December 11, 2005
The ten most common pitfalls when buying abroad
... and how to avoid them
With estimates that the Irish are spending between €2 billion and €4 billion on foreign property each year (between residential and commercial investments), it’s not surprising that so much can go badly wrong. From the investment companies and group schemes that buy multi-million investments, to the retired pensioner acquiring an old farmhouse in France, anyone can be stung abroad if they don’t know what they’re doing.
While many have lost money through fraud, more often it’s quite simply the buyer’s own fault.
Enda Faughnan, partner in tax and legal services with Price Waterhouse Coopers, was the keynote speaker at Ireland’s first developers’ conference last month. We asked Faughnan, an overseas property specialist, to name the 10 biggest mistakes Irish people make when buying a place abroad. This is his “watch out” list:
1 Picking the wrong location
“You would be surprised how many people pick the wrong place. Even in fairly reputable western European cities, there can be a huge difference between neighbouring streets,” Faughnan says. “You’ve got to do your research. You’ve got to consider current prospects, rent potential and future prospects. We recommend buyers choose a politically stable country with potential for good capital appreciation and good rent returns.”
2 Choosing the wrong sector
“Don’t go into the office market if that sector is flat. Don’t go into city apartment if prices are in freefall, or buy in the luxury end if nobody can afford to locally.”
3 Failure to consider Ireland’s tax claims
“Some people don’t seem to realise that when you sell an overseas property you’re also liable to pay capital gains tax in Ireland at a rate of 20%,” says Faughnan. “Furthermore, if you don’t structure your investment properly, you could end up paying income tax at an even higher rate on your day-to-day earnings.”
4 Failure to secure adequate title
“Title is defined differently in various countries. In some former communist countries, foreigners are not permitted to own land and must acquire property through purchasing companies. But companies can also come with unforeseen liabilities. In Bulgaria, the land registry system is in a mess. In other countries, it’s not unknown for properties to be deliberately sold to different people without each buyer knowing.”
5 Local succession rights
“Foreign inheritance taxes can be far higher than in Ireland — particularly in Spain, France and America,” says Faughnan. “On top of this, far more people than you might think can be entitled to take a chunk of your property after you die. In France, the system can allow many more extended family members to seek a portion of the inheritance.”
6 Failure to take exchange rates into account
“Outside the EU, exchange rates can play havoc with your ability to benefit from your overseas property. Buyers can have their profits wiped out by currency fluctuations.”
7 Failure to research local taxation systems
“In Ireland there is no residential property tax, but other countries sometimes have three or four different methods of taxing property. Local rates, services fees and other charges can take their toll.”
8 Failure to research an exit strategy
“There’s no point in benefiting from property value increases if you can’t then get your profit out after you sell. Some countries, such as China, will, through exchange-control restrictions, limit the amount of money you can take out at any one time. Others insist on a large amount being reinvested in that country.
“If you’re buying in Ukraine, it imposes heavy VAT on property purchases which you are supposedly entitled to get back. But in reality it actually takes between four and five years to do so.”
9 Failure to research interstate tax agreements
“Ireland has tax treaties with a number of countries ensuring that you don’t get taxed twice on the sale of a property. However, if you buy in a country that does not have such a treaty with Ireland, such as Turkey, you stand the chance of being double-taxed when you sell.”
10 Failure to recruit local help
“A local clown is better than no clown at all. There have been cases of buyers purchasing apartments from companies targeting Ireland only to find out that they could have bought them far cheaper over there.
“Sellers of foreign property recognise the Irish as cash cows and prices tend to go up once parties of Irish buyers arrive in a location. Take the trouble to go to your local market and always get local representation