Panama property ownership: what you need to know

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If you are planning to own property in Panama, there is so much to know before you start. Is it too much for one blog post? Yes – probably. So, I will try to summarise the information here. In many cases, I point you to other blog posts for more information.

The information in this blog post will be presented in the following order:

Purchasing a property or real estate in Panama
1. Finding where to live and choosing your property
2. Do you need a bank account in Panama?
3. Factors to consider when purchasing
4. Ownership personally or in a corporation?
5. Closing on your property purchase
Responsibilities of a property owner
1. Updating the tax department records
2. Paying property taxes and questions about tax exemptions
3. Limitations on property rental or AirBnB
4. Paying income tax if you have a rental property
5. The building or HOA maintenance
6. Estate planning considerations
Preparing to sell a property in Panama
1. Tax department
2. Listing and realtors
Closing of the sale of property in Panama
1. Signing the closing documents, including tax forms
2. Receiving the money

Hopefully, you will find this information useful. For actual legal advice, please contact our office.

Purchasing a property or real estate in Panama

There are many aspects of deciding to live internationally, especially in a country where the documents are prepared in Spanish. My first advice would be: if you do not speak Spanish fluently, then please make sure that your lawyer is fluent in English. This ensures you understand perfectly what is being explained to you.

While Google and ex-pat forums are a great place to get additional information, they are based on other people’s experiences, situations, and their understanding of the advice that they received. This does not necessarily represent the latest changes in Panama. Nonetheless, these forums and blog posts can give you an awesome glimpse into where to start looking and the questions that you should ask the lawyer you decide to hire.

Finding where to live and choosing your property

You might have a look at this post on our blog: Living in Panama: where do expats choose to live? Similarly, there are many other blog posts you will find about choices others have made about where to live in Panama.

In the end, where to live in Panama will depend on the type of lifestyle you are looking for: city, beach, mountains, off-the-grid. There are many options, but each of them has its pros and cons.

Other factors that you might consider when you are deciding where to live in Panama:

Do you need a bank account in Panama?

When you are purchasing a property in Panama you will need to pay for the purchase. Many may tell you it’s as simple as wiring the funds from your account in the USA to the seller’s account in Panama. This would not be a wise move unless they first have transferred title. If I were the seller’s attorney, I would not allow them to transfer title to you, without first having the funds!

My recommendation to clients is to open a personal bank account in Panama for the purchase. This will allow you to make payment of the purchase in one of two ways:

your bank will act as the escrow agent in the closing: they will issue the seller with a letter indicating that upon satisfactory transfer of title, they will disburse the funds to them;
you request a cashier’s check to the seller and then the Notary acts as the escrow agent in the sale, certifying that they will only deliver the check to the seller upon satisfactory transfer of title.

Other banking options:

Other options which may be offered to you:

Your Panama lawyer holds the funds in their bank account. They issue the check and it is held by the notary in escrow
Your Panama lawyer (or the seller’s) acts as the escrow holder.

These options are fine if your lawyer has a Trust Company license – in which case they are virtually acting as the bank in the transaction. But if they do not have a Trust Company license, they do not have the necessary insurance and security measures for this type of transaction.

We recommend to clients that they open a bank account in Panama, wire the funds to their account in Panama, and then issue the instructions to their bank here. This does, however, have certain limitations if the client will not be in the country at the time of the closing. These should be considered in advance, so that transaction details can be coordinated with the bank in a timely fashion.

Factors to consider when purchasing

The things which you need to consider when purchasing property in Panama are mostly covered in these posts:

One of the things that is not mentioned in these blog posts is: what if the property has a tenant renting? If the property is rented out, then you need to make sure that you know your rights regarding:

assignment of the rental contract to you as new owners;
the quality of the tenants – do you want to keep them in the house?
is this the income you expected to receive for the rental?
are you planning and moving in and when will it be ready for you to move?

You should definitely ask more questions if the house or property you are purchasing is subject to a rental agreement.

Ownership personally or in a corporation?

One of the questions that you need to consider when you purchase any property in Panama is whether you will own it in your personal name, the name of a Panamanian corporation or foundation, or even in a foreign corporation registered in the Panamanian Public Registry.

The principal reason that you would choose to register your real estate in an entity, rather than in your personal names is for estate planning purposes. So, for example, you might choose to title the property in your trust or a US LLC (if you were a US person).

