Property Acquisition Tax. How does it work.

Property Acquisition Tax

When we finally decide to buy a house , we think about many things: location, space, whether or not it is in a subdivision, if it is far from our daily activities, how safe it is and what credit we will use to pay for it. but there are also other procedures that must be taken into account, such as the Real Estate Acquisition Tax.

I already found the house of my dreams! And now, what’s next?

At last! You found the house of your dreams or a place to invest or inherited a property.

This is the easy part. We almost never take into consideration the  taxes  that we will have to pay when making the purchase, and it is a mistake, because we must calculate them in our budget in order to make the experience of acquiring a property pleasant and not a headache.

Do I have to pay taxes when buying a house?

The answer is yes. When buying and selling a property, two things happen: one person buys and the other sells. Each person must cover his taxes and whoever buys has to pay the liens, notary expenses and the Real Estate Acquisition Tax or Domain Transfer Tax.

The seller will also pay taxes, such as ISR, but we will discuss that later, in another chapter.

The real estate acquisition tax varies from state to state, since it is a state tax, but it is around 2% of the value of the property.

Property Acquisition Tax, ISABI or Domain Transfer

The Real Estate Acquisition Tax is also called Domain Transfer, because at the time of making the purchase, one of the procedures that has to be done is the change of owner before the Municipal Cadastre Directorate, where it is established that the property is now name of the buyer.

As we mentioned before, the Real Estate Acquisition Tax is state and to know how much must be paid, you can review the Municipal Treasury Law of each state. In the case of the state of Puebla, for example, the Property Acquisition Tax applies a rate of 2% on the value of the property.

The procedure is face-to-face and it takes 15 business days after having carried out the inspection. (The authority will make a visit to the house to verify that the property actually matches the papers presented).

As an interesting fact, the Property Acquisition Tax with the lowest rate in the country is paid in Yucatan (0.02%) and the highest in CDMX (From 3.1 to 4.5%).

The documents to be submitted can also be found on the websites of the state governments. How is a procedure carried out by the notary and he will ask us for the documents that we will need, we can use the reference information and to be sure that we will be able to cover the “extra” expenses that come with the purchase of the house.

Returning to the example of Puebla, the Real Estate Acquisition Tax that I will pay if I buy a house for one million pesos will be $20,000.00.

When do you have to pay the Real Estate Acquisition Tax?

The Property Acquisition Tax is paid at the time of deeding and is paid by all the people who buy a property. This applies to buildings, land, or buildings and land.

Is the rate fixed or variable?

As we have already said, the tax is state and is decided by the secretary of finance of each state. In some parts it is a fixed rate, that is, the amount of the cadastral value of the property does not matter. In some other states, such as CDMX, it is a progressive rate that depends directly on the value of the property and the market conditions in the locality where it is located, and that can reach up to 4.5% of the cadastral value.

Is it a procedure that the notary will do or do I have to do it directly?

The notary will include the payment of this tax within the total collection that they will make to you. Surely they will give you a breakdown of the concepts for which you are being charged, but if you have doubts, it is worth asking.

It is important to pay the Real Estate Acquisition Tax, especially because until it is paid, let’s say that the property is still not yours legally, since the name of the previous owner will continue to appear in the cadastre. Let’s say that what you are paying is for the property to finally appear in your name.

Can I check the amount to pay?

The notary will do the calculation for you, but if you want to have everything under control and know in advance how much it will cost, you can check it directly at the Ministry of Finance or at the State Treasury.

Every time the web pages of the governments are more friendly and there you can easily find the documents that they ask for and the percentage that they charge you on the cadastral value of your property, and they will be able to solve any doubts you have.

Does the physical state of the property matter?

No, the payment of the Property Acquisition Tax does not take into account the state of the property, only the cadastral value, that is, the amount at which the property is valued and with which it appears in the official documents. It is the amount from which they also calculate your property tax.

Is there any way to exempt this tax?

In some states, a Property Acquisition Tax exemption may apply if the property being purchased is intended to house duly accredited public or private charitable organizations or educational institutions. You should also consult this directly with the Secretary of Finance of your state, because I remind you that the tax is state.

In some cases, is the tax included in the sale?

If you are buying a new house from a builder, sometimes they include a free deed. And yes, the Real Estate Acquisition Tax is contemplated there. Although it is always good to ask what they mean by free deed. It is always good to err on the side of caution and not think that we will no longer have to pay any extra money when making the purchase.

If I receive a property in inheritance, do I have to pay the ISAI?

The answer is that, in principle, yes. This happens because the property is “transferred” from one person to another and, as we have said, the Property Acquisition Tax serves to register the new owner as the owner of the property.

There are some cases where they may not charge you, but remember that it depends on the state you live in. You will have to check with your notary or the finance secretary.

The cases in which the tax could be exempted have to do with three things:

  • The value of the property. (Check in your state what is the maximum value allowed for this to happen)
  • That the procedure is carried out before 5 years have elapsed between the death of the one who inherited and the one who receives the property.
  • Keep in mind that not doing it within a reasonable time will surely generate fines that you will have to cover in addition to the tax.
  • That the donation be in favor of the spouse, male or female concubine or descendants in the first degree.
  • This means that, if I want to inherit my house to my grandchildren and I leave it as established in my will, they will have to pay the tax yes or yes.
  • But if I inherit the property to my children, then if the value is less than the maximum allowed and they make the award in less than 5 years, they can enjoy zero rate.

What if I receive the property as a living donation?

Sometimes property owners prefer to donate their property while they are still living. The recipient will pay the tax the same as if he were making a purchase-sale. This is so, because if not, all purchases would be defined as donations and no one would pay taxes.

If I am a foreigner, do I also pay?

Yes, the Property Acquisition Tax is a state tax and depends on the place where the property is located and not on your place of birth.

What is the collection of this tax based on?

It arises from article 115 of the Constitution. Here it is indicated that the municipalities will receive the contributions, including the additional rates established by each state on real estate. This is where taxes come in, such as property taxes and the Real Estate Acquisition Tax.

In summary, when buying a house, you always have to consider not only its value, but also the “additional” expenses that come with the entire process. In any case, remember that buying a house will always be a good investment and that it will give you security as you build up your assets. Remember that if you have already taken the first step, making an informed decision will give you the guarantee that you have made the right decision.

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