1925 Some puzzles about the purchase process

Most web sites and books on the subject will advise that you declare the full price, however, it's a bit like the 'Dry clean only' labels in a lot of clothing; the purpose is to protect the manufacturers, not the clothes. No-one would want to put their name to a book that suggested you act illegally, even though the practice is the norm. You should take advice from a solicitor or your Notaio.

Regarding the residence issue; when you apply for 'residence' with your local comune, you are simply nominating that place as your principal address in Italy in order to claim the Prima Casa discount to which you are entitled. There should be no consequences on your tax. Most Comunes find it a struggle to handle the paperwork involved in preparing your council tax and rubbish collection bills, yet alone international taxation regimes!

[QUOTE=Flambo]..............We have been told we should pay the undisclosed price in endorsable banker's drafts of 10,000 Euros each. Is there some significance to that? What do Italians normally do? ................[/QUOTE]

This was explained to me by my estate agent when I bought my house. One tends to pay the declared value with a single bankers draft, which will 'trigger' the bank telling the taxman about a large payment into an account. The rest of the purchase price is paid in the 'endorsable banker's drafts'. These can be used by the vendor to buy things without going through his bank account [by signing the back], and as they are only Euro10.000 in value - do not trigger the 'telling the taxman' anyway.

I also had to split the 'endorsable banker's drafts' between the [in my case] two owners/vendors of the house.

Also - I paid Euro160 for some central heating oil with an unassigned [no name written in] cheque - so the vendor could pass that on as well.

The Notaio didn't blink at all whilst this was all going on in his office - it all seems quite normal

[QUOTE]The rest of the purchase price is paid in the 'endorsable banker's drafts'. These can be used by the vendor to buy things without going through his bank account [by signing the back], and as they are only Euro10.000 in value - do not trigger the 'telling the taxman' anyway.[/QUOTE]

I don't really feel qualified to address all of your post Flambo, but I believe the small checks are, as was explained, to avoid red flagging the authorities. It is a way around anti-money laundering laws. The practice of under declaring and paying on the side, while a proven and time tested way of buying property in Italy is, to be frank, money laundering. Essentially, you are paying less stamp duty on the purchase and the seller is avoiding capital gains tax. Both parties win, at the expense of the State. The good news for you is that I imagine that your potential liability would be less (though not nil), since you will still be liable for capital gains tax on the difference between your declared purchase price and your ultimate sales price (provided you declare it). If you perpetuate the under declaration process on the sale, then you would have exposure under the relevant tax and anti-money laundering laws. Having said all this, I haven't heard of a case of someone being prosecuted for this in connection with a property transaction. Maybe one of the esteemed members of the board has further insight on this?

So how does this affect a mortgage application where the lender conducts an independent survey/estimation of the property you wish to buy, AFTER you have signed the Compromesso?

[QUOTE]So how does this affect a mortgage application where the lender conducts an independent survey/estimation of the property you wish to buy, AFTER you have signed the Compromesso?[/QUOTE]

Actually, it shouldn't. The bank will make its decision on its assessment of the underlying market value of the property, i.e., what it can be sold for in the event of default.

[QUOTE=Marke]Actually, it shouldn't. The bank will make its decision on its assessment of the underlying market value of the property, i.e., what it can be sold for in the event of default.[/QUOTE]

Problem being the bank (at least the one I am working through) grants the loan as a percentage of the valuation or sale price, whichever is lower. So if a lower price is declared, you potentially are stuck with a lower value mortgage.

[QUOTE=Sano]Problem being the bank (at least the one I am working through) grants the loan as a percentage of the valuation or sale price, whichever is lower. So if a lower price is declared, you potentially are stuck with a lower value mortgage.[/QUOTE]

The Italian banks are well aware of the local practice of declaration versus actual purchase price, and will grant a mortgage based on the requested amount, provided it is, in the case of my bank, no more than 80% of the actual sales price or market value of the property, whichever is lower. This is to protect the bank in the event of someone paying in excess of the market value of the property.

[QUOTE=Marke]The Italian banks are well aware of the local practice of declaration versus actual purchase price, and will grant a mortgage based on the requested amount, provided it is, in the case of my bank, no more than 80% of the actual sales price or market value of the property, whichever is lower. This is to protect the bank in the event of someone paying in excess of the market value of the property.[/QUOTE]

Thanks! That makes sense. I have a hard enough time understanding the concept of a mortgage let alone trying to explain what was explained to me.

