#90 – The Expat Files: Real Estate, Legal Systems, and Tax Strategies in Latin America

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

[00:03] Hi everybody, I'm Johnny Mueller and you're listening to The Expat Files, living in Latin America. The show that tells you what it's really like to live, work, play and or retire in Latin America. I tell it just like it is, not the version they give you in those glossy travel magazines, or the picture they paint for you in those international traveler websites, where they're only trying to sell you something. What's it really like for expats living in Latin America? Well, it's time to take off those rose-colored glasses and find out. So let's get started. Now in the last show I was talking about dealing with realtors and real estate down here, and how you can cut a third even more off the price of real estate, as long as you don't go through one of those international real estate brokers like Century 21 or Remax. Because like I said, usually by the time a property gets listed by a big international

[00:49] company like that, and pops up on Google in the top 10 list if you do a search. Especially when you do a search in English. Well, when that happens, the owner's been led to believe that he could get a much higher price for his property, because he's marketing it with a first world connected company, and it's on Google and the internet throughout the world. And now he's no longer marketing it to local guys with a little less money, but he's hitting the first world people who are known to be rich, right? So anyway, like I said, it's much better and much cheaper to buy properties down here direct from the seller, by going into the local paper looking in the real estate classified ads, because generally a seller doesn't sign on with one of those big real estate brokerage firms until he's pretty much used up all his options. And so even if he's had his property on the market for a long time before he put it up

[01:36] with Remax or Coldwell Banker, almost always his original price will go up 5%, 10% or even 15% when he signs on exclusively to one of those big brokerage firms, simply because they get a big commission, 5% or 10%. But there's another great reason to buy from the owner directly. Because in almost all cases, your lawyer and the seller can work out a deal, kind of a gray market backroom deal that would be completely illegal in the first world. But down here, everybody does it all the time. And that is, you get the property registered to the new owner, which would be you, in the town or city's property registry, at a ridiculously low price, way below market value. For example, if you bought a condo or a townhouse or whatever for $150,000. In every country in Latin America, you have to pay a sales tax of 10%, 12%, or even 15%,

[02:21] depending what country you're in. And like I said in a past show, they call it the EVA, the Value Added Tax. So on a $150,000 condo, you'd be paying $15,000 or more just in sales tax. But if you buy that condo from the owner, generally he'll be glad to work out a deal with your lawyer, where the paperwork to transfer that property over and get it registered shows that the property was sold for, let's say, $50,000. And in that way, you'll save $10,000 or even more on sales tax. Now, everybody does that down here and nobody seems to ever get in trouble for it. In fact, it's so common that it's usually part of the deal. Unless, of course, you're a naive first world gringo and don't discuss it ahead of time with your own lawyer. Because a lot of times, when selling property to a first worlder or a gringo, people will

[03:06] try to do things on the up and up down here simply because they know that gringos and first worlders aren't corruptible or not nearly as corruptible as Latins. And they all know through the popular media on cable TV that the average gringo doesn't go for hanky-panky like that. And that's part of the reputation and stereotype that first world people have down here among the locals. And that's one of the only stereotypes we first world people have that's not necessarily to our advantage. So as far as lowering the purchase price, I mean doing it the illegal but often common way I just described, when it comes to doing the property transfer and registering it is something that you talk to your lawyer about beforehand and he'll bring it up with the seller. But here's the rub, if you end up buying a property through one of the big real estate agencies like Century 21 or Coldwell Banker, they'll never bend or break the rules like

[03:55] that and your property will be registered at full value and you'll pay the highest tax rate because these big franchise real estate agencies that came down from the first world, like Remax and Coldwell Banker, well their franchise is modeled completely on a first world business plan and are connected like any first world franchise to a home office somewhere up in the United States that makes the rules and they have to play by them and if they don't they'll lose the franchise and then they can't use that name Coldwell Banker or Remax anymore. So the bottom line is you're going to save a lot of money if you just buy direct from the owner. But now you got to be thinking if you buy from one of those big real estate companies they've checked out that property and they've checked out the owner and the title and if anything bad happens along the way or after you've purchased the property you can go back to Remax or Coldwell Banker and get satisfaction because well it's a first world franchise

