#474 – The Expat Files: Property Taxes, Legal Structures, and Real Estate Pitfalls in Latin America

Automatically transcribed from the original recording; names and wording may contain errors.

[00:00] South of the border, down Mexico way That's where I fell in love when the stars above came up to play and now I wonder Hello there all you expat wannabes I'm Johnny Mueller and you're listening to the expat files living in Latin America the show that tells you just what it's like to live Work play and or retire down here in Latin America It's a mix of the good the bad the ugly and the great and it's all right here. So let's get started Okay. Now last week. I spoke about my own personal cost of living and expenses down here in Latin America and just to Expand on a little portion of that. Let's talk about property taxes now in some Latin countries property taxes are abbreviated with the letters

[00:48] Usi uzi it's called down here and in full Spanish terms. It's called umpuesto unico sobre in muebles Now in muebles is a Spanish term for real estate buildings and property There are some really important things you need to know here if you buy a house or a condo from a developer Note that before the project even breaks ground he and the builder submit the plans to the local Municipality to get the actual building permit if it's a big project Let's say of 50 houses or more in a gated guarded subdivision or residential tower the cost of that construction project broken down house by house will usually be the actual cost of Construction. So for example a hundred thousand dollar condo will be registered at a hundred thousand dollars now

[01:37] It's no skin off the builder contractor or developers back whatever the future tax assessment might be because he's gonna sell the property and New owners will have to pay that of course now property taxes in Latin America are extremely low to begin with So for example, even on a hundred thousand dollar condo registered in the municipality at the true price you still might only have a tax bill of maybe five or six hundred bucks a year and On a two hundred thousand dollar property, maybe a thousand to twelve hundred bucks a year compared to us property taxes Very cheap now There are two separate situations where one could pay a small fraction of even that the first being when you Contract out and build your house yourself Then you and your architect or if you don't speak any Spanish just your architect will go down to the local

[02:24] Municipality building permit office submit the plans and estimate what the construction is worth now when you're off the gringo tourist trail Your architect can usually waggle that price down so low that it seems unbelievable For example a gringo friend of mine just built a 3,000 square foot house Probably cost him a hundred thousand in materials and maybe 30,000 for labor and I'm sure if there was a market which there isn't he could sell it for 200 or so and he has it registered in the municipality for around $15,000 not a hundred fifty thousand dollars. I'm saying 15,000 US dollars. So his recent tax assessment for the year has been around a 110 dollars now he'd never be able to get away with that if he bought a house in an existing subdivision

[03:10] From a developer because like I said the developer will have already submitted those plans long before the houses were built and registered For the amount closer to the real cost So then you might ask what if you bought an older business or an older house from a person whose tax assessment is extremely low I mean Embarrassingly low what happens for example when you pay the going rate Let's say it's two hundred thousand dollars and he's got it listed with the municipality is only let's say four grand Well, you've got two options there One is and I mentioned this in the show a long time ago. You can make a side deal with the guy you're buying it from I'm not recommending this. I'm just telling you a lot of gringos expats and Latins do this So you might say this is for entertainment purposes only ha ha ha anyway

[03:57] Basically, you're gonna make a deal with the owner that you're gonna write them two checks So let's say in this case you write one check for 50 grand in another check for 150 grand total 200 K The deal that you settled on with the owner now sooner or later You're gonna have to go down to the municipality and register yourself as a new property owner You know transfer of title and all that or maybe your SA corporations gonna own it better yet Because then no one will be able to attach it in a settlement or a lawsuit that's against you personally But you knew that already right oh and by the way, that's one move many expats and smart gringos Make as soon as they get down here They get an SA corporation going and even if it does nothing for a while maybe even years eventually it starts owning things

[04:44] cars boats houses businesses But you knew that too didn't you so anyway like I said you're gonna have to Register that you're the new owner or your SA corporation is the new owner with the municipality at some time or other because the tax bills Are gonna be sent out and if it's in the other guy's name and you've bought the place already and the deals been done Well that could cause some problems for you later So you want things to be on the up-and-up with the municipality in that the names and the ownership are correct As far as the actual value of the property that's never really on the up-and-up I mean come on this is Latin America. You know so is mistating the price you paid for a place illegal I guess it is So is spitting and smoking in public and running red lights and littering and being drunk and disorderly too