I can sleep peacefully tonight.

I would like to ask about the following problem in the above situation: given that one does not make a preliminary contract, but proceeds straight to the rogito: How can one orchestrate the payment of the "declared price" and the extra cash payment (ie. the real sales price) in a way that ensures that the buyer (namely us) does not get cheated out of the property. That the buyer does not simply pocket the cash, thanks us and walk out of the room without having signed the contract. Thanks for any clear explainations.

If you are using an estate agent he will usually hold the money until the contract is signed, BUT be sure the sale price is the same as you are paying or you may find the estate agent will be hanging onto envelope full of your cash!
You must insist on meeting the vendors and ask them face to face what the price is.
Also dont trust an interpreter provided by the estate agent, find your own.

One important fact is that the 3% or 10% tax you pay, depending on whether you take up residency or not, is calculated taking into account the "valore catastale" and not the purchase price. We got a very nice surprise last November when we purchased our property as we did not want to change our residence and we were expecting a higher tax than the one we ended up paying.

[quote=simone-non-martini;84032]I would like to ask about the following problem in the above situation: given that one does not make a preliminary contract, but proceeds straight to the rogito: How can one orchestrate the payment of the "declared price" and the extra cash payment (ie. the real sales price) in a way that ensures that the buyer (namely us) does not get cheated out of the property. That the buyer does not simply pocket the cash, thanks us and walk out of the room without having signed the contract. Thanks for any clear explainations.[/quote]

Hi there.
This thread was started back in 2005 and things have changed a lot since then. Unless the property is a new build (i.e. construction less than four years old and vendor is construction company), there is no longer any need for a difference between the declared and undeclared (cash). If I remember correctly you are buying from a private individual, correct? If so, declare the full amount - you will pay taxes on the much lower cadastral value of the property, not the purchase price, so the value declared in the deed does not affect the taxes paid at all. At completion you will sign the contracts and simply hand over your draft to the seller.

Thank you, but how is the cadastral value calculated? Is there a calculation model estimated by the council and if so, what is it based on? Will it be based on the purchase price of the property in our contract? What are the implications for any future taxes such as the ICI?
And as far as I gather from recent publications, the notaio's fee is also calculated from the declared price -- so surely there are still advantages to be had from under-declaring. There is no agent involved and yes it is a private sale.

In fact, it was the seller who suggested a "declared value" and a separate sum to be paid aside to himself. He said that it is of no advantage to himsef (no CGT applicable) but to us.

How do we know that the seller will sign the contract before he receives the difference that we have agreed on-- and which is only payable according to a prior aggreement between the two of us ie. not documented? You see the problem?

[quote=Flambo;13651]My wife and I are in the process of buying a house in Tuscany. I wonder if anyone can comment on the following issues which have arisen.

[B]Real price/declared price[/B]

I know this topic has been discussed before. I just want to make sure that I am up-to-date and understand what is at stake. We have been advised that if we declare the full price we will end up with a property which will in future be unsaleable, because no one in Italy would be prepared to buy a house which has a full-market valore catastale.

Is it still the case that most Italians buy property with a disclosed price which is lower than the real price?

Is it still the case (as has been said earlier) that the tax office cannot review the price if it is compatable with the valore catastale?

In practice, is there ever any problem with the tax authorities about this practice?

Is the practice changing, or does it differ from locality to locality within Italy? (Siena is the relevant one for us).

What is the worst case scenario if the tax authorities do investigate and object - is it just paying the additional tax plus a fine, or could the house itself be seized?

We have been told we should pay the undisclosed price in endorsable banker's drafts of 10,000 Euros each. Is there some significance to that? What do Italians normally do? Do other non-Italians really carry 1,000s of Euros into the country in cash?

[B]Italian residence[/B]

We have been told that we can pay 3% rather than 10% purchase tax if our new house is our principal residence in Italy (which it will be). That is obviously attractive.

However we have also been told that to qualify for the lower tax rate we have to become Italian residents within 18 months, and that means paying Italian tax on our whole worldwide income. We live in a low-tax jurisdiction (Hong Kong), so not so attractive.

Can anyone confirm whether, in order to qualify for 3% purchase tax, you have to subject your worldwide income to Italian tax?

What in practice happens in this regard?

Thanks for any guidance you can give us.

