Brazil Real Estate

Tax regimes vary greatly throughout Latin America. While some countries are investor friendly, others are not so open. There are several benefits (i.e. retirement programmes, tax discounts) but also some tax obligations. In this section we provide an analysis of the different tax structure in each country where January First Real Estate lists properties. This information may be very important for you to choose you retirement destination or where to invest. Keep in mind that there are related visa and residence issues which are discussed in Visa/Residence Requirements. Real estate assets are, without doubts, one of the most secure and profitable ways of investment. There are two main reasons for this: One, properties always tend to increase their value in the long term. They generate an income for their exploitation (rental/yields). And two, international real estate is set to be the biggest and best investment market of the next several years.

 

Taxes and Costs in Brazil

Taxes and Costs
Effective Tax Rate On Rental Income
Monthly Income
US$ 1,500 25%
US$ 6,000 25%
US$ 12,000 25%

 

Rental Income

The Brazilian tax system encompasses the following tax categories: federal taxes, state taxes and municipal taxes.

 

Income Tax (Imposto de Renda de Pessoa Fisica)

Brazilian income tax is a federal tax, levied on income and proceeds of any nature received by individuals or corporations. Nonresident taxpayers are only subject to tax on their Brazilian-source income. From 1 January 1999, nonresidents are taxed at a flat rate of 25% on their gross income, without any deductions.

 

Real Estate Tax (Imposto sobre a Propriedade Predial e Territorial Urbana or IPTU)

A municipal tax, property taxes are imposed on the market value of the real estate. The tax rates vary from one municipality to the other. Typical rates are around 0.5% to 4% of the property value, as assessed by the municipality, an assessment usually lower than market value.

 

Rural Property Tax (Imposto sobre a Propriedade Territorial Rural or ITR)

Rural property tax levied on the land located outside the urban zones of the municipality. Unlike the IPTU, this is a federal tax. The tax rates vary from 0.03 to 20% depending on the number of hectares of land and the ratio which the utilized area bears to the total land area.

 

Capital Gains Tax

Capital gains realized by individuals on a sale of real property, are subject to Brazilian tax at a rate of 15%. The taxable gain is computed by deducting the acquisition costs from the gross selling price.
Capital gains earned by nonresidents who reside in countries that do not tax the relevant income or whose income tax rate is less than 20% are taxed in Brazil at a special rate. As of January 2004, capital gains earned by these individuals are subject to a withholding tax rate of 25%.
However, gains are tax-exempt if you have owned the real estate for 20 or more years, or if the real estate is the sole estate you own, and you have owned it for at least 5 years and the sale price is not over, approximately, BRL 582,750 (US$ 259,000).
Capital gains derived by individual residents from the transfer of any property or rights are taxed at a flat rate of 15%, which is final. Capital gains derived from the sale of property or rights where the sales price does not exceed BRL20,000 (US$8,889) are not taxable.
However gains derived from sales of real estate acquired by the seller before 1970 are tax-exempt for Brazilian residents. Real estate acquired by the seller between 1970 and 1988 benefits from a progressive capital gains tax reduction.

 

Living There

Residents can avail of the following deductions and allowances from their gross annual income:
Substantiated and un-reimbursed medical, dental, and health-related expenses incurred by the taxpayer and his dependants
Certain contributions and gifts up to 12% of the taxable income
Education expenses incurred by the taxpayer and his dependants; up to BRL2,198 (US$977) per person
Aggregate of the monthly deductions and allowances (see below)

However, all incomes of residents are subject to monthly withholding taxes as advance payment for their final tax liability. The withholding taxes are levied at progressive rates, depending on the monthly taxable income of the resident taxpayers. The taxable income is the monthly gross income less deductions and allowances.

 

Withholding Tax

Taxable income rate, BRL (US$) / Tax rate
Up to 1,164 (US$517) / nil
1,164 –2,326 (US$1,034) / 15%
Over 2,326 (US$1,034) / 27.5%

Residents can avail of the following deductions and allowances from their gross monthly income:

BRL117 (US$52) per month per year for each qualifying dependant
Contributions paid to the national social security system
Contributions paid to qualified Brazilian private pension funds
Deductible expenses for calculating income from independent services
Alimony and child support payments
The first BRL1,164 (US$517) pension paid by the national social security system to taxpayers more than 65 years old
Realtors’ and lawyers’ fees in Brazil and other property purchase costs

 

Transaction Costs

Fee / % / Who Pays?
Lawyer’s/Notary’s Fee / 2.00% / buyer
Transfer Fee / 2.00% / seller
Agent’s Fee / 3.00% – 5.00% / seller

Costs paid by buyer: 2.00%
Costs paid by seller: 5.00% – 7.00%

Roundtrip transaction Costs: 7.00% – 9.00%

 

Property Purchase Process in Brazil

There are no restrictions on ownership of property by foreigners, except that article 121 of the Brazilian Tax Code says that foreign persons, or Brazilian corporations with foreign ownership, cannot purchase property located less than ten kilometers from the frontiers, nor on islands under the jurisdiction of Brazil. Foreigners may engage in commerce or industry without limitations.
Brazil encourages long-term foreign investment and offers a retiree incentive program, the Pensionado program, which is not necessarily age-related and whose benefits are considerable such as tax exemptions and big discounts on utilities and basic services.