[04:44] and it's backed by some first world style guarantees. Well that's true alright but like I said in so many shows before, expats always need to have their own personal lawyer, a guy that they use for a lot of different things down here not only with real estate purchases but with business, personal and immigration things too. And if you do have your own lawyer like I always recommend, if you're looking to buy a property, your lawyer, his legal secretary or his tramitador will investigate every little detail and make sure that property is in good standing, registered properly and the title is clear. And by the way, a tramitador is a guy with a motorcycle who works for a lawyer or lawyers and when a lawyer needs to file a paper in any one of the government agencies or when a lawyer needs signatures, stamps or seals on particular documents or if a lawyer just

[05:31] needs a warm body to hold a place in line for two or three hours at a bank or in a government building, his tramitador will do that too. And these tramitador have motorcycles because there's so much traffic in the big cities in Latin America that if you had to take a car from one end of a good sized city to the other, sometimes it could take two hours or more because of the typically bad Latin urban planning systems in cities down here in Latin America. The street layouts and traffic patterns are absolute nightmares. Because of course road and infrastructure contracts down here aren't let out on the basis of quality or know-how, but on nepotism and the buddy-buddy system. So most urban traffic layouts just simply suck. But a guy on a motorcycle, now he can make it from one end of the city to another, sometimes

[06:16] in 15 or 20 minutes, depending how well he can weave, run red lights and do occasional sidewalk maneuvers. In fact, the tramitador working for my particular attorney told me not so long ago that he breaks at least 30 traffic laws a day, and he said it with some pride. Now I don't know about you, but that's the kind of guy I want working for me. And I know it sounds really screwed up and archaic, but these guys, the tramitadores are the grease in the broken wheels of the legal system down here. I mean the legal system really does move along at a snail's pace, but without the tramitadores, nothing would get done. But back to buying Latin American property. Anyway, the two big advantages in buying from the owner out of the classified ads is that his price will always be much lower than if it had been listed by one of those big franchise real estate outfits, simply because there's a 5 or 10% commission added.

[07:06] And the second advantage is you could save a ton on a sales tax by having your lawyer make a deal with the seller to have the sale of the property listed in the registry at a much lower price. And sometimes when you're doing that kind of a deal, your lawyer will actually have you issue two different checks, one for the much lower sales price, for the price that goes into the property registry. And another check to make up the difference of the price that you agreed to pay the seller. Now of course you're thinking, this has got to be totally illegal. Screwing a government like that out of thousands in tax revenues. Well let me just say that once you've lived down here long enough, you realize that the government does nothing for its people. You get absolutely zero for your tax dollar. And what you do see in the way of infrastructure and roads is exactly what you see with everything else that government touches down here.

[07:52] Various stages of chaos and disrepair. Well anyway, most of that squandered money comes from international monetary fund loans from the World Bank, and big money free grants from first world do-gooders and NGO nonprofit foundations. And in fact, nearly all the tax dollars collected down here in third world countries are used to pay the bloated salaries of paper pushers and people who do nothing, who are hired on the basis of cronyism and nepotism, and what's left after they paid that money out is simply skimmed off by the politicians. So after you've been down here a while and you realize that nobody feels guilty about scamming the tax man, in fact it's a national pastime. And it doesn't take long after you see how things work down here, that you feel you're entitled to do it too. And remember I'm not endorsing or saying you should do anything illegal, I'm just reporting

[08:42] and giving you the facts. And if you first world expat wannabes eventually do come down here and decide to do everything on the straight and narrow, well that's no problem. Go ahead and pay the extra taxes and fees. But remember, everybody else is wiggling around it. And now folks listen up because I'm going to tell you the neatest little trick in the Latin American real estate business. Not only how you can save thousands of dollars when you buy real estate, but also if you have a property to sell. If you follow my advice right now, you'll be the one everybody wants to buy from. And of course it will involve your Latin American lawyer, but don't worry about that because lawyers down here are so dirt cheap that they run anywhere from 20% to 30% of what you'd pay up in the first world for the same service. And very often your lawyer ends up being a very nice, helpful, lifelong friend.

