Your retire-overseas dream may include a plan to invest in a home of your own wherever you intend to relocate. If it does, you’ll need a budget for that purchase. In addition to the expense of the property itself, it’s important to remember transaction costs.
If you’re coming from North America, you may be surprised to discover the various additional costs that can be associated with buying real estate overseas. Not planning for these can put your transaction (including your deposit) in jeopardy. In some jurisdictions, transfer costs can be so significant that, if you aren’t prepared, you could find yourself without enough cash to close.
The biggest cost of acquisition is what’s typically called a transfer fee (or tax) or stamp duty. This is a straightforward tax on real estate transactions, and it’s charged in most countries. In Europe, transfer fees can be as much as 12.5% (Belgium) or as little as 0% (several countries), depending on the price of the property being purchased. In places like Croatia, where no property tax is imposed, you can view the transfer tax as prepaying the property tax. No matter how you look at it, this tax helps keep speculation down in countries where it is charged.
A true transfer tax isn’t recoverable. However, some countries, such as Nicaragua, charge a tax at the time of closing that is really a capital gains withholding tax. This fee, when charged, is a way for the country to make sure it gets paid at least some of the income tax due on the capital gains from the sale of a piece of property. In reality, it works as a transfer tax, as most foreign buyers aren’t going to file tax returns when selling a real estate holding in a foreign country unless they are forced to. If by some chance the withholding tax is more than what the capital gains tax would be (in most cases, it won’t be), you can file a tax return to try to get a refund of the difference.
Other expenses to consider include attorney, notary and registration fees. In most cases these costs are nominal, but you want to make sure you know what they are before you start shopping so you can factor them into your overall capital budget. Belgium, again, is at the high end for these transaction costs. Notary costs in this country can run as high as 4% of the purchase price.
Unlike a notary in the United States, a notary in a civil law country is a licensed attorney with an additional license specific for performing the duties of a notary or a title granted by the government. These are semigovernmental agents who are the gatekeepers for official documents, including property titles. In France, for example, your notaire manages the entire real estate purchase process (meaning you don’t need a regular attorney, as well), including the title check and the transfer of title. In other countries, the notary is simply the official registration agent.
Attorney costs should run from 0.5% to 1% of the transaction cost, with the percentage decreasing as the value of the transaction increases. Unfortunately, in some Latin American countries, attorney fees can be all over the board. Confirm the fee for a particular transaction with your attorney before you begin to process any paperwork with him.
Registration fees should amount to less than 0.5%, but are typically charged as a set fee rather than as a percentage of the purchase price.
The final cost to remember when figuring your capital requirement budget for buying real estate overseas is the real estate agent’s fee. In many countries, the seller pays this. However, in some markets, including Argentina, Italy, and Croatia, this cost is shared, and you, as the buyer, will be expected to pay part (perhaps half). Of course, the reality is that, as the buyer, you’re really always paying all of the real estate agent’s fee. It’s just that in most places it’s included in the list price, rather than charged as a separate and additional cost.
There are always anomalies. In France, for example, the agent’s fee is included in the list price by some agencies and not included by others. In this country, agencies should note on their listing sheets if the fee is included in the list price or not. This difference should be by agency, not by property among the same agency’s listings.
The associated costs of acquisition can accumulate to become a significant part of the price for the purchase of property in another country. In Belize, the standard stamp duty for the purchase of real estate is 5 percent. You get an exemption on the first US$10,000 (saving you US$500). In addition, if you’re buying a piece of property from a developer, then you must also pay 12.5% sales tax. (Note that this additional fee does not apply to resale purchases.) Most developers don’t include this tax in their list prices, but some do. You should ask the developer at the start of the negotiating process, so you know exactly what you’ll be liable for at closing. Stamp duty and sales tax amount to 17.5%. In addition, you’ll have an attorney’s fees.
Governments can change fee structures at any time and often do. During the seven years we lived in Ireland, the government changed the stamp duty structure at least five times. It was their attempt to cool the speculation going on in that country’s real estate market at that time. At one point, the top rate of Irish stamp duty was 9%. Today, Irish property tax can be as little as 0.18% of the property value.
For more information on buying real estate overseas, read on about the 2015 Global Property Summit in Panama City, Panama, March 18–20.
Kathleen Peddicord is the publisher of Live and Invest Overseas, offering retirement and overseas living advice in her free daily Overseas Opportunity Letter and the monthly Overseas Retirement Letter. Her preceding essay first appeared on U.S. News & World Report.