Panama is a popular destination for expats, and for good reason. But there are some critical traps that you should be aware of if you’re looking to buy Panama property.
The first trap to watch out for is the Panama property tax law; for years, the government stimulated the real estate industry by promising property tax exoneration for up to 20-years for all new Panama properties. That is to say that, in order to qualify, a project must have been permitted no later than July 1, 2009.
For this reason, you see a lot of empty pits in Panama City where developers were technically within the law and are now frantically trying to pre-sell their Panama properties.
One of their key sales points is that if you buy their Panama condo, you won’t have to pay property tax for 20-years… what they don’t tell you is the plain and simple truth– in order to qualify for the tax exemption, the building must be completed by December 31, 2011.
The chances of all these new condo developments being completed by December 31, 2011 are slim to none… and slim’s out of town. That will leave new buyers stuck paying extra Panama property taxes.
The other thing to keep in mind is that even if a building does qualify, the Panama property tax exemption only applies to the actual construction, not the land value. Condo owners must still pay their share of taxes on the value of the land that the condo tower was built upon.
Ordinarily this would seem like a trivial sum… but many developers are now petitioning the government for a substantially inflated land value; this increases the developer’s cost basis and lowers their income tax while simultaneously increasing the government’s tax revenue at the buyers’ expense.
The second trap to watch out for is title– a lot of Panama properties have cloudy title, meaning that multiple parties often have claim to a single Panama property. These disputes grow from generations of sloppy record keeping, shoddy land surveys, squatters’ rights, and the neighbors’ ever-encroaching fences.
In Panama, possession truly is 9/10 of the law, and judges uphold this standard.
Title insurance companies now operate in Panama, which makes the transaction less risky… but a lot of property for sale is actually untitled, what is known as “Right of Possession” property, or ROP for short.
Panama ROP property holders are not registered with the government, and the buyer is effectively paying for use of the land, not ownership. A lot of buyers are OK with this distinction, but that will now surely change.
The government has recently stepped in with a new mandate that will effectively stick ROP landholders with an enormous fee for recording ROP as titled ownership. The fee applies to ROP land above 5-hectares and will cost anywhere from $10,000 to $625,000 per hectare.
My guess is that there will be a flood of sellers trying to unload their ROP land to unsuspecting buyers who don’t know about the new law. Don’t be one of them.
The third trap in Panama is unreliable information. In developed countries, property transactions are a matter of public record. In Panama, however, most sales are kept private.
How? Many properties in Panama are owned not by an individual, but by a Panamanian corporation. When it comes time to sell, the parties exchange shares of the corporation, not title to the property. In other words, the owner of the property is still the corporation, but the corporation’s shareholders have changed.
As there is no public database of shareholders for Panamanian companies, the property transaction is effectively kept private, and no one will ever know how much the property actually closed for.
The lack of reliable information in Panama generally gives rise to unsubstantiated rumors, especially from real estate agents. Naturally, it is in their best interest to spread rumors about how properties are still selling for high prices because there is always a greater fool willing to believe it.
Most Panamanian real estate agents are notorious for this, and if you’re in the market for property I would advise you to exercise extreme caution, regardless of how slick s/he may sound. As a foreigner, it’s very easy to get steered into overpaying for the wrong deal based on rumor and misinformation.
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