Flambo[/quote]
I don't know whats going on in Toscana of late but i imagine that it's going to be similar to what is happening here.Many purchasers under "guidance" from their estate agents are convinced to buy their property under the first house residency regime with the bait that their effective tax to pay will be only 3%.
However it is happening here now,with the automization of both the land registry,the revenue agencies,and local authorities that people who have not become residents within the 18 months necessary in order to be in order for the lower tax rate are receiving VERY heavy demands from the tax people.
some people who have bought nearby have just received an injunction for Euro 17.000,00.

[quote=simone-non-martini;84046]Thank you, but how is the cadastral value calculated? Is there a calculation model estimated by the council and if so, what is it based on? Will it be based on the purchase price of the property in our contract? What are the implications for any future taxes such as the ICI?[/quote]

The cadastral value is calculated from a set figure which you can find in the seller's deed. It is called the rendita catastale. This figure must be multiplied by 126 if it's a second home, or 115.5 if it's a "prima casa" to get the "cadastral value". The tax is then applied to this figure, NOT the actual purchase price. The purchase price has nothing to do with the cadastral value. ICI is also calculated on the cadastral value, and again has nothing to do with the purchase price (declared price). So you see, this figure (the cadastral value) has already been set and will not change according to the purchase price. At all.

[quote]
And as far as I gather from recent publications, the notaio's fee is also calculated from the declared price -- so surely there are still advantages to be had from under-declaring. There is no agent involved and yes it is a private sale.[/quote]

The notary's fee is not a percentage, it is on a sliding scale and the difference will be minimal if it is based on the purchase price or a slightly lower figure. Also, the new regulations state that in this case (tax calculating on cadastral value), the notary's fee will be reduced by 20%.

[quote]
In fact, it was the seller who suggested a "declared value" and a separate sum to be paid aside to himself. He said that it is of no advantage to himsef (no CGT applicable) but to us.[/quote] It sounds like the seller isn't up to date with recent laws. The advantage will be insignificant, and the disadvantages (illegality, possibilities of artificially high capital gains in future etc) will far outweigh it. Also the taxman has far greater powers of investigation now, and if you get caught the "tax relief" of only having to pay tax on the cadastral value will be revoked and you will be forced to pay the tax on the market value as decided by the taxman, plus fines and interest and maybe worse.

[quote]
How do we know that the seller will sign the contract before he receives the difference that we have agreed on-- and which is only payable according to a prior aggreement between the two of us ie. not documented? You see the problem?[/quote]

Back in the bad old days, when such practice was normal, the two things used to happen simultaneously: sitting in the same room, money is handed over as signatures take place. But there is really no need to break the law like this anymore.

Dear Gardahomes -- thank you so much for taking the time to answer so clearly. I really appreciate it. That all sounds very sound. But the Italian tax system does sound nevertheless odd -- if the property for example had been last sold some 20 years ago (in our case 5 years I have been told) how ever could the then stipulated Catastral value be in line with the market situation of today. Doesn't make sense from the tax mans point of view.

To give you a recent example, last November the catastral value of the property we purchased was a third of the price we actually paid. The last time our property had changed hands was in the 1990's. We ended up paying much less tax than we anticipated, even if it was calculated at 10%.
I agree with Gardahomes. It is in your interest to declare the full value of the transaction. I also think that the seller is not aware of the current situation regarding real estate sales.

[quote=simone-non-martini;84058]Dear Gardahomes -- thank you so much for taking the time to answer so clearly. I really appreciate it. That all sounds very sound. But the Italian tax system does sound nevertheless odd -- if the property for example had been last sold some 20 years ago (in our case 5 years I have been told) how ever could the then stipulated Catastral value be in line with the market situation of today. Doesn't make sense from the tax mans point of view.[/quote]

Welcome to Italy :bigergrin::bigergrin:
The cadastral value is not even close to being in line with current market values, not even fairly new builds. I recently came across an apartment built about four years ago, with a market value of around 220k euros, and a cadastral value of one tenth that figure! That means someone buying the property as a first home would pay less than 700 euros in purchase taxes. The cadastral figure is a fairly abstract value, and is not set from the purchase price of the last time the property was sold. It has nothing to do with that figure either. It is set when the property is registered with the land registry, taking into account the class, category, comune and size of the property and multiplying it by the "tariffa d'estimo" published in the Gazzetta Ufficiale.

These recent tax laws (meaning you can pay tax on the cadastral value and not the purchase price) were presumably introduced to discourage the previously widespread practice of underdeclaring. Eventually the true market prices of property will come out into the open and the government will be able to start readjusting the cadastral values to something a little closer to the truth. :yes: In fact I believe they have already started doing so.

