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Why Buy Real Estate In Panama?

Why Buy Real Estate In Panama?

Most foreigners who come to Panama City are completely surprised by what they find. It’s not the Third World. It’s not dangerous. And it’s certainly not inefficient.

The infrastructure, diversity, and sophistication of the country, especially in Panama City-with a metropolitan population of over 1 million -tell a different story than the media. The city easily surpasses its Central American neighbors and should be considered right up there with its Latin counterparts, such as Buenos Aires or Mexico City.

In fact, Panama City is our choice the globe over if you’re looking for inexpensive cosmopolitan living. You’ll find world-class restaurants, five-star hotels, international banks, hundreds of multinational businesses, a Manhattan-type skyline, and every imaginable luxury…all at about half the price you’d pay in Miami.

And the energy here -as well as the warmth of the people -is unsurpassed. It’s not just the skyline that looks First World. Things work here. You can get to the airport quickly and efficiently. High-speed Internet is the norm, rather than the exception. Your international phone calls go through the first time, every time. If efficiency and reliability are important to you, give Panama a closer look.

A Step-By-Step Guide To Buying Property In Panama

Purchasing property in Panama is very similar to the process in the United States, but there are some important differences.

Step 1: Confirm the Title

The first thing you need to do is confirm the legal owner of the property. After you’ve found the property you want to buy, ask the owner for two important documents: the public deed containing the title (escritura) and the ownership and encumbrances certificate (certificado de registro publico) from the public registry. You should then give these to your lawyer for an updated search. Even if these documents are not available, ask the seller for a property (finca) number. With this information, your lawyer will be able to search for the title. The escritura states the owner and carries a description of the property. The certificado de registro publico document indicates whether there are any liens against the property or other legal complications. Make sure all the documents are originals and bear the signatures, as well as official stamps, of the registration office. An updated search is advisable in any case. The seller must also provide copies of the survey plans of the property and any buildings thereon, describing the size and location of the property.

Step 2: Promise to Buy

Enter into a promise to buy-sell agreement, whereby you give the seller a down payment and set a date for the transfer of title. Normally, there is a penalty if either party backs out. During the period set out in the agreement, the seller pays the transfer tax and obtains the clearance certificates necessary to transfer title, and the buyer arranges for payment. At the agreed-upon time, both parties sign the final contract.

Step 3: Transfer the Title

Your lawyer will draft the final purchase and sale contract. He will gather all documents and make an additional search to ensure that no liens or mortgages have been filed in the meantime. The lawyer will then put the contract into final form and draw it up as a public deed, at which time all parties will go to a notary public to sign the deed. A notary public in Panama is not like the notaries you may have used in America. Panama’s notaries are high-ranking officials and are granted far more responsibility than their American counterparts. They represent neither the buyer nor the seller.

Step 4: Transfer the Funds

The safest thing is to pay the balance of the purchase price through an irrevocable letter of payment from a local bank in Panama. Your lawyer should be able to assist you in obtaining such a document in which the bank irrevocably promises the seller to pay the balance of the sale price upon the transfer of the title to the buyer. The other, riskier way to pay the balance of the purchase price is to give the seller a bank draft drawn on a bank in Panama upon the signing of the public deed at the notary public. This draft can be obtained from one of Panama’s international banks that are used to dealing with English-speaking foreigners. The risk is making the payment before you obtain the registered deed-usually the next step in the process.

Step 5: Record Your Purchase at the Public Registry

It will not be final until you do so. This process normally takes a few weeks, but can be done in about 10 days by having your attorney file the documents directly at the main office of the public registry in Panama City. If you are in a great hurry, the public registry charges an additional fee of $250 for next-day registrations (provided all documents are in order). Once the registration process is complete, your lawyer will give you the registered deed and make sure that a copy is filed with the tax records department (catastro), at which time the property will be yours.

Ownership Issues In Panama

Most land and homes are sold privately, without a real estate agent. There are active agents, however, and their fees are usually 5%. There is no escrow and no title insurance in Panama, though a secure transaction can be made through a local bank. We recommend you have land surveyed before you purchase it. And don’t purchase any property without consulting a local attorney who can help you through the process.

