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Wednesday, July 30 2014 @ 03:11 PM EDT

About Property Taxes and the Recently Approved Tax Reforms

Professional ServicesAnyone who owns property in the Republic of Panama should be aware of recent changes to tax property tax laws; specifically the Fiscal Reform Law #6 of February 3rd, 2005, amended in Law #34 of 9 November 2005. This law is relatively new and it contains an opportunity for property owners to apply for an "Alternative Tax" break. This law was just recently passed, and not very many people know about this "Alternative Tax" window of opportunity. By: Ramses E.Cordoba D, Avance Inspecciones S.A.
Appraisals of Apartments in Panama City

History and Background

Traditionally in the Panamanian system the value of a property is kept on the tax rolls in the Cadastre, based on declared buy/sale values and declared construction and on site improvements through the years. The property might be sold several times, and very often property market values can rise dramatically in twenty or thirty years. However, in most of the cases the value registered at the Cadaster, which is the value that the Government uses for property tax purposes, has remained way under the real market value. As a result of this inefficient system, most of the properties on the tax rolls are registered with the Cadastre but listed with a property value considerably less than the actual market value of the property.

Why is that a problem? Primarily it is a problem for the government of Panama. They are trying to modernize the tax system and to begin to collect the taxes they should have been receiving in accordance with established law for years. The government of Panama knows there is a HUGE difference between the registered values and the actual values, and they have taken steps to fix the problem. Obviously every case is different, so just plug in the numbers in your case and you can get an estimate of your potential tax savings in your own personal situation.

Explanation

For the sake discussion I will use as an example a single family home constructed in Bella Vista more than twenty years ago. When it was constructed the owners registered the property as required by law on the tax rolls in the Cadastre In 1983 the home was worth $25,000 but now the true market value of this property is $100,000. That increase in value has never been reflected in the tax rolls at the Cadastre. This example might sound a little strange or odd, but in reality it's a very common occurrence here in Panama. The government of Panama knows about the problem, and this great difference between the officially registered value and the true market values of most properties was the "genesis" behind the recent changes passed in the Law #6 of February 3rd 2005. Most of the properties in the country are "officially undervalued." For the rest of this article, I will continue to use the fictional $100K house as an example to better explain the impact of the law and the differences in the potential tax burden.


Appraisals of Single Family Homes

Repairing years of official neglect and bringing the tax books closer to reality is a tremendous burden and the Panamanian government knew getting things in order represents a Herculean task. To make the process faster and more efficient they decided to offer an incentive to individual property owners in the form of a hefty tax break for those who comply. This tax break is called the "Alternative Tax." Property owners can qualify for this tax break by providing updated and accurate property value information to the Cadastre, and those who take advantage of this program can realize significant tax savings.

Here's an illustration of how the "Alternate Tax" plan works. Using our example $100K home in Bella Vista, the property owner can pay to have a new appraisal done on the property and can apply to be billed under the "Alternate Tax" plan as allowed in Law #6 of February 3 2005. The Cadastre office will calculate the newly established tax burden based of the following chart:

  • Less than $30,000 - No Property Tax Assessed
  • From $30,000 - $50,000: Taxed at 0.7%
  • From $50,000 - $75,000: Taxed at 0.9%
  • Over $75,000: Taxed at 1%

Also, the tax chart is applied on a "slide-up" scale. That is to say that the first $30K is tax free, and the rest of the brackets are applied to properties valued at over $30K. The house in Bella Vista worth $100,000 would incur the following tax burden;

  • On the first $30,000 = nothing
  • From $30K - $50K, $20,000 taxed at 0.7% = $140.00
  • From $50K - $75K, $25,000 taxed at 0.9% = $225.00
  • Over $75K, $25,000 taxed at 1% = 250.00
  • Total Annual Property Tax = $615.00

Property taxes are paid every four months of each year (April, August and December). Therefore, the tax bill for this home would be $205.00 every four months.


Appraisals of Commercial Properties

Now, if you take a step back and consider the situation for a minute, you might think "why should I do anything at all?" You're house in Bella Vista is worth $100,000 but the government thinks it's only worth $25,000 and I'm not paying any property tax at all. And, maybe you've heard about changes that are in the works, but you don't believe for a second that the Panamanian government will actually come in and start forcing you to pay more taxes.