[09:29] Because Latins love to mix business with pleasure. Anyway, so here's how it goes. You might remember quite a few shows back when I talked about Latin American corporations and how every expat that has any kind of resources whatsoever, a car, a house, a condo, land, a business. Well, it's always recommended that he or she should set up a corporation, a Latin corporation, which are called society.anonymus, which of course your lawyer will do for you. And there's about a $500 one-time setup charge for that. And after it's set up, it only costs about $200 to $300 a year to maintain it. And that's only because your accountant will have to file quarterly tax forms on your corporation to report if you've gained any income on what that corporation owns. And if your corporation does make any income, let's say you have a restaurant or a bed and

[10:15] breakfast operating under the corporation, then you'll have to pay taxes on the profit. Just like you do up in the first world. Except the tax rates down here are much lower. But I talked about that on a previous show. So go back in the archives if you want to check that out. But right now I'm talking about owning a corporation down here just to hold your real estate and or cars or boats or larger possessions. Now, many astute people down here, people in the know, do that because they're completely protected against personal claims. In the event that they're sued for one thing or another, personally sued that is, it works much the same way as a corporation works up in the first world. Anything held by the corporation is completely immune from any action in a personal lawsuit or a divorce. But if you have one of these Latin American corporations, you will have to file tax forms just like a first world corporation.

[11:04] So even if it just holds real estate, your accountant will have to file tax forms every quarter. But here's the nice thing about it. If it just holds real estate, there's no money movement, so you pay no taxes. And that $200 or $300 a year you pay to keep the thing going is just the fee that you pay to your accountant to fill out the forms and file them at the tax office. You don't have to do a single thing or sign a single thing. In fact, you don't even have to be in a country to keep your corporation in good standing. Your lawyer and your accountant will keep it going for you. And the only thing you have to pay your lawyer is that first 500 or so dollars up front to file the incorporation papers and get it started. But still, to remain a legal corporation, your accountant has to file those tax forms quarterly or by trimester depending on the country you're living in. And I know what you're thinking.

[11:50] Now you're thinking, oh man, sure, I understand I gotta get a lawyer. But an accountant too? You mean I gotta get one of those? Suddenly things seem to be getting pretty complicated now. Well, don't think that because you'd be wrong. Your lawyer is always hooked up with an accountant because he has a lot of paperwork to file with the tax offices too. So just leave everything up to your lawyer's office, including the accounting and tax filing. Down here in Latin America, lawyer's offices are one-stop shops. And for first world expats, that's a lifesaver. A lawyer down here will take care of all your business paperwork, your accounting and tax preparation and filing your immigration stuff, your car, land, house, and boat purchases if you have those. And his office will do all the paperwork when you sell a car or a property too. Okay, you know that if you have a Latin corporation,

[12:37] it's cheap to maintain a few hundred bucks a year. You can hold your real estate properties and cars and protect that stuff if you get sued personally. But here's that great trick I was talking about that'll save you tens of thousands of dollars if you're doing a real estate deal. And here's the thing. It'll make any property you want to sell much more desirable to any buyer. And here's how that works. Let's say you built a house in Ecuador and you paid your lawyer 500 bucks and told him to open up a corporation and put the house in it. Now follow me here. When you build a house, you pay taxes on all the construction materials that you buy that go into the building of that house. For example, when you buy the cement, the windows, the doors, the wood beams. When you buy that stuff down here at the Latin version of Home Depot or the local hardware store, you pay the EVA or the sales tax

[13:22] directly on that stuff at the cash register. And they give you a receipt for it that has all that broken down. So once your house is completely built, you've paid all the taxes on it already in the material that you bought to construct it. Now let's say three years down the line, you want to sell that house. Now the guy that buys that house from you has to pay a 10 or 15% sales tax on that, depending of course what country you live in. And anywhere you go in Latin America, that's the law. And on a $100,000 sale, that's 10 or $15,000 extra that the buyer has to pay. And he's got to pay that to the government tax people and show the receipt before they'll register that property in the local property registry in the name of the new owner. Now just as an aside, up in the first world, you don't pay sales tax when you buy houses or land.