It is advised that a good way to protect all rights as a foreigner to hold real estate is through the establishment of a Brazilian Corporation. This will protect you from frivolous legal proceedings or asset seizure in your home country and has advantages under Brazilian law as well. Constitutionally, the government cannot seize private property unless it follows a procedure similar to eminent domain in the U.S. The owner receives fair market value for land and improvements.
The two most common alternatives used by foreigners are (1) to ensure that the property purchased is already titled, and (2) to purchase a “possession right” .

 

Titled Properties

The Public Registry Office (Registro Publico) keeps record of all titled properties in all nine provinces of Brazil. Information regarding titled properties is readily available through the Public Registry, and thus it is fairly simple to undertake a preliminary due diligence. The following are the steps necessary to successfully buy a titled property:
1. Perform a complete due diligence of the property, including a complete title search, review of cadastral maps, verification of tax good standing of the land, verification of good standing in utility bills (water and sewage, electricity, telephone, etc.) as well as verification of any other special characteristic, limitation or encumbrance over the property.
2. Enter into a Promise to Purchase Agreement to secure the property, which will give the buyer time to properly execute the due diligence, and to obtain financing. This agreement must be recorded in the Public Registry in order to affect third parties.
3. When due diligence has been completed, enter into a Purchase and Sale Agreement. It is important to include an indemnification clause in the event of hidden defects of the property.
4. Ownership is confirmed once the public deed containing an annotation regarding change of ownership is registered at the Public Registry Office.
5. Generally, payment is not delivered to the seller, until transfer of ownership has been registered. But in some other cases the parties agree to appoint an escrow agent (lawyer or banker) to receive the funds under an escrow agreement, which states that payment will be made immediately upon presentation of the deed of transfer of ownership of the property, duly recorded at the Public Registry Office.

 

Possession Rights Properties (Derecho Posesorio)

Not all properties in Brazil are subject to registry in the Public Registry Office. Many beach front properties, islands and real estate in special tourism zones such as Bocas del Toro and Portobelo are owned and managed by the national or local municipal governments, and only “possession rights” are granted over these lands for a determined period of time. Persons interested in investing in projects located in these restricted areas should be very careful to ensure that the award of the “possession right” or “limited ownership” is granted by the pertinent national or local municipal government authorities. It is important to verify the following:
1. That the award of the piece of land has been issued by the correct authorities.
2. That the award contains a complete description, including limits, boundaries, encumbrances, and other important details of the land. A complete blueprint should have been drawn and approved.
3. That the activity to be undertaken by the purchaser is allowed, that is that the construction or building to be made is acceptable to the national or local government.
4. That the award be extensive for a period of time suitable for the purchaser.
Due to the lack of uniformity regarding the granting entity for “possession rights,” it is of utmost importance to review each purchase individually and make recommendations especially for each land option. The length of the transaction process for the possession rights transfer will vary, and can take up to 6 months.

Derecho Posesorio can refer to two situations:
a. Government land occupied by peasants. After a length of time, the occupant can claim the occupied piece of land, and officially obtain the “right of use” for an indeterminate period (it has been known to pass from one generation to another). This right can be sold.
b. Unused idle private land occupied and worked by third parties for an extended period (at least 5 years), which can be claimed by the people who have worked the land. Establishing the Derecho Possessario is a legal process, that requires probes and witnesses. Conversely, owners must periodically inspect expanses of land, or people on them with livestock or buildings, in order to establish proof of use, and to discourage claims against the owner.
An important difference between a owning a Titled Property and a Right to Possession is that a titled property can be mortgaged, whereas possession rights cannot.
Be careful in dealing with Brazilian Real Estate Agents. Some agents have been known to ask 100% more for a property, without the owner knowing it. They then pocket the mark-up, plus their commission.
The whole process of registering a property can take around 44 days to complete.

 

Inheritance

Inheritance is not taxed in Brazil. The inheritance taxes (impuesto sobre donaciones) were abolished as of 26 December 2002.

 

 

 

 

Via January First