The Potential Pitfalls of Buying Property in Italy
Buying property in Italy can be a great choice when armed with a little knowledge about the local buying process...
Buying a property in Italy should be a pleasurable experience and there is no reason why it should not be. However, it is important to understand that there are likely to be some fundamental differences between the legal system in Italy and that of other countries. Understanding these differences helps buyers avoid potential pitfalls.
Under-declaring the sale price
In the past it was commonplace to declare a lower price in the title deeds than was actually being paid for the property and then pay the balance in cash. The purpose of this practice, which is illegal, was to pay less tax on the transaction. There was less transfer tax payable on the purchase and less Capital Gains Tax payable by the seller. Despite this being a routine occurence there are very good reasons why it is short sighted and should be declined by any potential buyer;
- The very nature of under-declarations is that the buyer is paying cash for the difference. This is so the money cannot be traced. This means that the buyer gets no receipt for that part of the purchase price and therefore cannot prove that they have paid
- Somebody has to go to the bank and take out cash. Between leaving the bank and the handing over the cash to the seller there is the possibility that something could go wrong (i.e. a mugging or just plain losing the cash)
- If you under-declare when you buy then unless you can do a similar under-declaration when you come to sell you have created a paper increase in the value of the property that is higher than reality. This means that you have an artificial Capital Gain and therefore would pay Capital Gains Tax on a profit that you haven’t actually made
- If the tax authorities find that you have done this then you can be charged fines and interest, which in turn means that you will pay more than you should have. If you get caught you are likely to get annual inspections by the tax authorities for the foreseeable future
In certain cases (mainly when land is being bought as well as property), tenants or neighbours of the current owner may have the right to purchase the property in preference of other people. This is called pre-emptive rights. If those neighbours or tenants are not informed that the property is for sale and given the right of first refusal then they are entitled to purchase the property from the new owner for up to a year after the transaction goes through. They would have to buy the property for the amount paid for the property, which could be a problem if the declared value in the transaction does not accurately reflect the full purchase price as then the person who has the benefit of the pre-emptive right could buy the property at the declared value rather than the actual price paid. It is therefore vital that your lawyer makes sure that in such cases proof is received that the people entitled to these rights of first refusal have been offered the property and that they have not taken up that option.
Sometimes in Italy the actual property does not correspond with what is registered either in the land registry or the Catastral Registry. It is therefore vital to obtain a survey on the property to make sure that you understand what you are buying and to agree what is included. A good Surveyor (Geometra) can assist you with this as well as advising you on any restoration / modifications that you may want to make to the property.
Lack of planning permission
Some properties, or part of the property, may have been built without the correct planning permission in place. Often it is possible to rectify this situation and get the property correctly registered but this can take time and is not guaranteed that correct permissions may be granted. It is therefore vital that your lawyer not only checks what is registered at the Land Registry but also that this is cross-referenced with what is physically there as these may differ.
In some circumstances an agent will charge commission not only to the seller but also to the buyer as well. It is therefore vital that you make sure that you understand on what basis the property is being sold to you from the beginning so that you know how much it will cost you to buy the property in total.
Because of the inheritance rules in Italy and the way that certain people have to inherit from you it is possible that a property can be owned by a number of different people. Typically this is a number of children who inherited from their parents. The problem with this is that all the owners have to be in agreement with the terms of the sale, which can slow things down as there can be disagreements over things like what price to sell for. In some cases all but one of the owners wants to sell and the one who doesn’t can hold the whole process up. It is therefore vital to make sure that you or your lawyer checks not only who the registered owners of the property are but also that they are in agreement on the terms of the sale.
Remember, it can be just as safe buying abroad as it can back home, providing that:
- You take independent legal advice
- You do things legally and don’t get involved in illegal practices such as under-declarations
- You understand how the process works and therefore when something you are being told is not right (and if in doubt check with your lawyer)
- You take advice on what to expect so that there are no nasty surprises
- You take advice on tax and inheritance issues before you agree to buy.