Cashing In On a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone. Tom Hammond Kelly
to Bocas Town are only connected to the mainland by a ferry at the town of Almirante). It is a stunning archipelago with small homes, bars and restaurants only accessible by water and beautiful nature scenes—don’t be surprised when dolphins follow your boat and jump in the wake you leave behind. The water is crystal clear, and the area remains unspoiled despite its status as a development hotspot.
Bocas Town, the main village of fewer than 5,000 people, is the hub of activity. It is a laid-back town that is densely packed, with many curious streets and some stray chickens vying for the road with the relatively few vehicles. Businesses, homes and other establishments made out of wood and tin sit on stilts over the calm waters alongside thatched huts. The town is surrounded on nearly all sides by water, thus earning its nickname the “Venice of the Caribbean.” For a small town off the beaten path, it has a lively restaurant and entertainment scene with Lebanese, Mexican and Thai restaurants. A mixture of European and U.S. tourists gives it a true international appeal. English is widely spoken and understood. While Bocas is off the beaten path, you’ll be surprised that cell phones and email work just fine, thanks to Panama’s excellent telecommunications infrastructure. You are only a 50-minute flight to Panama City and Costa Rica is 20 miles away. Bocas has many paved streets, treated water and sewer systems, electricity, telephones, cable TV, a hospital and ambulance service and a fire department. As is the case in all of Panama, there are no hurricanes in Bocas, giving it a big leg up on other destinations in the Caribbean. All signs point to Bocas being a boom place, but things don’t happen overnight in Central America. Investors need to always keep this in mind.
Bocas del Toro is an ideal place to build the single-family home of your dreams where waterfront properties are plentiful and affordable. Several large-scale developments are under construction, such as Red Frog Beach Club, which will have single-family homes and condos spaced over several dozen acres. Special consideration of the environment has been taken, and it will feel like a luxurious Jurassic Park when completed. As is the case in all of Panama, title insurance is a must. There have been several publicized incidents of problem claims in the area, but research and due diligence usually take care of most problems. Unlike David and Chiriqui, there are no plans for an international airport. So the tranquil, remote area should remain popular for years to come.
Tips on buying real estate in Panama
So, you’ve decided to buy a second home in Panama, either for investment, retirement or vacation reasons, and you want to get in on the boom. What do you need to know?
Panama has a surprisingly sophisticated real estate market. Salespersons must be licensed to sell real estate in Panama, and the country has approximately 1,000 licensees. When working with Panamanian agents, first confirm that they are members of the local real estate association, or ACOBIR (www.acobir.com). Members of ACOBIR are some of the best in the country; they utilize a Multiple Listing Service and must adhere to a code of ethics similar to the code honored by the National Association of Realtors. ACOBIR also participates in the International Consortium of Real Estate Associations (ICREA), where all properties are also listed. A U.S.-based broker should be able to locate a reputable broker in Panama. It’s always advisable to work with agents who hold the Certified International Property Specialist (CIPS) designation (see appendix). These professionals are fully trained and have the knowledge and expertise needed to guide you through the transaction.
Some differences and other tips in buying real estate in Panama:
•Appliances are traditionally not included. These are negotiated separately and understand that you will pay extra for these. This must be factored into the home price. Appliances can be purchased at rates similar to those in the United States.
•The rental market tends to be weak in Panama due to high home ownership levels. Do not buy property in Panama with the expectation that you will make a decent rental income—yet.
•Financing is widely available for local and international clients. There are more than 70 banks operating in Panama, and most offer long-term mortgages. For foreigners, the usual terms call for a down payment of 30 percent, sometimes less, with mortgage terms of 30 years. Interest rates vary from bank to bank, yet Panama will come closer to equaling U.S. rates than any country in Central America— another benefit of the long-time American presence.
Lenders will require a full application form, a copy of your passport, a letter of reference from your bank, an income statement or job letter with proof of income, the last three years of your personal tax return statements, and fire and life insurance (also known as mortgage-life insurance) for 100 percent of the mortgage. Shop around for the best mortgage. While financing in Panama is readily available to foreigners, the process can be different.
•Several companies offer travel to Panama at deeply discounted rates. And, if you purchase a property, you are rebated a percentage of the trip. This is a low-risk way of fully exploring the country and looking at the variety of real estate available. The pressure level is low and not what you would find on a timeshare presentation trip. One firm offering the service is Prima Panama, Panama’s premier real estate and travel company. This company sells special “passports” that entitle you to “2-for-1” hotel deals, rental cars and other discounts. A VIP service at the airport makes you feel comfortable upon arrival and a 24-hour hotline ensures that English-speaking help is close at hand. This is an outstanding way to explore Panama’s real estate opportunities. (Visit www.primapanama.com. Realtors can enroll in a special program via www.primapanamaprogram.com).
Capital gains tax
Taxpayers can choose how the capital gains resulting from the sale of Panamanian real estate are taxed. There are two options, and both can be confusing:
1.5 percent of the sum of the following:
a.The property’s cadastral value (public-record value, similar to a county assessment)
b.Improvement costs
c.10 percent of the property’s cadastral value for each year of owning the property
This method of taxation consolidates the transfer tax and the capital gains tax, meaning the taxpayer choosing this option is not liable for the 2 percent transfer tax. Taxpayers choosing this option also are not subject to any more tax on capital gains arising from the sale.
2.2 percent of the higher value between:
d.The sales price
e.The sum of the property’s cadastral value at the time of acquisition, improvement costs effected at the time of ownership and 5 percent of the cadastral value of the property (including the improvement costs) for each year the property was held
Taxpayers choosing the second option are subject to a further tax on the capital gain. The taxable gain is the selling or transfer price less the following: the acquisition cost or the cadastral value, transfer costs and 10 percent of the acquisition cost for each year the property was held. The gain is then divided by the number of years the property was owned by the seller. The resulting amount is then taxed at the standard income tax rates.
In the second option, the 2 percent initial tax on the selling price can be credited as real estate transfer tax. In computing the capital gains tax liability for the same property, this tax can therefore be deducted from the selling price as a cost of transferring ownership.
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Reasons Behind the Purchase |