For about a year now, Panama has debated decentralized government. It will use property taxes to assist local city councils in this endeavour. Resistance to change has been very vocal, especially as scaremongering occurred: You will lose your homes. If you fail to pay your property taxes, your home will be taken from you. This is just another measure of expropriation. At the end of August, Bill 509 was sent back to first debate for re-drafting after a public outcry. It went through a lengthy second debate. Last night, Bill 509 was approved by the legislature in its third debate. It now awaits signing into law by the President, Juan Carlos Varela. We expect it to be sanctioned by the President and published, as there is no pressure for veto or further debate.
Bill 509 – 2017
The principal debate centered on an article removing the tax exemptions enjoyed by Free Trade Zones. “Free Trade Zones” refers to Processing Zones, Baru, Colon FTZ, and Panama Pacifico. Most of the Chambers of Commerce in Panama objected to modifying their tax treatment. They alleged it is important to have legal certainty for foreign investors. Although these changes were forward looking, they modify all of the special laws which had established these Free Zones. A key concern is investment: private investors in infrastructure will be scared away if changes are made. The Free Trade Zones have been hit hard in recent years by other economic factors, some of which have decimated sectors of the business.
For home owners, however, Bill 509 promises a large reduction in property taxes. In some cases, a reduction down to 0%. For most, the reduction will be 75%, and for some of the higher valued properties, only a 50% reduction. As it stands, Bill 509 establishes the following tax rates for primary family residences:
- 0% for homes valued under $120,000.00
- 0.5% for homes valued between $120,000 and $700,000
- 0.7% for homes valued over $700,000.00
These new tax rates apply as of January 1, 2019. This is because before that date, property owners must present to the Tax Department their affidavits regarding this being their “primary residence” or “family home”, to establish it as the residence that receives these new rates.
However, a property owner with more than one property, will be eligible for these new tax rates only on their primary residence. The following rates apply to weekend or holiday homes, investment, rental, commercial or industrial properties:
- 0% – less than $30,000 (this stays the same)
- 0.6% for properties valued between $30,000 to $250,000
- 0.8% fo properties valued between $250,000 to $500,000
- 1.0% for properties valued over $500,000.00
Even for properties in the highest bracket, this is a reduction from the highest existing tax rate on properties of 2.1%.
Bill 509: improved collections
One of the changes that Bill 509 introduces that will assist with collections is that it appoints banks & mortgage financing companies as tax collectors. This does not apply to first time home buyers, but does apply for all other purchasers. Banks will add the property taxes due to the monthly fees, interest and principal calculated and will include the tax in the monthly payments. The bank will then remit the property taxes to the respective tax office.
Bill 509 also establishes that there will be no appraisals carried out on property values until 2024, allowing 5 years at current property values. Nevertheless, I would expect that after 2024, there is a general move by the tax department to get updated appraisals on all properties for the purpose of collections.
Good news: Moratorium
For anyone that owes property taxes, the good news is that there is a moratorium until December 31, 2017 to get up to date. This moratorium ensures that you only pay the actual taxes that you owe – they are writing off the interest and penalties if you pay all of the property taxes that are owed. For some property owners, this will be thousands of dollars in savings.
Gray & Co. will provide an update once the law has been sanctioned & published. We are also available to assist clients in getting up to date with the payment of their property taxes, taking full advantage of the moratorium that is being offered.
In 2018, our office will be available to assist clients in registering their primary residence under this new law in order to take advantage of the new tax rates.
