Wednesday, January 30, 2008

Property tax exemption for 20 years, BUT ...

According to analyst Osvaldo Lau a new law has been approved by the Legislature to extend the number of projects with a 20-year property tax exemption.

To qualify for this exemption:
a) the BUILDING permit has been issued before July 1, 2009, AND
b) the REGISTRATION of improvements in the Public Registry is completed BEFORE December 31, 2011.

Since registration can take around 1 week, in practice the Occupation Permit would be from 1 week before, in order to comply with the deadline for registration.

There is no actual extension for new projects. The projects already allowed to be built before September 1, 2006, are given extra time to reach the Occupation Permit stage and enjoy the 20-year benefit. The law will only enter into force when signed by the President and published in the Official Gazette As of now, Bill 386 "Whereby article 81 of Law 6 of 2005, article 27 of Law Decree 9 of 1987 and section G of article 2 of Law 63 of 1993 are reformed" has not been enacted.

The text of the bill can be downloaded in PDF files (Yahoo registration required):

Unlike the previous schdule of exemptions which had September 1, 2005, as threshold date for construction permits which would qualify for the 20-year exemption, Bill 386 has a confusing text which applies :
  • the normal 5-15 year exemption to residential improvements with building permits issued AFTER September 1, 2006,
  • the 20-year exemption when the building permit was issued before JULY 1, 2009.

What happens with homes with building permits dated between September 1, 2006 and June 30, 2009? Presumably they would be subject to a 20-year exemption only if they register the improvements by the 2011 cutoff date. If they miss the 2011 date, the normal 5-15 exemption applies.

Despite this extension, residential improvements have the normal limited exemptions of:
  • 15 years Up to US$ 100,000.00
  • 10 years From US$ 100,000.00 to US$ 250,000.00
  • 5 years Above US$ 250,000.00

Non-residential improvements keep exemptions of 10 years.

A caveat: These exemptions only apply to the value which the builder declares for the improvement, NOT to the full value which the buyer pays for the property. For example: if a builder underreports that a condo unit is worth US$70,000, but signs a bill of sale to transfer the unit for US$120,000, property tax would be applicable as follows:

- US$30,000 would be free of taxes because of the minimum threshold for property tax,
- US$40,000 would be free of tax for 15 years (or 20 if the builder registered the improvement before the 2010 deadline).
- US$50,000 would be subject to property tax from the date of the purchase because they are not part of the original value of the improvement.

So if you already purchased a property believing the 20-year tax exemption spiel from your friendly realtor or developer, get a statement ("estado de cuenta") from the nearest Ministry of Economy and Finance (MEF) for the "finca" where your unit is located. It is likely that the builder has not even notified MEF about the new owner, so you may have to show up with your title deed. Property tax statements are NOT sent by mail so outstanding taxes, interest and surcharges may be piling up as you read this post...

Extension to file appraisals

And what developers really like about the bill is that it extended the December 31, 2007 deadline to claim an alternative property tax rate to December 31, 2009. Property owners who file an update appraisal before that cut-off date are entitled to 40% savings in property tax, with a reduced rate of:
a. 0.70% over the property value above US$30,000.00 up to 50,000.00.
b. 0.90% over the property value between US$50,000.01 and US$75.000.00.
c. 1% over the property value US$75,000.00.

The cut-off date has been extended several times since the original 2006 deadline (See: June 30: Last day to file for property tax reductions). Since appraisers tend to list inflated values, this increases the assessed value with the government which is used to estimate the gain realized when the property is sold later.

The catch: The amended value cannot be increased by the Government for 5-years, which means that after that period, the Government will have a database of the properties which are likely to have increased values.


Moderator said...

This posting is replaced by

dpw-arch said...

i was under the impression that 20 yr exemption was an exemption - it seems that the land portion is not exempt, only the structure - is this correct? i bought a condo three years ago and every year i have had to pay taxes for the land portion...