[quote=gardahomes;84064]
These recent tax laws (meaning you can pay tax on the cadastral value and not the purchase price) were presumably introduced to discourage the previously widespread practice of underdeclaring. Eventually the true market prices of property will come out into the open and the government will be able to start readjusting the cadastral values to something a little closer to the truth. :yes: In fact I believe they have already started doing so.[/quote]

I am sure you are right about the reasons for introducing the tax based on cadastral value, but it also usefully serves as a reliable, possibly eventually public, database of 'market' values, which never existed before.

As to readjusting the values, anybody who is old enough to remember the shenanigans when the UK got rid of the old 'rateable value' - I think a government fell, didn't it!

[quote=Charles Phillips;84066]I am sure you are right about the reasons for introducing the tax based on cadastral value, but it also usefully serves as a reliable, possibly eventually public, database of 'market' values, which never existed before.
[/quote]

Definitely! It's about time.

One of the reasons why you are advised to pay the full price is that if agricultural land is involved, then the seller must advise all adjacent neighbours of the sale and the declared price. If one of the neighbours earns 70 per cent of his income from agriculture then he may purchase the land at the declared price thus pre-empting you, if done within a certain time-limit. This is why an Italian-law savvy solicitor paid by you is a must!

Regarding residency and taxes: We're retired Americans whose only income is from our U.S. pensions. We live permanently in Italy and established residency here, meaning that we paid 3% tax on our house purchase vs 10%. It's our understanding that taxes are paid to the country in which they're 'earned', meaning that we pay taxes to the U.S. Maybe we're supposed to be filing an Italian tax return showing zero due to Italy, but that's way too comp.icated for us and doesn't seem worth investigating. If you don't earn any income in Italy, and pay taxes to whomever you owe, you shouldn't have a problem.

Hi Umbria Lover

You may have to look at paying taxes in Italy, because my understanding is that you do have to file a tax return and are in fact liable for some italian tax based on the value and 'potential earnings' of your house. There will be others with more specific info. but I suggest you ask a commercialista (accountant).

Our commercialista advised us that you have to pay taxes in the country of your residency, ie where you spend the greatest proportion of your time (in each tax year).

I think a few different issues are being complicated.

One is capital gains. If you sell in less then five years the house gains are taxed. So if you under report the purchase you'll pay more in capital gains taxes then if you'd reported the full value to begin with.

Income taxes in general. Italy taxes tax residents on worldwide income. The US is one of a few countries that tax citizens no matter residences. IIRC on income over 67.5k but don't trust my memory. NB I said tax resident for Italy. It's quite possible to have residency in Italy and have tax residency in a different country. The rule is basically a balancing act. Looking at the centre of your life. Last week [week before?] an Italian actress living in Monaco get hit by a hefty tax bill. The straw that broke the scale was her babysitter in Roma. So depending on how many ties you have to Italy versus your previous country you may not be Italian tax resident. Remember the tax man may disagree with you but if you do things in good faith you'll hopefully be okay.

Okay to note again. NB capital gains on property are taxed in the location of the property. No matter what. Of course somebody will pull out a tax treaty from some country proving me wrong :laughs: But having property capital gains taxed in Italy is a big positive. Why? No capital gains if you own for longer then five years. :winki:

One more thing.

[url=http://www.iht.com/articles/2007/12/28/america/ATAXES.php]U.S. expats facing tax 'sticker shock' - International Herald Tribune[/url]

My memory is telling me Italian taxes are even lower then French so US expats are at even greater risk then French for the issues discussed in the article.

Not many of us have "the problem" of earning more than $87,500 dollars abroad per year. Unfortunately.

[quote=NickZ;84124]capital gains on property are taxed in the location of the property. No matter what. Of course somebody will pull out a tax treaty from some country proving me wrong :laughs: But having property capital gains taxed in Italy is a big positive. Why? No capital gains if you own for longer then five years. :winki:
[/quote]

don't want to start another long saga (like the previous one about where to pay tax on holiday home rental payments made outwith Italy :no:) -but this statement is potentially misleading and could do with some clarification:

It's true that as long as you are a tax resident in Italy, then there is no CGT on a main residence sold after 5 years+ ownership.

It certainly is not true if you're tax resident elsewhere - still no Italian CGT, but your own country's tax regime will apply. In the case of the UK at least, HMRC will take a slice of the pie.