Disadvantages

The disadvantages of owning property in an entity, rather than in your personal name are the following:

annual costs – a corporation will have annual registered agent and government fees
you keep accounting records for your Panamanian corporation or foundation
you will need to make sure that your lawyer always has updated due diligence for the beneficial owner and directors of the company or foundation

On the other hand, if you decide to own in your personal name, ensure that your estate planning has everything in order. In particular, check for lower probate costs. You should know the costs of probate and legal fees for such an eventuality when you are making your plans.

Another consideration is asset protection. In Panama, appropriate insurance policies cover these risks and typically cost less than the annual fees of a corporation or foundation.

Closing on your property purchase

You will need a lawyer to close on the property purchase in Panama. This might be a lawyer that works inhouse at a real estate company or title insurance, or might be the bank’s legal department if you are purchasing with a mortgage. Note, however, that these lawyers will not provide you with ancillary advice regarding other factors – they will merely take care of getting the proper title transferred.

If you want legal advice of any nature, you need to have your independence counsel.

Steps in the closing

A property closing in Panama typically takes place as follows:

You identify the property you want to purchase;
The lawyer/bank checks title and values;
The lawyers coordinate between them (buyer/seller) and draft up the Promise to Purchase Agreement. This is similar to an Option to Purchase, with the large difference that this is a BINDING agreement to purchase, as long as the conditions are met. If there are conditions under which you can get out of the purchase, make sure that these are clearly stated and outlined in the agreement. This typically has a non-refundable deposit made by the buyer. The seller usually uses part of this to pay the property transfer taxes and complete details. The time between the signing of the Promise to Purchase to Closing could be as little as two weeks or as much as three months, depending on what needs to be done in between. Typically, there are penalties for a late closing and even cancellation of the purchase with steep financial penalties.

Closing:

The «closing» takes place with signing the public deed for the Transfer of Title. This may or may not be the day of delivery of the keys. At this point, the seller has a promise of payment (funds in escrow by the bank or cheque held by the notary, etc.). However, the seller does not actually receive final payment until the Public Deed with Title Transfer goes through the Public Registry. The Public Registry charges $250.00 to expedite this in 24-hours. Otherwise, you should expect this to take 4-6 business days.
Once the Public Registry transfers title, THEN the seller receives their payment. If you did not already get the keys or these are not in the possession of the realtor, this is the time to make sure you get them!

Responsibilities of a Panama property owner

If you are the owner of a property in Panama, the responsibilities are various:

tax payments – which at the very least are property taxes, but may include income tax returns if the property is a rental unit
maintenance & HOA regulations
insurance coverage

Updating the tax department records

The first thing to do as soon as the property is transferred into your name is to update the records at the tax department. Typically, your lawyer will do this, simply by presenting a copy of the transfer of title at ANATI. They will then update the tax department database with the relevant information:

name of the new owner
new property values

Of course, it has been my experience that you have to check this after it has been done. On more than one occasion, I have found mistakes in the way that the information was updated, resulting in errors in taxes in the years to come.

Paying property taxes and questions about tax exemptions

Most of the information regarding paying your property taxes and getting tax exemptions has already been answered on our blog in other posts. Rather than adding to the length of this post, I will merely refer you to the relevant posts. If more information interests you:

If you have specific questions regarding your property taxes and exemptions, please call our office or send us an email.

Limitations on Panama property rental or AirBnB

There are several limitations that you should be aware of when planning to rent out your apartment or home. Most of these are «obvious», but in case you had not considered them, the two primary limitations on your freedom are:

Make sure you comply with any HOA rules. If the HOA has limitations on pets, then ensure that these same limitations are reflected and communicated in your rental agreement. Likewise, communicate any information regarding moving times, use of the social area, having guests over, etc.
Make sure you are aware of the rules on short-term rentals – both in Panama City or for your Condo/HOA. If you plan to put the house or apartment on AirBnB, be particularly careful to ensure that this is allowed. Obviously, it’s not a problem if you simply own a home outside of a gated community and are not in Panama City.

Paying income tax if you have a Panama rental property

If you lease out your property in Panama, this is Panama source income, even if rented through Airbnb. As such, you should ensure compliance with Panamanian tax rules and reporting.

Even if you receive the income into your account internationally, Panama’s tax law still considers that income as generated here.