Getting clear title to property in some parts of Panama can be problematic if you’re not careful. It’s best to avoid the San Blas region on the country’s eastern coast, for example, where the Kuna Indians live in what has been designated an independent, sovereign state. Some people have attempted to partner with the Indians to buy property here, with no success…even the Smithsonian was kicked off this land. In addition, most of the property in and around Bocas del Toro (and in the country’s agricultural areas) is owned by the government. You cannot readily acquire titulo de propiedad (formal titled ownership) to any of these properties.

Another way to acquire land is through derecho posesorio (possession rights), which permit a buyer to acquire a right to possession that is transferable in perpetuity, so long as the land is actively used for the public good. This is a gray area, and the Panamanian courts are working to clarify the condition; a favorable judgment would make derecho posesorio an acceptable form of ownership for tourism development. Until then, we recommend that you never purchase a property with possession rights only, even though we know of several people who have done so without a problem.

For foreign buyers in Panama, the following restrictions apply:

Under Article 286 of the constitution, foreign ownership of property within 10 kilometers of an international border is forbidden.

Untitled land must be owned by a citizen of Panama for a minimum of two years before it can be sold on to a foreign buyer. After the two-year period, the land can be titled and resold without restriction. (Note: Some untitled land can never be titled, so get professional advice before you decide to buy.)

There are restrictions on foreign ownership of waterfront and island property. Such restrictions may be avoided if you are investing in one of the tourism zones. By law, all beachfront properties must provide a public right of way starting from the highest tide to the property line. (This distance may vary.) Permits to build over the water require a concession from the maritime authority and the Ministry of Finance. (One exception to this restriction is Contadora in the Pearl Islands, where there is no restriction on foreign ownership.)

Transaction Costs When Buying Real Estate In Panama

Real estate agent commissions typically range from 3.5 to 5% of the selling price, and are paid by the seller. The buyer must pay the expenses regarding title at the public registry. The amount to be paid is estimated according to article 314 of the Fiscal Code. This scale is rather cumbersome, but as a general guide, closing costs typically amount to around 3% (including legal fees, registration and notary fees).

Panamanian Real Estate Taxes

Transfer Tax

Transfer taxes in Panama are paid by the seller, and are 2% of either the updated registered value of the property or the sale price, whichever is higher. The updated value is the registered value, plus 5% per annum of ownership. If the property is bought by a corporation, it is customary for the shares of the company to be sold (instead of the property), thus eliminating the need to pay transfer tax.

Inheritance/Gift Tax

Inheritance taxes in Panama have been completely abolished. Despite this, taxes on gifts ( inter-vivos) of properties located in Panama are in effect, and the rate depends on the degree of relationship between the donor and the donee. This does not apply to property owned anywhere outside Panama.

Rental Income Tax

If you receive rental return on your property, you will be liable for income tax up to a maximum of 30% (on returns greater than $200,000). However, if you invest in one of the special “tourism zones,” you may be exempt from income tax for 15 years.

Property Tax

Properties with a registered value of $20,000 or lower do not pay property tax. For properties of a higher value, they pay as follows:

  • $20,000 to $50,000: 1.75%
  • $50,000 to $75,000: 1.95%
  • Above $75,000: 2.10%.

If you buy or build a residential property in Panama, you may be exempt from property tax for up to 20 years. However, this provision is being phased out gradually. The 20-year exemption applies to cases where the construction permit is issued before Jan. 1, 2004, and the completed construction registered before Dec. 31, 2004. Houses or apartments where construction permit is issued after Jan. 1, 2004, will have the following exemption on property tax:

  • Value up to $100,000: 15-year exemption
  • Value from $100,000 to $250,000: 10-year exemption
  • Value over $250,000: 5-year exemption.

The exemption is transferable during the exemption period to any new buyer. The land itself is not exempted and would continue to pay property tax if its value is above $20,000.

Capital Gains Tax

Real estate gains should be included in the annual tax return, and are taxed at whatever level the individual is being assessed for income tax.

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