US Taxes on Selling Property in Mexico : What an American Owes the IRS on a San Miguel Sale

Yes. If you are a US citizen or a US tax resident and you sell a house in Mexico, the gain is taxable in the United States as well as in Mexico. Mexico taxes first, through the notario at closing. The United States taxes the same gain on your return for that year, measured in dollars rather than pesos, and allows a foreign tax credit for the Mexican income tax, capped at the US tax on the gain. Mexico’s rates, 35 per cent of the gain or 25 per cent of the whole price, are higher than the US long-term rates of 0, 15 and 20 per cent, so the Mexican bill is often the larger, though currency movements can reverse that. When it is, the credit usually removes the regular US tax on the gain, does not touch the 3.8 per cent Net Investment Income Tax, and leaves the surplus to a carryforward that a seller with no other foreign income cannot use.

Our page on capital gains tax in Mexico declined to say any of this, because our research then held no primary US material. This page supplies it from the Internal Revenue Code, Treasury regulations, the treaty and IRS publications, summarising the Mexican side briefly.

Do I pay US tax when I sell my house in Mexico?

Yes, and living in Mexico does not change it. IRS Publication 54: if you are a US citizen or resident alien, “your worldwide income is generally subject to U.S. income tax, regardless of where you are living.”

The tax treaty does not switch this off. Article 1(3) of the US–Mexico convention lets each country tax its citizens “as if the Convention had not come into effect”. What Article 1(4) preserves is the relief-from-double-taxation article, which is where the credit comes from.

Two beliefs common among Americans living in San Miguel full-time are wrong. The foreign earned income exclusion does not cover the sale: Publication 54 says “the only income that is foreign earned income is income from the performance of personal services abroad. Investment income isn’t earned income.” And paying Mexico does not settle the matter. Mexican tax is a credit against US tax, not an exemption from it, and the credit has a ceiling.

What Mexico takes first, in one table

The Mexican side is set out in full on our capital gains page. For a non-resident seller, which is how most foreign owners in San Miguel sell:

Two features of that table drive what follows. Mexico computes its gain in pesos, indexed for Mexican inflation and written down by mandatory depreciation. And Mexico collects within fifteen days, long before the IRS sees anything.

How the sale goes on your US return

A gain you cannot exclude is reported on Form 8949 and carried to Schedule D, “on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home,” per Publication 523. The holding period runs from the day after you acquired the property to the day you sold it. More than one year is long-term.

The date of sale matters more than usual, because it fixes the exchange rate. Where no Form 1099-S is issued, Publication 523 sets it as the earlier of the date title transferred and the date “the economic burdens and benefits of ownership shifted to the buyer.”

The 2026 thresholds come from Revenue Procedure 2025-32. The last row matters: Publication 544 states that a “loss from the sale or exchange of property held for personal use is not deductible.” A holiday home sold at a dollar loss produces no US deduction, and, as the currency section shows, can still produce a Mexican tax bill.

Does the $250,000 home-sale exclusion apply to a house in Mexico?

It can, if the house was your main home. For most American owners in San Miguel it was not.

Section 121(a) excludes gain on property “owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more” in the five years ending on the sale: up to US$250,000, or US$500,000 on a qualifying joint return. Neither the statute nor Publication 523 sets any condition about where the residence is, so a house in San Miguel faces the same tests as one in Texas. We found no IRS statement on foreign homes specifically, and rest that conclusion on the absence of a location requirement, not on a ruling.

The tests are where San Miguel owners fail. “An individual has only one main home at a time,” says Publication 523, and where you own more than one, “the most important factor is where you spend the most time.”

Those who do qualify meet a second problem. Mexico’s own exemption depends on Mexican tax residency, not on the US test, and caps the exempt sale price at 700,000 UDIs; our residency page covers the status. A couple can exclude the gain in the United States and still pay Mexican tax on it. The credit does not help, because the Form 1116 limit is built on taxable foreign-source income, and excluded gain is not taxable income. That Mexican tax is simply a cost.