Property Taxes: Types
When you are thinking about retiring, the last thing you want to deal with are the details. But the devil is in the details, and one of the details you need to clearly understand is property taxes in Panama. There are a number of property taxes in Panama, but the principal ones that you need to be aware of are:
- Annual property tax
- land tax
- improvements tax – or tax exemptions
- Transfer Tax (2%)
- Capital Gains Tax
Annual Property Taxes – Land Tax & Improvements
Whether you own an apartment or a house, you need to know what taxes are going to be charged by the Panamanian DGI (Dirección General de Ingresos) each year. We recommend that before you buy, you ask the sellers for the tax statements so that you can see the history of what they have paid each year. You should also ask what is tax exempt and when the tax exemption runs out. As I said above, the annual property tax has two parts:
- land tax
- improvements tax or tax exemption
The land tax
There is a difference between owning a condo and owning a house. The property taxes are the following:
- Condominium: you will pay 1% of your proportional value of the land under the building. Say the land is worth $1,000,000 and there are 84 apartments in the building: you are responsible for $11,904.76 in land value. Your 1% per annum is: $119.05. Whatever the value of your assigned piece of the land, your tax rate will always be 1%.
- House – land taxes: This is a little more complicated! The first $30,000.00 in value is exempt from taxes. Then the following rates apply:
- 1.75% = $30,000 < and up to $50,000.00
- 1,95% = $50,000 < and up to $75,000.00
- 2.1% anything over $75,000.00
- So, if the land value of your property is $85,000.00 you will pay: $0.00 on the value between $0.00 to $30,000.00; 1.75% on $20,000.00; 1.95% on $25,000 and 2.1% on $10,000.00. Which is about $1,050.00 per annum in property taxes.
What you need to look out for is cases, which I have seen, where the previous owner, in order to get a reduction in 2005 or so on their capital gains tax, did a property appraisal and pushed the value of the land up over $250,000.00, and at these rates, the property taxes each year are about $4,500.00! This means that you will pay in April, August & December about $1,500.00 in property taxes.
Improvements Tax or Tax Exemptions
The other part of the equation in calculating your property taxes is the tax on the improvements. There are many properties that have a 20-year tax exemption on the improvements, and so for now you only have to pay the land taxes. But the questions to consider are:
- Are the improvements exempt?
- If so, when the tax exemption expire?
- What is the tax rate after the exemption expires?
So, if you purchased an apartment in a building that was built in 1996, the 20-year tax exemption would already have ended and you would need to pay property taxes on the land and the apartment itself. That is why you find so many people prefer the new buildings, even though the older buildings are much more spacious and possibly better construction (depending on the building and the year of construction).
Sale of a Property: taxes due
When you go to sell a property, there are 2 taxes which need to be paid:
- Land transfer tax
- Capital Gainst tax
Land Transfer Tax:
The land transfer tax is based on 2% of the higher of the two values:
- the tax basis value in the DGI system
- the sale price value
The Tax Department always wins – they will collect on the higher value!
Capital Gains Tax:
The 2nd tax payable at the time of the sale is the Capital Gains Tax: 10% of the value of the gain.
BUT… and as everyone says, when you see the word “but” just ignore everything you heard before the word: the tax department requires you to prepay an estimated 3% tax on the value of the sale to cover your capital gains tax.
- Your purchase price: $270,000.00
- Your sale price: $320,000.00
- Your gain: $50,000.00
- 10% of the gain: $5,000.00
- 3% value of the sale: $9,600.00
At the time of the sale, you will pay the tax department $9,600.00 in Capital Gains Tax. As you look at this, you might think “that’s unfair!”, but your only option is to ensure that your lawyer does the paperwork right and requests a refund of the overpayment of the capital gains tax! This process is some 3-4 years long – and some clients simply walk away. The Tax Department pockets the difference.
On the other hand, if you made a large gain, there is a box that you can tick, stating that this is your “final return” on the transaction, and that is the complete amount of capital gains tax that you owe. You should review these numbers carefully with your realtor or the lawyer that is handling the closing for you.
For more information regarding your property purchase or sale in Panama, please contact Joan Villanueva in our office.
Other Property Tax issues:
There are more issues to consider regarding property taxes, such as filing your Declaration of Improvements (if you just finished building a house on a lot), presenting a request for a tax exemption (if the builder did not request the exemption from the tax department), and other similar issues, but we will deal with them in another article.