Overseas Property Tax Tips!

Tax Tips when purchasing

·         Research or obtain tax advice on all aspects of your investments – tax on purchase, tax when renting/holding the property and tax on ultimate sale or transfer (gift/inheritance tax). Click on the country specific tax details for each at www.dgitax.com which summarises tax rates by country for transfer tax (stamp duty), VAT,  income tax, corporate tax (if applicable), local property tax (rates), wealth tax, capital gains tax and gift/inheritance tax.

·         Consider the optimal legal/tax structure for you eg. own in personal name(s), in a company etc.
In many cases it is often more tax efficient to hold residential property in your own name(s) to avoid double taxation when extracting net rents or gains from a company.  However in some countries foreigners cannot own property in their own name and must purchase it through a local company. The tax implications will vary depending on the structure so specific tax advice should be sought before finalising your investment.

·         Always declare the full value of the purchase price on the Notary Deeds. Some advise that you can reduce your transfer tax on purchase if you declare a lower price than what you actually paid for the property. Transfer tax rates vary per country but (excl. Ireland) average about 2%. If you reduce the price on the Notary Deeds you will end up paying higher capital gains tax, at a much higher rate eg 25% in Ireland, when you ultimate sell or transfer the property as the lower cost base will be used to determine your taxable gain.

Tax Tips when renting/holding property

If you own a foreign property and rent it out, even if you make a loss, you are obliged to file a tax return in the foreign country. You must also declare your foreign income in Ireland (resident country). However, Ireland has a double taxation agreement (‘DTA’) with many countries eg France, Germany, Spain, Portugal, USA, UK, Hungary etc. and where a DTA exists, any foreign tax paid can be offset against Irish tax due on same source income.

·         Retain invoices/receipts for all costs. Deductions vary per country – many will have similar deductions to Ireland eg insurance, advertising for tenants, maintenance, annual tax write off of furniture & fittings, local taxes etc. – while others disallow loan interest payments eg Poland – while others allow an annual % deduction of the purchase cost of the building eg France & Germany. Keep a record of all costs incurred and your accountant can advise which are allowable.
Note, in Spain & Bulgaria, if a non-resident individual purchases property in his/her own name as oppose to through a company, tax is levied on gross rents with no deduction for costs. This applies when calculating foreign tax due. In Ireland, foreign costs are deductible from foreign rents when arriving at taxable profits/losses in Ireland.

·         Foreign losses cannot be offset against Irish rental profits or other Irish income. However foreign losses can be carried forward and offset against future foreign profits so it is important to file a tax return even if you make a loss.

·         Check out the situation regarding personal use or vacant property. For example, in Spain, even if you do not rent out the property you are liable for ‘deemed rent’ tax & in some cases wealth tax.

·         If you are tax resident in Ireland, don’t forget to declare your foreign income in Ireland and claim double taxation relief where applicable.

·         In addition to income tax (or corporate tax), wealth tax may also be payable eg in France wealth tax is payable if your French assets less French loans/liabilities exceed €790,000. Also local property taxes (rates) are due in most countries – click on the country specific flag at www.dgitax.com to see applicable tax rates.

·         File your tax returns on time to avoid interest & penalties on late filing.

Tax Tips when selling/transferring

·       Keep a record of all purchase costs – legal fees, transfer taxes, travel costs (in some countries), renovation costs etc.. Some renovation costs may be deemed maintenance and allowed against rental income, others will be treated as ‘substantially altering the property’ in which case it will be added to the purchase costs for capital gains tax purposes.

·         Where an annual write off of the purchase cost was given against rental income eg Germany, the cost base for CGT is reduced by the amount already claimed against rents over the period of ownership.

·         Any foreign gains are also subject to Irish CGT. Where a DTA exists relief for foreign CGT will be given against Irish CGT on the same gain. However the calculation of the gain may vary to the foreign calculation eg where an annual write down of the purchase price was given in the foreign country, it will not have been allowed in Ireland against rents. Therefore the full purchase costs will be deducted in arriving at the taxable gain for Irish CGT purposes.

Inheritance/gift tax rules vary per country. In many foreign countries transfers between husband & wife are not tax free as is the case in Ireland. The tax free thresholds and rates per country also vary. Specific tax advice should be sought.

·         Some countries have roll-over relief when you sell a property and re-invest the proceeds in another property in the same country so enquire about such reliefs before selling.

The best tax tip of all!

Before signing up for an investment property, invest in some specialist tax advice.  DG International Tax is an Irish tax & accounting firm which specialises in overseas property tax. The firm is registered with the Institute of Chartered Accountants in Ireland and can advise you on both the foreign & Irish tax implications of investing in a foreign property - or if you have already purchased – can bring your foreign tax returns up to date.

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