Reporting or Manifesting the Construction of Property
Whenever a party sells their property, the reported or manifested cost of construction of the property as stated in the recorded transfer deed for the property will be used to determine the cost basis of the property for purposes of the applicable capital gains tax liability.
The reporting or manifesting of construction to the applicable authorities and the issuance of the letter of completion of construction work (Aviso de Terminacion de Obra) from the department of public works (Direccion Municipal de Catastro) are all necessary if the cost of the construction of the property is to be added to the cost basis of the property.
Process for Construction of Property
Much like in the U.S., construction of a property in Mexico is typically handled through a contractor. The manner in which services are arranged is similar to the way they are provided for domestically. Such services are typically performed through what is commonly known as a Cost Plus Contract or a Fixed Price Contract. The premise of a Cost Plus Contract is that the owner pays for the cost of all materials, services, permits, etc., while the contractor receives as payment for his services a negotiated percentage for the work. In a Cost Plus Contract, the owner of the property is responsible for paying the Social Security tax applicable to every person working on the construction of the property. Social Security, Known in Mexico as Seguro Social, is of extreme importance as it is the tax that ultimately provides the workers’ insurance coverage for most matters during the period of their service at the job site. As the owner is the party ultimately responsible for all filing matters under this type of agreement, it is of primary importance that the contractor provides the owner with an invoice (factura) for eachtime the contractor is paid. Such an invoice must be in the owner’s name and must include the “IVA” or Value Added Tax applicable for such services. Said invoice or Factura is necessary in order to deduct such expenditures and add them into the reporting or manifesting of the construction.
The basic premise of a Fixed Price Contract is that the contractor provides a flat fee for the construction of the property. This will include all materials, services, permits, labor, Social Security, etc. It is in essence a turnkey contract. In this type of agreement it is the contractor who has the responsibility for handling all record keeping matters. While the invoice or Factura is still required, The IVA or Value Added Tax should not be due for such services.
A building permit is required to both start and also finish construction. Typically, the contractor is the party responsible for acquiring such a permit. Two of the key