Exemption From Income Tax On Income Derived From The Sale, Transfer Or Otherwise Disposal Of (Conveyance of Title to) A Residential Dwelling (i.e. Capital Gains -Tax Exemption)
Article 109, Section XV, subparagraph a) of the Income Tax Law (Ley del Impuesto Sobre la Renta, abbreviated LISR in Spanish) sets forth that income derived from the sale, transfer or otherwise disposal of (conveyance of title to) a residential dwelling shall not be subject to income tax (Impuesto Sobre la Renta, abbreviated ISR in Spanish), provided the Seller has not received the benefit of this exemption from the sale of another residential property within the last 5 years (prior to said sale).
A few taxpayers considered that this provision violated some constitutional principles, an opinion not shared by the Supreme Court of Justice of the Nation (Suprema Corte de Justicia de la Nacion, abbreviated SCJN in Spanish) in noting that there is no transgression committed with regard to the following principles:
- Tax equity (or fair taxation), since the exemption from the sale, transfer or otherwise disposal of (conveyance of title to) a residential dwelling is intended to avoid the ISR affecting the ability of the party (individual) to acquire a better residential dwelling that, in turn, increases their living conditions. Furthermore, the aforementioned period is a benchmark that narrows the scope of the exemption by means of the time factor which, by its very nature, is associated with residential dwellings and not with the sale, transfer or otherwise disposal of (conveyance of title to) of any real property with another use.
- Tax proportionality, given that the exemptions allow for both social justice criteria to be set forth and satisfy other purposes protected under the Constitution, such as the right to decent housing. In other words, the exemption respects the extra-fiscal target, and not in order to regulate a presumed situation giving rise to taxes (tax accrual).
- Non-retroactivity of the Law, being that it cannot be argued that this is a question of a right acquired by the transferor, due to the fact that the exemption contemplated in the previous legislation cannot govern future sales, transfers or otherwise disposals of (conveyances of title to), because the norm in effect at the time of the transaction and when the profit is obtained would be the ensuing applicable norm for said sales, transfers or otherwise disposals of (conveyances of title to).
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