[14:10] Though if you do build a house, you do pay taxes as you buy the raw materials at Home Depot or whatever, just like you do down here in the third world. But that's only if you're building a new house. You do end up paying taxes, however, if hopefully you sell your house for a profit and therefore there was a capital gain. So if you roll over a lot of houses and make a profit, you'll have to pay capital gains tax. And the only way you can defer that capital gains tax is if you buy another property of equal or greater value within a certain period of time, which I think is two or three years. And I think too that there's an exemption for older and retired people who happen to sell their principal residence after holding at a certain number of years. And that's how it happens up in the first world. Well, thankfully down here in Latin America, it's not that complicated. There is no capital gains tax on a property that you sell that you've made a profit on.

[14:59] Instead, the new owner pays that sales tax 10 or 15% on the price of that property, which means of course the government collects big time every single time a house is sold. And of course, like I said earlier, you'll pay that 10 or 15% EVA or sales tax on the full price of your house land or business if you buy it through a big real estate office. But if you buy it from the owner directly, sometimes your lawyer and the seller can juggle the paperwork and whittle it way down, like I explained earlier in the show. Anyway, there is a really cool way using a society anonymous corporation so that the buyer pays no tax on the property at all. Yep, you heard me right. Absolutely zero taxes as compared to paying 10 to 15% of the purchase price if you don't use a corporation.

[15:46] Now here's how it works. You build that house in Ecuador and you put it in a corporation, a society anonymous and you let that house remain in that corporation. And that house is registered at the property registry in the local area under the name of that corporation. So if anyone looks up that corporation, they'll immediately see that it owns that house. And the cool thing is this. Let's say you sell that house for $200,000 a few years down the road and the owner has to pay 10% EVA, which is $20,000 in sales tax. Well, he really doesn't have to pay any tax at all. If when he buys that property, you transfer the corporation over to his name. In other words, you give him the corporation, you hand it right over to him, all the paperwork, all the documents, the shares and all.

[16:32] And at the same time, your lawyer changes the board of directors on that corporation and puts down the names that the new buyer wants as the new board of directors. And now the corporation is his, the house is his and nobody pays any tax and nothing changes in the property registry. The only thing that really happened was that the corporation that owned the house changed hands. It's ridiculously simple and easy, saves a ton of money, but almost no first world people know about that. And to prove to you what a well-kept secret that is, I bought and sold a few houses down here before I ever found out about it. So I lost a ton of money by being unaware of that loophole myself. Anyway, as far as the corporation being handed over, the only thing that new owner has to do is to keep paying the original accountant

[17:18] two or $300 a year or the new owner might want to use his own account. Because certain papers have to be filed just to keep the corporation in good standing with the tax authorities. And by the way, if for some reason you were to leave the country and let's say you didn't pay your accountant and he quit filing those tax returns. Well, I can tell you right now, I know for a fact, nothing really happens. If you don't file those returns for a certain amount of time, your corporation just becomes inactive, even after five or 10 years of non-payment. In fact, that happened to a friend of mine down in Costa Rica. He bought a giant piece of farmland up in the northwest corner known as Guanacaste. And of course, he did the right thing and put it in a corporation, but he had to leave unexpectedly and didn't come back for six or seven years. Well, he ended up paying a few hundred dollars in fines and charges, but that was all he had to do to get a lawyer and an accountant to reactivate the company.