IMO the media have a lot to answer for on that score. They've hyped up Italy's abolition of CGT (after 5 years ownership), suggesting this means that investment in Italian property a very tax efficient vehicle for protectng capital gains. Complete rubbish, and Amanda lamb and her cronies need taken out and shot for repeatedly trotting out this drivel.

If I am a UK tax payer, and I buy a house in Italy, then sell it >5 years later and realise a €20K gain ... the Italian revenue will not want anything but HMRC will treat the €20K as a captal gain by a UK taxpayer, subject to UK tax. They tax you on your worldwide income; the fact that the Italians don't tax the gain makes no differene to the UK authorities.

If I ever sell my Italian place, I'll be ensuring that I've become tax resident in italy 3 years prior to selling up so that the UK taxman doesn't take me for a free ride.

Unless the UK/Italy tax treaty is unusual [and I'm too lazy to go download it] then realty capital gains are taxed in the location of the property. It's should be pretty clear in the treaty.

[quote=Noma;84129]Not many of us have "the problem" of earning more than $87,500 dollars abroad per year. Unfortunately.[/quote]

At least some of the people in the Tribune story don't either. But because of the treatment of things like health care they end up over the limit.

[quote=NickZ;84136]Unless the UK/Italy tax treaty is unusual [and I'm too lazy to go download it] then realty capital gains are taxed in the location of the property. It's should be pretty clear in the treaty.[/quote]

no real need to look at the UK/Italy double tax treaty. There is no double tax to avoid (as Italy doesn't charge any). But lets do it anyway - the treaty would allow the UK to take the difference between what Italy charged (zero) and what the UK charge (40% subject to taper relief) ... i.e. the UK could take its full CGT.

I'm not going to argue ths one further - but anyone who is a UK citizen and tax resident, and who's selling up an italian house, should get their own advice on this rather than believe ither me or NickZ.

[url=http://www.hmrc.gov.uk/manuals/dtmanual/DT10153.htm]Particular agreements: Italy: Taxes admissible under the agreement[/url]

Okay found this which implies that the old capital gain could be written off against the UK tax. :wideeyed:

[url=http://www.hmrc.gov.uk/manuals/dtmanual/DT10212.htm]DT: Italy: double taxation agreement, SI 1990/2590, Article 13: Capital gains[/url]

Okay there is paragraph 5 but if you follow the twists:

The UK could tax an Italian resident that was an UK resident.

[url=http://www.taxationweb.co.uk/forum/discuss.php?id=5549]live in uk selling italian house/holiday home, CGT implications[/url] would appear to agree broadly with my interpretation. But thats just more opinionated guys on internet forums.

I know what my position is, cos I've spoken to my accountant and to specialists at the UK revenue to clarify. Sell the Italian property while remaining UK resident & ordinarily domiciled, and you're liable to CGT. There may be ways of reducing or (legally) avoiding the UK CGT, which I'll of course pursue if it ever comes to a sale & depending on my circumstances at the time.

Basically, its complex and you have to satisfy fairly strict criteria on domcile & residency if you are to avoid the CGT. Also one of the many situations where (if the gain is substantial) then paying some fairly serious cash to a tax specialist may prove money well spent.

[quote=NickZ;84137]At least some of the people in the Tribune story don't either. But because of the treatment of things like health care they end up over the limit.[/quote]

My point is most of us make no where near $87,500 of Italian earned income, including health benefits etc. That's a high income for an Italian, let alone an expatriate.

Pigro the links I posted are the UK governments opinion on things.

IMHO they both at least imply you're right.

[quote=Noma;84156]My point is most of us make no where near $87,500 of Italian earned income, including health benefits etc. That's a high income for an Italian, let alone an expatriate.[/quote]

At the current exchange rate that's less then 60K before taxes and including all benefits. That's not much above the northern Italian family average or I bet the central Italian average.

But why worry about the average? US citizens can't get a work visa for a job earning the low end of the southern Italian averages. With the quota system they can't get many of the low income jobs at all. Jobs like domestics aren't likely to have many Americans.

The main point is the benefits. Some one getting health benefits,housing allowance,car allowance and relocations assitance could be making less then the Italian average and because of the benefits end up over the 87K number.

Not saying there are none, just saying they're few. I'm not real sympathetic for someone making that much while whining about having to pay US taxes on only the portion that exceeds $87,500, not on their entire income. :winki: