxes are relatively low in Mexico, but capital gains taxes are not. Registering an inaccurately low number will cost you much more in the long run. PAH Holdings will work with you to make certain that all your documents are in order and that your actual costs are recorded properly. Just as there are no shortcuts or legal ways around taxes in the U.S. or Canada, there are no shortcuts around taxes in Mexico. Your home is a costly investment and following proper legal steps will ensure a safe and enjoyable experience in Mexico. If someone says, “This is Mexico, and that’s the way we do it here,” then beware. Seek another agent or broker.
• Always get your trust.
• Always record the real value of your purchase.
• Always manifest your construction.
If you are considering a real estate purchase in Jalisco, make certain everything is done right. Allow PAH Holdings to put our knowledge and experience to work for you. We are an independent brokerage, assuring our only interest is representing you in a safe, solid and secure real estate transaction.
IMPORTANT: The Letter of Termination of Works is the document that actually establishes your construction cost basis for the tax office.