I have probably written 3 or 4 articles on this subject, but it is so important, that I must reemphasize the importance of these issues, so here we go again!
A Manifestation is the final step, to legalize any construction on your property. It actually registers the construction and its value with the “assessor’s office” here in Mexico, called Catastro. Normally, the amount that will be registered will be the value you listed on your construction permit.
A word to the wise would be before you allow your contractor to receive a construction permit, review it, have your accountant review it and make sure it realistically reflects the actual cost of construction. Make the number as high as possible! This number will follow you, all the way to selling and your eventual potential capital gains calculations. So, if your construction is going to cost you $100,000 USD, then make sure that the construction license is as close to that number as is allowed by Mexican law.
Will it cost you more? Yes. The construction license cost will be based on that number, as well as other factors, such as the amount of m2 of construction…but these costs are a fraction of the costs that you will pay for capital gains. So pay the piper now, at a reduced cost, or pay later at a rate of 35% for capital gains on the unsubstantiated costs in your permit and manifestation.
I might also mention, that you may not legally sell a property in Mexico without the property being “manifested”. Construction and raw land. So, if you did not undergo this step, it is the Seller’s responsibility and expense to make sure it is done by the close of the sale.
If you do not have a manifestation or did not do it in a timely manner, (timely manner: immediately at the end of your construction), the costs of rectifying this omission can be staggering. Not only do you need to provide full architectural plans, structural calculations, a DRO (Director of the Work) signature (with a fee, of course), pay the current rate to obtain a construction permit and pay a FINE and penalty that can be VERY substantial. In La Paz, for example, the minimum fine is 2% of the current value of the property…YIKES. Plus interest! In other words, it will cost you the same as if you did it right the first time PLUS huge penalties. Why not do it right the first time? And remember, we have no idea what the exchange rate will be in 5 years…which also affects your rectification process and costs. (Note: Remember, if you do not manifest right after construction, the government views this as tax evasion, because you have been paying property taxes based on raw land, instead of the tax value of the home on the land. So the penalties reflect this.)
If you hire a contractor, DRO or architect, make sure that you have this step covered by one of them. Your DRO, is legally responsible to do it, BUT, many do not simply because they are not asked or contractually obligated (despite the law). The process to get them to cough up the work or money to cover later it is next to impossible …so do not pay your contractor, architect or DRO in full until they hand you a registered manifestation and make sure it is a line item in your contract! You would be surprised how many sellers, unaware, have skipped this step and years later are faced with this daunting process and fees to rectify this omission.
Even if you built your home as owner builder, you will be required to have a DRO signature, and to manifest the construction at the end.
As I always say, an educated buyer/seller is a much happier buyer/seller. Knowledge is power!
“Facturas” are OFFICIAL tax receipts that can be used for deductions against your capital gains when you sell. Cash register receipts do not work. Facturas made out to your contractor’s name without a matching factura from your contractor to you for the amount or accumulated amount, DOES NOT count as a deduction against your capital gains…in fact, you just gave your contractor a tax present, that he gets to use off your dollar!
(On the public website for the MLS BCS are many articles about facturas and manifestation. Visit the website and read more at www.mlsbbcs.com.mx – Real Estate Articles. It will give you the way to get facturas, RFC numbers, and much more detailed information. Visit the site often, we are always adding new topics. Check out the article, “Why Facturas are Sooooo Important”.)
In addition to your official registered construction amount, facturas can augment the amount that was registered as a manifestation for the money you have invested in your property. Deductible expenses against capital gains are any materials, labor (registered in IMSS or with a factura from a company), permanently affixed improvements to the property and some costs of legal, engineering, Notarial fees and services, your original closing costs and the 2% acquisition tax you paid upon the original purchase. You CANNOT deduct normally, as an individual: furniture, maid service, property taxes or trust fees. Ask your accountant or Notario for a precise list of deductions allowed against capital gains. Take time to get an official tax receipt for paint, plants, mechanical systems, plumbing, etc. at Home Depot, the ferreteria, block vendor, etc. This extra 10 minutes can reduce your capital gains exposure, and may even make it go away altogether! As most legitimate businesses are already charging you the 16% IVA anyways, getting the right paperwork will yield enormous savings for you in the end. If you do not, it is literally a tax gift to the government, paid by you - twice!
FINAL THOUGHTS: Please understand that your realtor is not responsible for the lack of a manifestation or the lack of facturas to legalize your property and to reduce your capital gains. But, many of us have the truly distasteful job of delivering the bad news to our Sellers. I cannot tell you how many people depended solely on their contractor for fiscal advice, as well as, the construction. A bad mistake! And remember, your realtor in the U.S. or Canada never handles these issues for a Seller. So don’t shoot the messenger!
As an architect myself, I am extremely against the cultural practice here in Baja of the architect that designed your home also constructing it and administrating it. There is a huge conflict of interest in that scenario, but also, I do not know any person who is a great designer, a great constructor and a great administrator - all rolled up in one package…highly unlikely! So make sure that you protect your investment – and reduce the stress of constructing. Hire an accountant, a good administrator, a good designer and a good contractor individually. (You don’t ask your medical doctor to diagnose your car problems, so don’t ask your contractor for tax advise!) Also, hire a Mexican lawyer to review your contracts and make clauses in your contract to protect YOU. Accepting a contractor’s contract without a legal review, will most probably, put you at their mercy.