Your gain is measured in dollars, not pesos

This is the part most guidance skips. The IRS rule: if your functional currency is the dollar, which Publication 514 says it is for anyone not self-employed, “you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency … Use the exchange rate prevailing when you receive, pay, or accrue the item.” Applied to a house, that means four translations, each on its own date:

• Your cost, at the rate on the day you paid it. Publication 551 defines cost as “the amount you pay”; if you paid in dollars, there is nothing to translate.
• Each capital improvement, at the rate on the day you paid for it.
• The sale price and selling expenses, at the rate on the date of sale.
• The Mexican tax, for a cash-method filer at the rate on the date it was withheld, per Publication 514.

Mexico does none of this. It computes a peso gain on the escritura figures, indexed for Mexican inflation, with the building written down 3 per cent a year. Two gains on one house, measured in two currencies by two methods, can come out far apart, and with opposite signs.

The rows below use round, hypothetical exchange rates chosen for legible arithmetic, not quotations of any historical rate.

Case C carries a second warning. Without the election, the default Mexican tax would still be 25 per cent of the gross, MXN 2,380,000, on a sale that lost money in pesos.

The swings are real even if these rates are not. On the IRS yearly averages, the peso ran at 20.284 per dollar in 2021, 17.733 in 2023 and 19.212 in 2025. Those are annual averages, not the rate for your purchase or sale; our currency risk page explains why the two measures must not be mixed.

Leave the proceeds in pesos and convert later, and the movement in between is a separate item. Section 988(e) of the Code disregards the exchange gain on an individual’s personal transaction only where it is 200 dollars or less. Anything larger is for your preparer to classify.

The foreign tax credit: how Mexican tax comes off the US bill

The mechanism is Form 1116. Publication 514 lets you take qualified foreign income taxes as a credit or as an itemised deduction, all one way in a given year, and notes that the credit is usually worth more.

The gain is foreign-source: Publication 514 sources the sale of real property where the property is, and for a US resident Article 24(3) of the treaty treats Article 13 gains as arising in Mexico. That matters because of the ceiling: “Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.” In practice, the credit is capped at roughly the US tax on the foreign gain.

Read the carryforward row plainly. A surplus credit is worth something only if, within ten years, you have other foreign-source income in the same category lightly enough taxed abroad to leave room under the cap. A seller whose only foreign income was the house will have none.

One caution. Treasury rewrote the definition of a creditable foreign tax in January 2022, and Notices 2023-55 and 2023-80 let taxpayers apply the earlier definitions until further notice. We found no IRS guidance applying either version to the Article 160 tax on 25 per cent of gross. The treaty language points towards creditability; we state no more than that.

Why the 25 or 35 per cent election reaches your US return

Here the Mexican choice stops being purely Mexican.

Treasury Regulation section 1.901-2(e)(5) treats any payment above your actual liability under foreign law as not a tax at all for credit purposes, and measures liability by applying foreign law “in such a way as to reduce, over time, the taxpayer’s reasonably expected liability”. Paragraph (e)(5)(iii)(A) deals with elections directly: “where foreign tax law provides a taxpayer with options or elections in computing its liability for foreign income tax whereby a taxpayer’s foreign income tax liability may be permanently decreased in the aggregate over time, the taxpayer’s failure to use such options or elections results in a foreign payment in excess of the taxpayer’s liability for foreign income tax.”

Article 160’s gain-basis election is such an option. Read literally, a seller who pays 25 per cent of gross when 35 per cent of the gain would have been lower has paid more than the liability, and the difference is at risk of not being creditable at all, not even as a carryforward. The regulation does excuse reductions whose arm’s-length cost would exceed the saving. We found no IRS guidance applying the rule to this election, so treat it as a strong reason to run both numbers before closing, not as a settled outcome.

The practical conclusion is simpler. When the Mexican tax on either basis exceeds the US tax on the gain, the choice does not change your US bill that year, because the credit is capped either way. It changes how much Mexican tax you pay and how much is stranded. The US credit will not rescue a wrong Mexican choice.

What the US–Mexico tax treaty says about selling real estate

Less than people hope. Article 13(1): gains a resident of one state derives “from the alienation of immovable property … situated in the other Contracting State may be taxed in that other State,” with immovable property defined, under Article 6(2), by the law of the country where it sits. Mexico keeps the right to tax the gain on a San Miguel house sold by a US resident. Publication 54 notes this is the norm: several treaties exempt capital gains “other than from sales of real property in most cases.”