[18:07] But falling behind on a simple thing like that is not recommended. Why would you want to get on the bad side of your accountant? Why would you want to stiff him when he's been doing long-term and consistent work for you? Just remember that 20 to 25 bucks a month that accountant is getting from you would be like 100 to 150 bucks a month if you were up in the first world and had a first world accountant. And down here, your Latin accountant might only be making three or $400 a month. So he's really depending on that little piece of monthly change that you're giving him. So pay your bills and don't be a jerk. Remember, it's their country and you're just a visitor. Though I do know a lot of times us expats down here get pretty busy and we're on the run a lot. We're always traveling on vacation at the beach or visiting someone. And to most Latin people, we look like we're going through life in hyperspeed,

[18:54] even though we're often stuck in first gear compared to the way we used to live our lives up in the first world. And sometimes we really do forget about those little guys we pay five or 10 bucks a month to, especially since we often pay people a year in advance for their services. And a lot of times we do pay people like accountants a year in advance, because it's so much easier that way. Who wants to stop at an office every month and fight some of the worst traffic in the world? Or even write a check for 25 bucks every month and send it through the mail, which is undependable at best. You're much better off in the long run to pay some of these guys by the year. But often as things happen, we forget that the year has ended and we're supposed to do it again. So try not to get caught up in that cycle. Do try to keep current with these guys. In fact, every successful expat I know always has a tiny notebook and writes things down,

[19:43] which is something that Latins almost never do. So anyway, the bottom line is if you put a house or a piece of land or a condo or whatever in a Latin corporation, when you sell it, the guy who buys it does not have to pay any sales tax. He hands you the money and you just hand over the corporation to him. And that's it. Of course, there'll be some paperwork to sign along the way in your lawyer's office or his lawyer's office, but he's going to be the happiest guy in the world, knowing that he's going to save tens of thousands of dollars. So naturally for expats, I always recommend get your property into a society that in anima, it not only protects you from personal lawsuits, but it makes your property very enticing when you want to sell it. And by the way, since we're talking about society, anonymous down here, if you want to go completely under the radar,

[20:30] society that anonymous are just the way to go. I know there's a lot of expats down here who've had some trouble up north, whether it's legal troubles, ex-wife troubles, bankruptcy, whatever. And it seems my good friend expat Eddie has been dragged through them all. Anyway, every expat's got some kind of story. And generally there was one straw that broke the camel's back, something that sent every one of us over the edge and just made us want to come down. And down here, almost every expat to a person that I know likes to keep a pretty low profile, especially the ones that have had a few bad experiences up in the first world before they left. In fact, I know a lot of expats still smarting from blood-curdling divorce battles up in the first world. And many of those expats once down here do their best to try to remain

[21:17] absolutely anonymous, especially the ones that have left a few loose ends up north before they came down. So it's no wonder that most of the expats I know do have society anonymous, just like I've been talking about. And to make it even more anonymous, a lot of these guys go one step further and have the board of directors of their little corporations filled out by their trusted lawyer and whoever else he selects to be on the board. But here's the trick. The expat himself is not on the board of directors of his own company. If he wants to remain completely anonymous, he never chooses to be on the board of directors, even though technically he owns the corporation. So it works like this. Your lawyer's on the board, and he's the only one with the power of attorney. And the other spots on the board, those two or three spots required by law in any corporation

[22:05] down here, are filled by people the lawyer recommends, usually some of the legal and clerical staff in his own office. They end up being board members on a lot of corporations, but they have no power. And that's the way expats set up corporations down here if they want to remain completely anonymous. Because if they're not on the board of directors, when that corporation is legally filed, your name does not appear anywhere. So if anyone's trying to check up on you for anything at all, no matter how much money, power or influence they have, it doesn't matter because your name just doesn't show up in any of the government registries, or on any of the official corporate documents. All right, so now you're thinking, great, I'm completely anonymous. So what's to stop my lawyer and the guys on the board of directors from stealing everything from me? And one day I walk up to my beautiful $200,000