[05:31] Not to mention if you're up in the states you commit three felonies a day whether you know it or not Remember the book three felonies a day. So yes, you're lying or someone is lying But then again, that's the business of governments throughout the world lying That's their stock and trade and because Latin's are so damn used to their governments lying to them perpetually They return the favor by lying right back giving as good as they get. I'm not saying you should play that game I'm saying almost everyone does down here So if you want to report and pay more than everyone else does go ahead your choice So anyway, like I said most gringos expats and almost all Latins will write two checks one for 50 grand in this case And one for 150 grand remember we're not talking about a new property here

[06:18] We're talking about buying from a previous owner And when you bring down the newly changed title in the bill of sale to the municipality showing that you're the new owner Actually, your lawyer will probably do that that's the new price that will show up in the municipal records for tax purposes and better yet what a lot of smart people do and Your lawyer will advise you on this If you buy an older existing property that has a very low tax assessment a lot of times Like I said if it's a nice upscale decent property It'll already be in the SA corporation of the owner Then you and he haggle back and forth and decide on the price of the property you pay him and all he does is Turn over the SA corporation that owns that property to you now you own the SA corporation which owns that property Then you avoid the municipality altogether not to mention any sales or IVA tax, too

[07:09] Again IVA down here is the same tax as VAT is in Europe That also means no one has to go down and submit Paperwork for the new owner because it remains the same owner the SA corporation only now. It's your SA corporation You get it cool, huh now I did say that happens a lot when you're buying an older upscale property because the better Properties and building projects are generally owned by latins with some means that means they're better educated and in the know and Probably upper middle class by Latin standards are better meaning by our standards They're middle class or better and like I said many of these guys use SA corporations to protect themselves I repeat most all Latin people of means have SA corporations

[07:55] But do note if you're gonna buy let's say a raw piece of land or a junky little house somewhere and you have plan on you Know maybe leveling it and rebuilding You most likely will be buying it directly from the owner who is not a sophisticated wealthy latin Maybe just a landowner farmer Whatever who has had that land in the family handed down for generations and who has no idea what an SA corporation is He knows about cows and driveway chickens But SA corporations not in his sphere of knowledge or influence that said if you the gringo or expat come down And you see a nice piece of property on the boonies somewhere Let's say you then make a deal with the owner for 50k and the original owners got it in his name because well It's been in the family for 200 years

[08:42] Meanwhile in the municipality registry, it's down on the books as maybe 40 dollars I'm not kidding. Yeah, in that case you're usually stuck Registering it for the price you paid so suddenly on the municipality books It's gone from 40 bucks as the valuation to 50 grand It's something that would seem highly unusual up in the first world, but pretty common down here Often what's strange to us is entirely normal to latins and vice versa Oh and one more thing if you're searching for properties and you buy from a real estate broker like remax or century 21 Whatever. Yeah, they're both down here. You'll generally pay top dollar all the time. That is top dollar for Latin America So beware, I'm not saying you shouldn't use them. In fact, I do advise that you use them

[09:29] I mean use the hell out of them. Just don't sign anything or give them any money Go ahead and ring them up and ask them to give you a nice big tour have them show you all their properties Of course, it'll be on their time and dime and in their cars, too You'll see the neighborhoods in the houses and of course, they'll try to steer you to the high-end properties because you're a gringo That's cool. Let them do that And if you see something you really like I suggest you go right behind their backs and deal directly with the owner And the owners of course don't care In fact, they kind of like it because then they don't have to pay a commission. So then you might ask what about Exclusivity agreements to which I say screwed that those things are never enforced and they don't mean crap So then we'll remax or century 21 sue you or the owner if you go behind their backs up in the states

[10:17] They might but down here. There's no such thing as enforcement and exclusivity agreements are not really binding here As it turns out most realtors down here don't do crap for you Anyway, they just sit on their dead asses in their offices waiting for their phones to ring Yep, that goes for a local mom-and-pop realtors And of course that goes double for Latin realtors connected with first world franchises like century 21 and remax They do not aggressively work in your favor The fact is if you want to sell a property and you list it with let's say century 21 After a couple of months or even a half a year of absolutely no action They'll try to aggressively get you to drop your price to get that commission Which is generally between three and five percent and because of that giant real estate bubble going on down here