What the treaty adds is Article 24(1): the United States must allow its residents and citizens a credit for “the income tax paid to the other Contracting State”, treating tax under Mexico’s Income Tax Law as an income tax, “in accordance with the provisions and subject to the limitations of the law” of the United States. The credit is the domestic Form 1116 credit, ceiling and all. Article 24(4) adds ordering rules for a US citizen resident in Mexico; they are technical, and the point to carry away is that Mexican residence does not switch off US tax.

A worked example: a San Miguel second home, in pesos and dollars

Every number here is hypothetical. The exchange rates are not historical quotations, the Mexican taxable gain is an assumption rather than a computation, and no figure is San Miguel market data.

A married couple, US tax residents in Texas, filing jointly. The San Miguel house was a second home, never rented. Bought in 2016, improved in 2019 with invoiced work, sold in 2026; selling costs ignored. The notario’s Mexican gain, after indexing and Article 124 depreciation, is assumed to be MXN 6,000,000, which is 42.9 per cent of the price and under the 71.4 per cent crossover, so they elect the 35 per cent basis. For simplicity the whole US gain is taxed at 20 per cent, although in 2026 that rate starts at US$613,700 of joint taxable income, and the Form 1116 limit is taken to equal the US tax on the gain, an approximation of the real computation.

The couple pays US$133,300: 16.7 per cent of the sale price and 38.1 per cent of the dollar gain. The regular US tax disappears into the credit; the NIIT does not. The US$50,000 of Mexican tax above the cap carries back one year and forward ten, and is worth something only against other foreign-source income in the same category.

On the default basis, the Mexican tax would have been US$200,000, the credit still capped at US$70,000, and the total US$213,300. On a literal reading of the regulation, the US$80,000 difference would not be creditable in any year.

If you rented it out: depreciation recapture on both sides

Renting through Airbnb or a long let changes the US arithmetic in three ways.

Publication 946 requires the Alternative Depreciation System, straight-line, for property “used predominantly outside the United States”, and Publication 527 sets the ADS period for residential rental property at 30 years, generally 40 for property placed in service before 2018. Basis falls whether or not you claimed it: “If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable,” says Publication 946. On sale, the gain equal to that depreciation is unrecaptured section 1250 gain, taxed at up to 25 per cent under Topic 409, and Publication 523 bars it from the home-sale exclusion even where the rest of the gain qualifies.

In the worked example, US$40,000 of depreciation would raise the dollar gain to US$390,000, with US$40,000 taxed at up to 25 per cent and the rest at 20 per cent: US$80,000 of regular tax before the credit rather than US$70,000. Here the US$120,000 Mexican credit still absorbs it; with a smaller Mexican bill it would not.

Mexico’s building depreciation is a separate thing. Article 124 writes construction cost down 3 per cent a year for anyone computing a Mexican gain, landlord or not, and it neither follows nor affects what you claimed in the United States. The rental income is taxed in Mexico under its own regime, covered on our rental income tax page; the letting economics are on our short-term rental page.

The 3.8 per cent the credit cannot touch

The Net Investment Income Tax is 3.8 per cent of the lesser of net investment income or the amount by which modified adjusted gross income exceeds US$250,000 on a joint return, US$200,000 for single filers or US$125,000 for married filing separately. The IRS notes these thresholds “are not indexed for inflation,” and lists “gain from the sale of a second home that is not a primary residence” as net investment income. Gain excluded under section 121 is not.

Regulation section 1.1411-1(e), issued in Treasury Decision 9644, states that foreign income taxes allowed as a credit under sections 27(a) and 901 “are not allowed as a credit against the section 1411 tax.” Its preamble adds that a treaty granting the credit subject to “the limitations of United States law” would, in Treasury’s view, “not provide an independent basis for a credit against the section 1411 tax.” Article 24(1) of the Mexican treaty uses equivalent wording: the credit is allowed “subject to the limitations of the law of the Contracting States”. We have found no authority on the Mexican treaty specifically and take no position beyond the regulation. For a high-income seller of a San Miguel second home, the NIIT is often the US tax that survives the credit.

