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From carry-on luggage to credit card fees, it seems there are hidden costs around every purchase. Yet, the frustration over tagged on and glossed over expenses pale in comparison to the sticker shock some people get after purchasing a home abroad.
“Depending on which country you’re buying in, there are numerous extra costs that most buyers aren’t aware of,” says Philip Hodgen, an international tax attorney with Hodgen Law Group, PC. “They must budget for the cost of traveling back and forth, annual carrying costs, and in some cases, the possibility of a transfer, or stamp duty tax when the property is eventually sold.”
And these additional expenses may prove to be more costly than expected. In fact, buyers should assume that purchasing a foreign property will cost 10 to 15 percent more than purchasing a similar property in their home country.
— John Di Pietro, a real estate broker with Sotheby’s International Realty
“Most out-of-town buyers don’t realize the impact that certain expenses, such as closing costs and notary fees can have on a property purchase,” says John Di Pietro, a real estate broker with Sotheby’s International Realty, based in Montréal.
In fact, foreign taxes are the largest expense that catch property owners off guard, says Cliff Perotti, director of the International Services Division at Frank Howard Allen, an independent luxury international real estate company based in San Francisco. The value-added tax, or “VAT,” is usually an expense that foreign property owners fail to take into account, he says.
“This tax is similar to the sales tax that property owners have to pay in the United States or the goods and services tax that property owners pay in Canada,” Perotti says. “It’s only paid once at the initial purchase and in most countries it can add up to about 25 percent.” For example, if a home is purchased at the selling price of $100,000, the buyer would have to pay about $125,000 to cover the VAT.
And it doesn’t stop there. According to Di Pietro, foreign property owners should reserve funds to cover the foreign tax that federal governments issue after the home is purchased, as well. “For example, in Quebec we have something called a welcome tax,” he says. “It usually costs between 1 and 1.5 percent of the initial purchase price, although the cost usually depends on the value of the property.”
Beyond the issue of foreign taxes, property owners must also plan for the cost of hiring a property manager to oversee maintenance issues and tenant concerns, particularly if they plan on renting out the property throughout the year. “Homeowners will usually pay a property manager to look after the grounds, take care of marketing and advertising efforts — if the homeowner is looking for renters, collect rent payments and take care of eviction issues,” Perotti says.
Outsourcing property management duties can give property owners peace of mind, but also can be costly. Perotti says that expenses related to property management usually equal 6 to 10 percent of the property owner’s revenue stream. To account for these expenses, he encourages individuals to factor property management costs into their total budget.
Prospective buyers should also account for extra expenses associated with upkeep, as well as maintenance and repair issues caused by renters. “A lot of times, people end up having to put a lot more money into repairs than they initially predicted,” Perotti says. “They get on-site and realize that there is a lot more work to be done — and unfortunately, most aren’t financially prepared for it.” A property manager will generally undertake these responsibilities, so Perotti suggests that property owners set aside savings to pay managers if these issues do arise.
By researching all the costs associated with foreign property ownership, potential buyers can focus on enjoying their home abroad without taking an unexpected hit to their pocketbooks.
“The amount of work, time and effort that property owners put into their homes can be overwhelming,” Hodgen says. “But if a buyer does their research and saves in advance, they can eliminate the stress and prevent those extra costs from adding up.”
“Overseas Property FAQS,” Pryce Warner International Group (UK), 2011-2012
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