[11:04] Once the property has been on the market for six months or so with absolutely no action Sellers often become desperate a very good situation for expat gringos Oh and by the way in the classified Employment ads in all the local newspapers and on internet employment sites, too There are just loads of real estate sales opportunities because existing realtors are dying on the vine And they have to be replaced of course and those are commission jobs So it's no skin off the agency so anyway when it comes to real estate brokers down here Go ahead use them and abuse them But don't buy from them and not because they're lazy and sit on their dead asses all day long Looking at soap operas and flipping through their smartphones But mostly because as so many gringos have found out once you buy something through them

[11:50] You the new owner will have your property registered at the official purchase price So thus your property taxes will be much higher than if you play the usual games Latin display when there's just a buyer and a seller and no Intermediary getting a commission like a real estate person now I know a lot of gringos and expats who come down looking for property or checking it out anyway They take great comfort in hiring a company like remax or century 21 thinking, you know It's first world and on the up-and-up that should signal no corruption or funny business And of course someone in the office will always speak English Well, you know, it's bad enough off the gringo tourist trail But on the gringo tourist trail like in Costa Rica even now in get this police Colombia and Nicaragua Lots of expat gringos are real estate brokers often remax and century 21 guys and gals themselves

[12:42] That said if you really want to get taken to the cleaners with gringo prices Go ahead and hook up with one of those guys again It's all about clueless gringos thinking that if they hook up with those guys, they're back in the comfort zone Yeah, the gringo realtors comfort zone. Yep when you phone him up He knows he's got a live one and I've got a hundred examples to prove it Oh and just one more point about the legal versus the illegality of it all, you know Putting down a different price than what you really paid the government's down here I just so corrupt and so lazy themselves as expat Eddie always says you're being Foolish if you don't take advantage of every little avenue like that to screw them too cuz they'll do it to you For example, I just saw a news report the other day coming out of Panama and said the average Deputado that would be senator or house of representative person in Latin American government has get this

[13:34] 15 full-time bodyguards assigned to him and his family at all times in contrast to the corrupt state of Illinois Where I come from where oddly enough state senators and persons in the house of representatives are assigned exactly zero bodyguards Now the interesting thing about those two cases is that down here in Latin America You're probably gonna pay a maximum of ten percent taxes to the local corrupt governments Whereas up in the states you're paying at least 50% of your income to those putrid asswipe jerks and you know As far as most expats are concerned many pay less than ten percent some almost nothing So then you might ask with tax rates so low or sometimes zero How can we even say that local politicians are taking a bite out of you and me now?

[14:21] Of course most all the money they steal comes from the fact that the World Bank lends billions of dollars to these countries with little to show afterward Why because it's all skimmed off of course, which just becomes part of a Latin country's national debt You know always kicking the can farther into the future and when they run out of money, they get another loan You know how that goes so back to that point. How are they taking a bite out of you and me expats and gringos? well, it's mostly through gas taxes at the pump and The EVA which is the VAT tax in most Latin countries off the gringo tourist trail It's around ten to twelve percent of everything you buy And when you're on the gringo tourist trail or in countries like Argentina where the economy's always fallen apart their VAT tax on everything called IVA down there or EVA can be anywhere from

[15:11] 15 to 21 percent as in the case of Argentina So that's how Latin governments steal from must gringos and expats and their own Latin countrymen on a daily basis Except of course when you buy things from the gray or underground economy Like for example those little kiosks on the street and those gigantic great produce markets No one's charging VAT tax there. Oh, and by the way Uruguay a country I don't quite recommend even though international living in a lot of other retirement magazines do they've got a 22 percent IVA Whoa Which always strikes me funny because you read all the time in the press how the president of Uruguay at least the former President was such a man of the people he had no bodyguards lived in the same old farmhouse and had an old Volkswagen He drove to work every day. No doubt. He himself is an incorruptible nice guy