Well, here's the kicker. The government of Panama knows about you, about your house, and they know exactly how much it's worth. They have been listing to experts tell them that the only thing they have to do is to start to apply the laws that are already on the books and they will approximately quadruple their income from property taxation. They know you're not going to like it when it happens, so they have been nice and have given you until 30 June 2006 to help out a little and to reduce your property tax bill by more than 50%. If you do your own appraisal and report the actual value of your property to the Cadastre, then you will begin to pay the tax you owe at the "1%" rate.

But there is a deadline. After 30 June 2006 the Panamanian government is going to go out and do their own appraisals, and will assign a value to your home or apartment. In other words, instead of an appraisal, your property will be assessed for taxes. And, since there are a lot of properties out there, the government will most likely do blanket appraisals of apartment buildings, or come up with charts and formulas to determine the real market value of your property. It's quite possible that the government will assess your $100,000 home in Bella Vista as being worth $150,000 or more. Anyone who does not apply for the "Alternate Tax" will be taxed at the "2.1%" rate. And again, using our $100K home for comparison;

  • Up to $30K = Exonerated from Tax
  • $31K - $50K, 20K taxed at 1.75% = $350.00
  • $50K - $75K, $25K taxed at 1.95% = $487.50
  • Above $75K, $25K taxed at 2.1% = $525.00
  • Total Property Tax Liability = $1,362.50

So, if you go out and do your own appraisal and apply for the Alternate Tax then you will secure an annual tax savings of $747.50 per year. That's right, if you do this one time, you will then pay less tax every year for a very long time. This program represents an incredible opportunity for property owners to significantly reduce their tax burden. In the case of apartment units, doing your own appraisal usually will result in a lower property tax burden with the “Alternative Tax”. That is because the construction depreciates over time and the percentage of participation of the apartment unit on the land, which generally gains value over time, is not much significant within the total value of the property.

And there's more. Property owners who own houses or apartments that are less than 20 years old are still enjoying a tax exoneration. Well, here's another little bit of good news. If you have an appraisal done before 30 June 2006 you can still apply for the tax break under the Alternative Tax. In effect, you will be establishing a true market value for the government tax rolls at the Cadastre and making yourself eligible for the Alternate Tax under Law #34. When the property gets to be 20 years old and no longer eligible for the exoneration, you will pay property tax at the 1% rate. If you do nothing, then you will pay at the 2.1% rate.


Financial and Technical Inspections of Construction Works in Progress

So, no matter what your situation right now, chances are good that somewhere along the line you are going to be needing the services of a real estate appraisal company. Avance Inspecciones S.A. is an established and respected appraisal company, and is registered at the Department of Cadastre, a branch of the Department of Economy and Finance of the Government of Panama. Avance Inspecciones S.A., is a company founded by two civil engineers with more than 20 years of combined experience in construction inspection, real estate appraisals and construction project management, offering superior quality, reliability and experience for appraisals anywhere in the Republic of Panama.

Please do not hesitate to contact us for a free consultation. We can tell you if and when you should apply for the Alternate Tax based on your individual situation. In addition, we can provide a quick turn-around on standard appraisals for real estate purchases. We are fully bilingual, and are standing by to help you complete your real estate transaction.

BUYING PROPERTY? You will need our services

Anyone who is planning to buy real estate in the Republic of Panama should understand how the system works here. The starting point for any purchase or sale of property is an appraisal, or Avaluo in Spanish. On the first hand, banks usually will require a recent appraisal before they will grant a loan on a property. On the second hand it is simply smart to have any property you are considering to purchase inspected and evaluated by a trained professional to determine the current market value of the property. Most of the banks have lists of companies they know and work with regularly, companies who's appraisals they trust to be accurate. Avance Inspecciones appraisals are accepted at the major banks in Panama.

Contact Us:

  • Ramses E.Cordoba D, Avance Inspecciones S.A.
  • Balboa Ave in the Balboa Plaza Building Office #413
  • Telephone: *011 (507) 264-0701
  • Cellular: *011 (507) 6-613-7059
  • Email: rcordoba@avanceinspecciones.com
  • Website: http://www.avanceinspecciones.com
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