Purchase of real estate

Chris9 · #1 03-12-2003, 05:31 PM

What taxes are payable when purchasing an appartment in a condo?
Who pays them, buyer or seller?
What inheritance tax is payable if the owner dies?
What ways are there to avoid paying these taxes?
Regards, Chris9.

Ken · #2 03-12-2003, 05:54 PM

You can avoid inheritance taxes by forming a company to buy the property, if the seller doesn't already have a company. Most foreigners buying property in the DR prefer to handle it through a company rather than to buy as an individual. If the individual dies, there are hefty inheritance taxes. If the president of the company dies, the vice president becomes president and the company goes on. In other words, there is no change in the company, other than a different person is now president.

You may well find when you find a property you want to buy that the property is owned by a company. If this is the only property owned by the company, the company will be sold to you, not the property. You will still get the property because it belongs to the company, but the company will be listed as the owner. If the owner doesn't have a company, you can have him form your company, at your expense, then buy that company from him.

Fabio J. Guzman · #3 03-16-2003, 09:39 AM

Taxes and sundry expenses on transferring property are approximately 5% of the purchase price.

Usually the buyer pays it unless the parties agree otherwise.

Inheritance taxes range from 17% to 32% of the appraised value of the estate depending on the relationship between the beneficiary and the deceased. If the beneficiary resides outside the Dominican Republic, inheritance taxes are subject to a 50% surcharge.

Inheritance of real property is governed by Dominican law which provides for “forced heirship”: part of the estate must go to certain heirs by law. For example, a foreigner with a child must reserve 50% of the estate to that child despite the existence of a will. To avoid the application of Dominican rules of inheritance to the estate, it is advisable for foreigners to hold real property indirectly through a holding company.

Owning real property through a corporation does not avoid inheritance taxes. The estate must still pay taxes on the value of the stock. The procedure, however, is relatively simple since there is no ownership change: the property stays in the name of the corporation.

Chris9 · #4 03-16-2003, 11:06 AM

Thanks for that. Your reply leads me to ask one further question:
To avoid inheritance tax could one sell the property (or the company that owns it) to one's heir before one dies, at a low price?
How low could one go?
Regards, Chris9.

Quote:

Originally posted by Fabio J. Guzman
Taxes and sundry expenses on transferring property are approximately 5% of the purchase price.

Usually the buyer pays it unless the parties agree otherwise.

Inheritance taxes range from 17% to 32% of the appraised value of the estate depending on the relationship between the beneficiary and the deceased. If the beneficiary resides outside the Dominican Republic, inheritance taxes are subject to a 50% surcharge.

Inheritance of real property is governed by Dominican law which provides for “forced heirship”: part of the estate must go to certain heirs by law. For example, a foreigner with a child must reserve 50% of the estate to that child despite the existence of a will. To avoid the application of Dominican rules of inheritance to the estate, it is advisable for foreigners to hold real property indirectly through a holding company.

Owning real property through a corporation does not avoid inheritance taxes. The estate must still pay taxes on the value of the stock. The procedure, however, is relatively simple since there is no ownership change: the property stays in the name of the corporation.

Amicus · #5 03-16-2003, 02:39 PM

Quote:

Originally posted by F. Guzman Inheritance taxes range from 17% to 32% of the appraised value of the estate [/B]

What is the basis for appraisal? For instance, some multiple of rental value? Or, an estimated retail value of the property?

Fabio J. Guzman · #6 03-20-2003, 07:04 PM

The days when you could put a ridiculously low price on the deed of sale in order to avoid paying transfer taxes are about over. In most jurisdictions (for example, Santo Domingo, Santiago, Puerto Plata, Sosua) the tax authorities have set minimum prices per square meter depending on the location. If the deed of sale establishes an amount below the one set by authorities, you still have to pay based on the gov't price.

You cannot get around the tax selling the property to your son for a very low price arguing that it's partly a gift. Taxes on gifts are higher than the transfer tax.

A government appraisal for estate purposes is still a recondite art which on most occasions has nothing to do with market values or multiples of rental income.

Amicus · #7 03-27-2003, 09:28 AM

Is there any confirmation of rumors that the DR will adopt at Value Added Tax (VAT) resembling that of the EU? If so, in what way could it be applied to real estate purchases? Is it likely to increase the total tax due if it the VAT is larger than the present sales tax?

Fabio J. Guzman · #8 03-29-2003, 07:29 PM

We have had a VAT for years now. It's called ITBIS. The present rate is 12%. It does not apply to real estate sales, however, which are subject to a special tax.

Amicus · #9 03-30-2003, 03:36 AM

Thank you.

But I suspect the ITBIS is a sales tax. The VAT works in another way. It is applied at all levels of the production cycle, but recuperated by intermediary suppliers and therefore paid only by the end-purchaser. That is why it appears to be a generalized sales tax, but is not only a sales tax on the final product.

For instance, a manufacturer of goods would buy from component producers certain pieces that are incorporated in the manufacture of thier product. When they sell their product to a distributor with the VAT included, they recuperate the VAT they paid on all the component parts. The distributor pays the manufacturer the price of the product plus the VAT, adds his margin, resells the product to the end-buyer and sends the VAT revenues to the state, but then recuperates the VAT they have paid in purchasing the finished product.

The difference between what the VAT they pay and what they recuperate is the percentage of the VAT paid on the "added-value" in each step of the manufacturing/distribution process. This amounts to a sizable revenue for state coffers beyond just an end-user sales tax.

In fact, in most European countries, the VAT collects anywhere from 60 to 70% of all tax revenues. The income tax being only a minor percentage of total tax revenues. The VAT was instituted in Europe, therefore, because governments knew that people would cheat on income taxes, but companies could not avoid paying the VAT.

In fact, underestimating income for purposes of taxation still happens in Europe ... and all around the world.

NB: I suspect the DR tax authorities know very well how a VAT works, and if it has not been introduced there are reasons. It is a very difficult tax to administrate since it is applied at all levels of transactions requiring not only collection of the tax but reimbursement to service/product suppliers. It also requires an army of "inspectors" to assure that suppliers are actually paying the tax.

Fabio J. Guzman · #10 04-03-2003, 07:18 PM

The ITBIS is a valued added tax, not a sales tax.

Your example about the manufacturer works in the DR exactly as you describe.

Even in the legal profession, subject to ITBIS since 2001, it works in a similar fashion. We collect 12% ITBIS from our clients on their legal bills. Every month, we pay the government all the taxes we collected MINUS all the ITBIS we paid to our suppliers (Codetel, etc.).