[16:00] But then why do they need a 22 percent IVA tax? The fact is if a government really does run a nice tight Efficient minimally corrupt ship then IVA should be around two to three percent. Don't you think so in that case? I don't get it. I can understand why Argentina's evil is at 21 percent and I can understand why Panama's is at seven because you know The government steals all its money from the Panama Canal charges and related industries In fact the past three presidents and many cabinet ministers are under indictment right now for doing just that And I can't really understand why Mexico's IVA is at 16 percent It's mighty high for a country who is high government officials get their extra millions for helicopters and beach houses

[16:48] From their kickbacks from the narco trade They don't need to drain their own people in tourists with a 16 percent IVA But they do so then why am I bringing up this EVA or IVA thing in the first place this BAT tax? Well because if you buy land or a house or a business in Latin America You're gonna pay that country's EVA IVA on the amount that you actually register Which is another reason why so many smart Latins and expat gringos write two checks like I mentioned before So for example if you're in the Dominican Republic and you're buying a nice beach house for 200 grand Let's say you're gonna get nailed with an 18 percent eva tax. That's about 36,000 bucks on the transaction for their putrid thieving government

[17:34] Which is why local Latins there will do everything and anything to lower the price that they list on the books in the local property registry So the game there for Latins is anyway working people lie to the government to keep their taxes low The government on the other hand lies and steals and everyone there gets paid way too much to do nothing Sound familiar? Which is why in the end almost all Latins except those born into family wealth Would really prefer to sit on their dead asses and work for the government. Oops. Sorry about that I forgot the word work and government should never be used in the same sentence Oh and speaking of Latin American real estate, you know There's a big real estate bubble and almost every Latin American city now Just waiting for a pin to come along and pop it

[18:21] There are way too many medium and high-end developments and projects and no one with the money or creditor resources to buy them On the other hand, I've had a few fresh gringos come down and say but Johnny look everywhere I see these gigantic billboards for residential towers and mega projects high-end stuff and they say things like only Two units left or 80% sold better get in now in Spanish, of course So what you talking about Johnny if people are actually buying these things, there's no bubble It's supply and demand and the supply seems to be matching the demand Aha, but here's what you didn't know because these days like up in the States and the rest of the first world Bank interest rates and CDs are very low

[19:07] the rich Latin families and narcos and thieving political scumbags have switched from bank accounts and CDs where they used to park their Money to what they think is the traditional sure thing real estate So when you see a giant billboard for a nice residential tower that says get in now before it's too late It's 80% sold. Well, it's 80% sold to narcos Thieving politicians and wealthy lands, of course, they're not gonna live there They've just bought up whole floors of these places and whole subdivisions Then when the projects complete they contract a real estate broker for the rental and the sales like century 21 So then technically it's true. These places are sometimes 80 90 or a hundred percent sold

[19:55] But you see all you have to do is to drive by at night and see how many of those places Actually have lights on in the windows lots of ghosts subdivisions and dark towers because it's expensive To keep the lights on when no one's home. So then you might ask is now the time to get in Nope, it's time to rent In fact, there are thousands upon thousands of beautiful places down here brand new places that you can rent For half or less of what they really should be going for In other words, these fools who thought they were so smart are losing money. They're parking it All right in non-productive real estate and land In fact, it's costing them money and that's why so many people come down to places like Cali or Bogota, Colombia And they see some beautiful condos for 150k and they feel this

[20:43] Overwhelming urge to get in before it's too late. Well, it's already too late It's hard to tell you because you see another big sign of the bubble down here Is that the majority of these projects are self financing the owner or the developer is acting as the bank now note that down here In Latin America that kind of situation never even existed five years ago You either had to get bank financing or put up all the cash yourself And of course, there are all these gigantic billboards and internet ads and newspaper ads With no money down deals and other little teaser that never existed five years ago And back then if you'd have predicted that would be the case in the future People would have laughed in your face and said you were nuts Because you know back then banks wanted 20 even 30% down to give you a loan and banks wouldn't even give 30 year

[21:34] 15 year mortgages unless it was some kind of government subsidized very low-income cracker box crap housing By the way, there's a lot of subdivisions like that down here And those are the ones you want to stay away from even if there's a beautiful guarded gated luxurious single-family housing or condominium complex nearby You don't want your house or subdivision to be too near cracker box housing like that It always signals trouble for the neighborhood people there have limited educations and lots of kids So you kind of know what that neighborhood down the streets gonna be like in a few years And even though your subdivision might be beautiful and well protected You still have to drive right through that matchbox ghetto to get to your place But I digress as usual. Where were we? Oh talking about the ridiculously low valuations of most of the housing in latin america

