IL Postcard

The Truth About Property Tax Exemptions and Land Revaluations

Date: 07/09/2007

Editor's Note: Keep those cards and letters coming. IL readers have been bombarding us recently with questions about what's going on inPanama. If you've been reading our Panama First Alerts and other news sources, including blog sites, you know that there is lots of talk-some of it bordering on hysteria-about recent rulings and considerations being made by the Panama government.

In a series of special reports, International Living's Latin America Editorial Director, Suzan Haskins, attempts to answer some of your questions. Here's the first, about the expiration of the property tax exemption:

Before we get started, be advised that some of the issues you are hearing about are still being debated. We have heard through the grapevine that the Panama Assembly may consider another extension of the tax exemption-and as soon as we have any official word, we will pass this information along to you.

So what's all the buzz about?

The expiration of property tax exemptions: One of the big incentives to buy property in Panama is the country's 20-year property tax exemption law-first passed 20-30 years ago to encourage economic development and investment. This allows buyers of homes or condos to be exempt from property tax (improvements value) for up to 20 years from when construction was completed. The expiration of this exemption has been extended several times in the past, but is now due to expire August 31, 2007. Unless construction on the property you purchased is complete by that time, you will no longer be eligible for the full 20-year property tax exemption.

That's not to say that tax exemptions will expire altogether or will not still be applicable, in some variations, and unless you are buying a home, condo, or building older than 20 years, you can still qualify. For a property built within the last 20 years your annual property tax exemption will be in effect for 20 years from the date construction was completed. If construction was completed in 2004, for example, you are exempt from property taxes through 2024. And there will also be tax exemptions for projects yet to be constructed-of five to 15 years, depending on value.

It is important to understand that the property tax exemption has now been in effect for many, many years -and it was never the intention of the government that it last forever. Far from it. This law was passed to enable the country to get on its feet and encourage economic growth. There is absolutely no doubt that this has happened-one has only to visit Panama to see proof that the economy is strong, and the building boom continues.

And with all these positive things that are happening in Panama-the major growth of tourism, the position of Panama as the business and financial hub of Latin America, the real estate boom, and the influx of new residents that come with that, tax dollars are (and will be) sorely needed for infrastructure improvements.

When the current exemption expires, the following will apply on buildings under construction:
For houses and condos:
? Value up to $100,000: 15-year exemption
? Value from $100,000 to $250,000: 10-year exemption
? Value over $250,000: 5-year exemption
For commercial buildings:
? A building of any value: 10-year exemption. The remaining time exemption is transferable to any new buyer during the 10-year period.

Land itself is not exempted and will continue to incur property taxes if its value is above $30,000. (More about land revaluations and resultant taxes in a minute…)

What does this mean in dollar values? For example, if you are building a home valued at $250,000 that is completed after the current exemption expires, you will qualify for a five-year property tax exemption. After five years, you can expect to pay-under current Panamanian rates-an annual property tax of just over $4,500. If you have a pre-sale contract for $450,000 for a luxury apartment, for example, and construction is completed next year, in 2012 you can expect to start paying an annual tax bill of just over $8,700.

Now, about the new policies on land valuations. As we mentioned, land in Panama has never been exempt from property tax-with the exception of land valued under $30,000. Any improvements on the land are, of course, taxable. But until this year-as of the August 31 deadline-if the land was valued at less than $30,000, no property tax was levied on the land or the improvements if it qualified for the 20-year tax exemption.

Recently, Panama tax authorities instituted a new policy that-through the end of 2007-allows property owners to revalue their land on the tax rolls. By doing this, the annual property tax will be reduced to 1% of the new value (down from the current 2.1%). Obviously, this provides an incentive to revalue land properties. For property developers and sellers in general, there is also another incentive to do so- and it has to do with capital gains, which in Panama is taxed at a rate of 30% for developers and 10% for non-developers. By raising the valuation of his land, a developer or seller increases the cost of the land for tax purposes and potentially reduces his capital gains obligation.

For example: a developer is selling lots with homes on them for $250,000 each. It cost him $75,000 to build each home. To rectify his $250,000 price, he revalues the lots at $100,000 and the homes at $150,000, although his costs for tax purposes are $175,000 (the revalued cost of the lot plus the actual hard costs to build the house). When he makes a sale, his 30% capital gains tax (calculated on the difference between the sales price of $250,000 and his verifiable-for-tax-purposes costs of $175,000) is $22,500. If he hadn't revalued the land, his 30% capital gains tax would have been much higher. His hard costs would be figured at $30,000 for the land and $75,000 for the construction, or $105,000. And his profit, then, would have be $145,000.) He will pay a capital gains tax of $43,500 in this case-$21,000 more than if he revalues the land.

Why does this matter to the buyer who purchases from this developer? The buyer will no longer qualify for the exemption that he would have been entitled to if the land was still valued at just $30,000. Instead, the buyer will pay property tax from the first year of ownership, even if the property qualifies for whatever time period remains under the 20-year tax exemption. In our example above, since the land is now valued at $100,000 and the first $30,000 is exempt, the 1% property tax bill amounts to about $700 a year.

The final word: We're as keen on Panama as we've always been. The incentives still far outweigh any effects of these policy changes. Just remember that when you contemplate buying property anywhere in the world-and Panama is no exception- you must do your homework. If you are buying a home or condo in Panama and are concerned about property taxes, ask how much exemption time is left. Ask the developer or seller how the land is valued in the tax rolls. Before you commit any money, ask your attorney to verify this information.

And remember that buying for one price and declaring a lower one artificially, is nothing else but tax fraud.

Regards,

Suzan Haskins
For International Living

P.S. Panama has been #1 on our Global Retirement Index for six years in a row-and there are many reasons for that. But Panama isn't just for retirees-it is for anyone who wants to live better for less. (Quality of life is high while the cost of living is low, as are real estate prices.) Living is easy in Panama, and we invite you to find out for yourself when you join us for our Live and Prosper in Panama Seminar, August 2-4. This is your chance to meet the in-country professionals that can tell you all you need to know to determine if Panama is right for you.