By Jorge Alberto Cadena Lobato
One of the most important economic activities in Mexico is the construction of real estate developments, whether for residential, commercial, or mixed-use purposes. In recent years, Mexico has become a favorite tourist destination, particularly in areas such as Puerto Vallarta, Nuevo Nayarit, Punta Mita, Sayulita, San Pancho, Riviera Nayarit, Los Cabos, and Ixtapa Zihuatanejo, among others.
If you are a developer involved in building and selling real estate projects, it is important to know that Mexican domestic legislation offers a tax incentive for you, primarily consisting of deferring the Income Tax (ISR).
This tax incentive essentially consists of using the cost of the land from the next project’s investment to reduce the income tax (ISR) payment for that fiscal year. To illustrate this effect: if a developer completes the sales of a real estate project in 2024 and reinvests the generated profits (1 million) in the purchase of land (1 million) for the next project, then this incentive can be applied, which would look as follows:
Without Tax Incentive | With Tax Incentive | |
Taxable income from real estate project | 1,000,000 | 1,000,000 |
Tax incentive for real estate developers | - | ( 1,000,000) |
Adjusted taxable income | 1,000,000 | - |
Corporate tax rate | 30% | 30% |
Income Tax (ISR) | 300,000 | - |
Key Points to Consider
It is essential to consult a tax advisor before deciding to apply this tax incentive to review the requirements and implications. Here are the three most important points to consider:
A financial projection for the next real estate project must be conducted, considering that applying this tax incentive incurs a "tax interest" of 3% on the tax incentive for the next three fiscal years or until the land in question is sold.
Ensure that the purchase deed for the land used in the tax incentive complies with the fiscal requirement of stating that its cost will be used as a tax incentive.
The land used as a tax incentive must be used for real estate development.
If you find yourself in this situation, please do not hesitate to contact us. Every case is unique and requires individualized attention to analyze the best tax scenario for your real estate project.
In accordance with Article 89 of the Federal Fiscal Code currently in effect, the content of this reproduction, presentation, or the documents and/or examples used to illustrate it may express positions that differ from those of Mexican tax or judicial authorities. This reproduction is not intended to, and cannot be used by anyone, for the purpose of avoiding (i) a federal, local, or municipal tax, or (ii) the imposition of tax penalties in the United Mexican States. Consultores Cadena, Barrio y Asociados, S.C., is not responsible for the use or interpretation of this content by any user.
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