[22:26] So then gringos want to know will I get in trouble if my house is assessed for tax purposes at a tenth of what it's really worth Well, that certainly won't happen if you're off the gringo tourist trail because there are just no government assessors That come around to your house Never not at any time In fact even in the more developed latin countries where they're trying to be so first world like argentina, for example They are trying their damnedest to reassess some of those properties, but they're not sending people around. They're checking out google maps That means if you call up your local municipalities inspection department Can you say something completely stupid like can you please send someone out to assess my house? I've just put on a second floor a swimming pool and a heliport My house is worth a lot more now and I don't want to underpay my taxes

[23:14] Well, if your brains have leaked out and you do that guess what no one will come Though of course if you're on the gringo tourist trail, they might they just might make a half-ass effort And finally in regards to property taxes You listeners out there are smart enough to know that you really don't own your house Even if you've had a mortgage burning party You just quit paying your property taxes for two years and see how fast your house goes on the auction block So then what happens if you fail to pay your property taxes in land america? Well all you guys and gals out there who get doug casey's reports and I get all those reports. It's a great service But I notice that sometimes in those various reports they really overreact Like for example a recent doug casey report started out like this

[24:00] Did you know there are 10 countries in the world that assess no property tax? Then the article went on to say if you don't pay your property taxes in the other countries Your house will get taken by the government or auctioned But the article never mentioned that it will not happen like that in latin america In fact latin americans in general are some of the biggest deadbeats i've ever seen Many of them are years even decades behind in paying their property taxes Even so you never see houses going on the auction block For back taxes down here soon enough you'll realize there's a huge deadbeat population in all classes of society rich poor middle class It doesn't matter which is why you should strongly resist making any kind of loan to a latin person if you do And of course, that's your business

[24:45] You might as well call it what it is a gift because chances are you're never going to get it back And I know i'm really going off subject here Wait a minute. What was the subject? Anyway, this is developing into a very bad habit Yeah, I know i'll work on it Anyway, I can't say that I haven't lent a few latin americans money every so often I do get touched for 10 or 20 bucks from my maintenance guy or cleaning lady And they always say they'll pay me back or to deduct it from next week's salary or whatever But I think that's a pretty evil and scrooge like thing to do and these people are only making 12 or 13 bucks a day Which is why you should never press think of it as a gift and don't think you're going to be the exception to the rule Now I know there's a lot of dead beats up in the states I got some in my own family

[25:31] But like I said you ain't seen nothing yet until you come down here to latin america and a corollary to that is you should never Extend anyone credit in business not down here and checks Well accept them if you will but I can guarantee you a good percentage of them will bounce higher than a super ball So what i'm saying is that doug casey thing's a bit misleading He's saying you should think about locating to one of those 10 countries that has no property tax I'm saying that if you come down here to latin america if you don't pay your property tax Nothing will happen to you or your property until you want to sell it That's when you'll have to clear your title and ante up. But like I said in a past show That's why throughout latin america and all the departments and municipalities Every year or so they offer complete amnesty to everybody who's behind in their property taxes

[26:22] In other words, they'll take what they can get without any penalties or interest at all So it's the inviolable rule of the deadbeat and slow payer down here. There's just so many of them They're basically steering the ship. You've been warned enough said about that Now i'd like to remind you that richard martin from the wake-up call show You all should be listening to that by the way Just go to www richard martins with an s Wake-up call all one word dot pod bean dot com To hear his twice weekly shows He's of course of the same mind as we are that is the only way to survive the inevitable crisis That's coming is to have a plan b and get the hell out of the us So he's offering a seminar on the other side of the world in penang southeast asia

[27:11] So if you have a mind to live in an english speaking southeast asian country Do make an effort to find out about his seminar. So give him a call at 702-609-9962 Or send him an email rm at gfawd.com That seminar will be from august 23rd to the 28th You've been listening to the expat files living in latin america coming to you twice a week from somewhere south of the border Email me the expat files at gmail.com And don't forget to check out expat wisdom.com to sign up for your free reports on latin america See you next time. Nos vemos