[22:54] condominium, and my keys don't fit because someone changed a lot. And I find out I don't really own it anymore, but my lawyer does. After all, he's on the board of directors, has power of attorney, and your name doesn't show up anywhere. Well, not to worry all you first-worlders and expat wannabes out there. Anytime you open up a corporation, you issued a beautiful little share of stock. And that little share of stock signifies who the real owner of that company is. And as long as you have that in your hand, you are the owner. And in Latin America, most countries still have what they call bearer shares, b-e-a-r-e-r, shares. And down here in Spanish, they're called axiones de portador, axiones de portador. And with those kind of shares, your name doesn't even have to be on it. No one's name has to be on it. Whoever holds that share in

[23:41] his hand is technically the owner. And in effect, the stock share says, and it's printed in big letters, that the holder of this share is the owner of the company. So if I hand that share to someone else, they're the owner automatically. However, you could sign your name officially to the bottom of that share with someone as a witness to prove that you are the only owner, and it can only be transferred legally to someone else if you countersign it in front of a witness and write that it's been transferred to another person. But then it's not a bearer share anymore, and if you hand it to somebody else, they're not the owner. You still are because you've signed it. Anyway, there's a lot of pressure from large foreign banks and first world countries trying to get Latin American lawmakers to eliminate the bearer shares. Because obviously, first world countries are really into big brother. And when you have bearer shares,

[24:29] they're not able to control you because they don't know about you and don't know who actually owns a company. And bearer shares are a very good way to transfer wealth around without ever having to deal with government officials paying taxes or getting on any kind of a big brother list. I'm sure you're beginning to get the idea how nice these bearer shares are, and how you can use them to preserve your anonymity, and why first world governments don't like them. In fact, bearer shares are like having gold. You hand somebody a piece of gold, and that's it. It's a deal between two private parties and the government doesn't have to know a single thing about it. And in fact, it's none of their business, which is one of the reasons first world governments don't like gold either. Anyway, so there's a big push by first world governments to get Latin American governments

[25:15] to outlaw the use of bearer shares. However, they're still legal in a lot of countries down here, and Latin legislators don't want to get rid of them because Latin politicians are involved in all kinds of dirty business themselves. And the very smart ones use bearer shares to hide, move around, and transfer their own ill-gotten gains themselves. Anyhow, as of now, bearer shares still do exist in a lot of Latin American countries. So expats can take advantage of that if they want. But even so, it's not a huge deal for expats, because even if you don't have bearer shares and you have your name printed or written on your stock shares of your company, still nobody has to know that you're the owner of that company. As long as you're holding on to those shares, you could stick them in a safe or hide them anywhere you want. And even if your name

[26:03] is on the stock certificates themselves, the owner whose name is on the stock certificates, which means you, does not appear in any government file or archive. Even though the shares themselves are printed by a government office and registered in the government files and their computers. For example, in the registry it might say, the company Hueco Negro S.A.A. has 30 outstanding shares, along with some kind of registration number that's printed on each share. And that's it. It doesn't say who owns those shares. Now once those blank shares get to your lawyer's office, he'll handle shares to you because you own the company. And if they're bearer shares, you don't even have to sign them. Just take them and put them away. And if they're not bearer shares, you'll have to sign them and get them notarized and your lawyer will take care of that. So what I'm saying is, even if you sign those shares and they're not bearer shares,

[26:52] only your lawyer knows that you signed them and that they're yours. But you have all the proof you need that you're the owner because they're now in your hands. And if that company is holding a property and you want to sell it, you'll sign a few documents and hand those shares over to the new buyer. And he'll be the new owner of that property and will have completely avoided thousands of dollars in sales taxes. And meanwhile, you remain completely anonymous and off the radar as long as you're not on the board of directors or have your name in any of the incorporation papers. And guess what? Your Latin American lawyer knows all the ins and outs because he has a few society anonymous too, protecting his own ass. You've been listening

[27:38] to the expat files living in Latin America. And don't forget you can email me on anything at all about Latin America, the expat files at gmail.com. That's the expat files at gmail.com. See you next time. Nos vemos.