Everything You Need To Know About Real Estate Taxes Worldwide
Nobody ever wants to think about them, but ignoring them sure won’t make them go away.
As you shop for real estate in another country, you’re probably thinking about capital gains taxes, factoring in what you’ll owe if and when you eventually resell and take your profits. If you’re buying a rental, you’re factoring in taxes on the rental income.
But what you may be overlooking, for example, are the most important taxes to figure up front: transfer taxes. Most countries charge them, though sometimes they call them something else. In the UK, Ireland, and other Commonwealth nations, they’re called “stamp duty,” for example. But a transfer tax by any other name is still a transfer tax. And you’re going to have to fork it over upon closing. Meaning you want to remember to factor it into your cash requirements for any purchase.
Know the amount of the transfer tax in any market before you start shopping. It ranges from 1% to 10% (yes, 10%).
In Panama, the conveyance tax is 2% of the purchase price…but the seller pays it, not the buyer.
In Ireland, the amount of the tax depends on the price of the property. The bigger the price, the bigger the tax percentage. (Yes, that seems the reverse of what it should be…take it up with the Irish revenue authorities.)
Not only is the Irish transfer tax big, it’s also ever-changing. In the 10 years we’ve been paying attention to the Irish property market, the particulars of the stamp duty have been adjusted at least three or four times. Recently, they simplified the rate bands. Instead of six, they now have two…well, actually, three. Properties selling for less than 127,000 euro (hard to find right now…but give this market a little time…see below) are stamp duty-free. Properties selling for more than 127,000 euro are charged 7% on the amount above 125,000 euro (don’t ask why the exemption figure is different from the no-tax figure…but it is). The rate goes to 9% for any amount of the sales value over 1 million euro.
In other words, buy a piece of real estate in Ireland for $1.1 million euro, and you owe stamp duty of 7% on 1 million euro minus 125,000 euro…plus 9% on 100,000 euro.
I highlight the current stamp duty situation in Ireland not because I think this is a good time to buy property in this country (though, again, see below), but because it’s a good example of how complicated and convoluted this tax stuff can be.
On the other hand, sticking with taxes in Ireland, you don’t pay property taxes on residential real estate in this country. So you could view the stamp duty as a pre-payment of property taxes. Hold on to the property long enough, and this works in your favor. You still, though, have to come up with the 7% and the 9% at closing…
Ireland isn’t the only market that doesn’t charge property taxes. Neither does Croatia. Nor Buenos Aires…though you’ll owe property tax on real estate you own in Argentina outside BA.
In Panama, new construction is exempt from property taxes for 20 years. This exemption has been debated and reconsidered again and again in recent years. The good news is that it was recently extended.
Furthermore, in Panama, the exemption goes with the property, so even if you’re buying used, not new, you should check to see if any exemption time remains. If the place was built fewer than 20 years ago, the answer should be yes.
Some countries charge sales tax on the purchase of real estate, sometimes included in the listed price, sometimes not. Some agents in some markets charge sales tax (or VAT), as well.
However, after transfer tax, the second most important tax to figure into your projections and planning is capital gains. Like transfer tax, it can be complicated.
Some countries don’t charge it…at least not ostensibly. In Nicaragua, for example, you don’t pay “capital gains tax.” You do, though, pay tax on profits from the sale of real estate…a tax figured at ordinary income tax rates. Meaning you can be liable for a tax of as much as 35% on property proceeds.
Some countries don’t charge capital gains tax, period. New Zealand, for example.
UK real estate profits are exempt from tax for non-U.K. residents. In France, Croatia, and Italy, you can make yourself exempt from capital gains tax by holding on to your property for an extended time. In Croatia, the required holding period is but three years; in France, keep a piece of real estate for 15 years or longer before reselling it for profit, and you owe the France government 0% of those profits.
In Argentina, you’re exempt from capital gains tax on the proceeds from the sale of real estate you held in your individual name (as opposed to that of a corporation).
Net rental income is typically treated as regular income and taxed at regular income tax rates. Though if you have only one small rental property, your net income may be less than the minimum threshold for income tax, depending on the country, once you take into account all deductible expenses.
France and Argentina impose wealth taxes. As a resident in France, you are liable for wealth tax if your worldwide net assets exceed a certain level. Part of the answer to the question, “Yikes, how do I avoid that?” in France is to hold any real estate in that country in an SCI, which is a particular kind of company specifically intended for the purpose of holding real estate.
Then there’s inheritance tax. Here’s my advice on this subject: Don’t die in France.
P.S. Remember that, in addition to local capital gains tax on the proceeds from the sale of a piece of real estate, an American is also liable, no matter where the piece of property happens to be located, for capital gains tax in the States, as well. However, you can defer U.S. capital gains tax indefinitely by taking advantage of IRS Section 1031, which, since 1921, has been allowing for tax-deferred “like-kind exchanges.” This works for U.S.-to-U.S. or non-U.S.-to-non-U.S. property exchanges only. And the paperwork involved is not negligible. So you’ll want to seek expert tax help. But, follow the rules, and a 1031 exchange can allow you to sell real estate anywhere in the world (other than the United States) and avoid paying tax in the U.S. on the capital gains by putting those gains into another piece of real estate anywhere in the world (again, other than the United States).