This includes:

Do you need to file a tax return – did you pass the minimum threshold of income?
Was your income minus expenses more than the lower limit? You will need to pay income taxes.
Do you need to charge your tenants ITBMS (goods & services tax) on the rent and then pay this to the tax department?

Have a book-keeper, if not an accountant, spend the time with you to look at these questions.

The building or HOA maintenance

Whether you live in the city, a gated community or a condominium building, there will be maintenance requirements.

For example, in some communities like Altos del Maria, Cerro Azul, etc., there is no requirement to build your home in X number of years. Nonetheless, the lot is expected to be cleaned at all times, and should you fail to do so, it will be cleaned at your expense.

Additionally, most HOA or condominiums have rules regarding the color you may use in the exterior of your homes. They may additionally have rules regarding gardens, fences, and the suchlike. You should be aware of these before starting any new projects.

Estate planning considerations

Finally, as a homeowner in Panama, you should make sure that you have an estate plan in place. Consider these resources:

Preparing to sell a property in Panama

When you decide to put your home on the market, there are obvious things to do making it more inviting for the potential buyer. No doubt, you can find some great checklists on the internet suggesting what to consider.

The only things I plan to mention below are problems clients have experienced when preparing to sell their property that could have been avoided with a little foresight.

Tax department

Remember how I said above as a homeowner you should update the tax department records? You’d be surprised how many times a client has come to purchase a home or sell their property, and we discover that the tax department still has the previous owner in their database.

Other similar issues that arise:

the property values are not up-to-date (and the client receives a horrible surprise about how much they owe in property taxes);
the improvements on the property were registered in the public registry, but not with the tax department;
the improvements were updated at the tax department, but no request was made to exempt the improvements from property taxes;
etc., etc., etc.

These minute details can delay a closing two to three months. My recommendation to clients is that the tax department records be the first item on the list to verify and make sure that all is in order at the time you start looking to sell.

Listing and realtors

If you don’t already have a great realtor, ask around with others in your community. Just because someone has a great realtor in Boquete, doesn’t mean that the same company or person will be great for a sale in Veraguas, much less in Coronado.

Also, check where the realtors market their listed houses. Some of the realtors have great MLS listings, while others work with a network of realtors and contacts to get the buyer.

The listing contract – do you want to give them exclusivity or will you be listing with various realtors? What happens if you find a buyer yourself or through a friend? How much commission are you willing to pay the realtor – is that what the market is charging?

Another question that I cannot emphasize enough in Panama: What work will the realtor do for their commission? Not all realtors are created equal! Some realtors will preselect who gets to see your house, based on their actual financial capacity, while others will show your home to anyone that expresses interest.

Hand-in-hand with the above consideration is the question of financing for the purchase: how will the buyer pay? Do the realtors involved have the necessary contacts to give the buyer a great introduction and get the mortgage paperwork through quickly or will this be a slow closing?

Closing of the sale of property in Panama

When you are on the selling side of a property purchase in Panama, considerations are different from the buying side. You want to receive the ten percent (10%) down-payment upfront because you will use about five percent of that to pay land transfer and capital gains taxes.

You also want to ensure that the buyers are serious and not going to walk away before closing.

Signing the closing documents, including tax forms

At this stage, you will prepare (online) the following tax forms:

2% land transfer tax
3% capital gains tax prepayment (if you overpay the capital gains tax, you will have to ask for a refund, which typically takes 48-72 months)

You need the Promise to Purchase Agreement, with the finalized details of the buyer to prepare the tax forms. If they are purchasing in their personal name or a corporation, this has to be included in the tax forms. It takes WEEKS to get a correction on the forms done once submitted. Don’t let the buyers change their minds about this halfway through closing!

As per the purchase of a property, who typically prepares all the paperwork for closing is the BUYERS and their lawyers. The sellers take care of all the tax filings and paperwork associated with getting it all ready to sell.

Once you have all the forms filed and taxes paid, you are ready to show up to the closing and sign.

Receiving the money from the sale of your Panama property

Once again, a moment to consider where and how you will receive your payment. Hopefully, you have a bank account already in Panama and simply deposit your certified or cashier’s check into your account. Remember to provide the bank with a copy of the closing documents to justify the deposit of funds.

After you have received your funds and they are cleared in your bank account, you are free to transfer those funds to any investment or bank account in Panama or internationally .

For more information about purchasing property in Panama – contact our office.