Corrected 8 October 2026: earlier versions of this page said Article 24(1) of the Mexican treaty contains the phrase “the limitations of United States law”. Its wording is “subject to the limitations of the law of the Contracting States” (United States–Mexico Income Tax Convention, Treasury text published by the IRS, read 8 October 2026). The table of Mexican rules also cited Article 126 of the Ley del Impuesto sobre la Renta for the notario’s fifteen days; for a non-resident seller the same rule is in Article 160 itself, which the table now cites.

State income tax: Texas and California as the two ends

We researched two states. California taxes residents on “all income regardless of source,” according to its Franchise Tax Board, and “does not have a lower rate for capital gains. All capital gains are taxed as ordinary income.” Its credit for tax paid elsewhere excludes, in the Schedule S instructions, “taxes paid to any foreign country.” A California resident’s Mexican tax produces no California credit.

Texas is the other end. The state comptroller records that “Texans pay federal income taxes but not state or local income taxes,” which is why the worked example uses Texas. For any other state, check its treatment of foreign-source gains and foreign taxes before assuming either outcome.

The proceeds: FBAR and Form 8938

The house, held directly in your own name, is reportable on neither form: the IRS comparison table lists foreign real estate held directly as outside both. The account the proceeds land in is another matter, as is the peso account many owners already keep for predial and staff, a point our American buyer’s guide makes.

Sale proceeds paid into a Mexican bank cross the FBAR threshold the day they land, and because Form 8938 also tests the highest value at any time in the year, they may cross its thresholds even if moved out quickly.

Mexico collects in fifteen days; the IRS collects later

The two systems run on different clocks, which creates two practical problems.

The first is cash flow. The notario remits the Mexican tax within fifteen days of signing. The US tax is due with the return for the year of sale, but the IRS expects it earlier through estimated tax, with 2026 instalments on 15 April, 15 June and 15 September 2026 and 15 January 2027, per Publication 505. You are generally protected from the underpayment penalty if you pay 90 per cent of this year’s tax or 100 per cent of last year’s, 110 per cent where last year’s adjusted gross income exceeded US$150,000. For income that arrives unevenly, Publication 505 points to the annualized income installment method, and it notes that the NIIT may need to be included, which matters because the credit will not absorb it.

The second is the year-end straddle. Publication 514 lets a cash-method filer claim the credit “only in the year in which you pay the tax.” A late-December closing whose Mexican payment is made in January puts the gain in one US tax year and the Mexican tax in the next. The one-year carryback can return the credit to the year of the gain, but only by amending that return afterwards. Publication 514 also offers an election to claim credits in the year taxes accrue, made on a timely original return and binding thereafter. If a December signing is possible, raise it with your preparer before the date is set.

Can you avoid capital gains tax on a Mexican property sale?

Not legally. The shortcut still occasionally suggested in inland Mexican markets, under-declaring the deed, is shown on our capital gains page to be expensive on exit. What you can do is keep the Mexican tax as low as the statute allows and stop the same gain being taxed in full twice.

Becoming a Mexican tax resident to reach Mexico’s own exemption suits some owners and not others. It changes your Mexican position on everything, not only the house, and does nothing to US tax on a citizen. It is a decision for someone who holds both sides of the file.

Documents to keep from the day you buy

Every figure on the US side has to be proven in dollars on dates that may be a decade old, and every figure on the Mexican side in pesos with Mexican paperwork. Collect it the week you buy. Our buying process and closing costs pages describe the documents as they arise.

Ask the notario, in writing and before signing, which document you will receive as evidence of the tax paid. Publication 514 gives you ten years from the return’s due date to claim a refund if you find you paid more foreign tax than you claimed, which is a reason to keep the file, not to defer building it.

What we could not establish

The American side of a San Miguel sale is not harder than the Mexican side. It is decided on a different calendar, in a different currency, and nobody at a Mexican closing table is responsible for it. The notario answers for Mexico. The agent is paid on the price. Your US return is yours.

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This is published research, not tax or legal advice. The US rules cited are those published by the IRS and Treasury for the 2025 and 2026 tax years and retrieved on 24 September 2026; thresholds and rates change, and the worked example uses hypothetical figures throughout. Before you sign a promissory contract to sell, engage a US-licensed CPA or enrolled agent who regularly prepares returns involving Mexican property and Form 1116, and have them speak to your notario before closing rather than after. Invest In San Miguel is not a brokerage, earns no commission, and has no financial interest in whether your sale or your purchase closes.