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This is rather a lengthy article by some Panama City lawyers who specialize in expat RE transactions. Please do take the time to read it. Ning is not a lawyer and this is not intended to be RE or legal advice. Please seek legal advice.
Foreigners have the same rights as nationals when it comes to buying a property and getting a clean title of ownership on said property. The only restrictions foreigners have is in relation to properties located near the borders, other than that, the same laws and rules apply to everyone.
Every purchase and sale of a property implies a payment of 3 taxes. The Real Estate Tax, Transfer Tax and Sale Tax, and unless otherwise stated in the Purchase/Sale Contract, the SELLER is responsible for paying these taxes.
Mortgages, donations, declaration of improvements, affidavits of co-owners are some of the Real Estate related transaction that could be registered in the Public Registry. In Panama, all necessary documents to legalize a Real Property can be registered, but this article addresses only the Sale and Purchase and aims to help you learn about the process.
First, find a good, reputable lawyer you can trust. There are many law firms in Panama that specialize in expat/foreigner buyers. You must trust your lawyer, but 100% verity these steps are taken prior to finalizing the deal.
1) Verify the status of the Property in Public Registry. Registro Publico has many online services, so you can even do some verifying yourself, if your Spanish is good. You may find mortgages, liens, claims, easements, etc. over the property. So this one is very important.
2) Check the status of the Property at the National Direction of Survey and get copy of the survey, however, it is recommended you spend the additional $200 and get your own new survey to verify there are no encroachments.
3) Go to MEF (Ministry of Economy and Finance) and find out the annual property taxes and if the property is in good standing and with taxes paid up to date.
4) If you wish to make improvements, go to the Ministry of Housing/Development and ask about the zoning and construction requirements for this property.
Usually, when buying a Property, the first step in buying Real Property is to sign a Letter of Promise or Letter of Intent to Buy. This is a preamble to the final contract, by which you are legally bound to buy the Property and pay the entire sale price to the Seller.
Payments on the contract are usually made up of different deposits or down payments. It is recommended to read and become acquainted with any penalties the contract may have in regards to late deposit payments. Many people have lost large sums of money for not reading these clauses and making late deposit payments.
The Purchase and Sale Contract is the LAST step in acquiring Real Estate in Panama. First sign the Letter of Intent, establish a due diligence period and upon completing this, then sign the contract. Make sure that when you sign this contract, you are familiar and in agreement with all clauses, as this is when you obliged to pay the Seller the full amount of the transaction. Understanding this contract will ensure a smooth transaction and transfer of title, without compromising your rights over the property or any hidden lingo, fiscal responsibility and other expenses in general. Once this step has been completed, then there comes the tabulation of fees and your Paz y Salvo (Good Standing Affidavit).
All Sale/Purchase transactions are subject to 3 different taxes: The Property Tax, the Property Gain Tax (3% of the Seller’s net profit) and the Title Transfer Tax (2% of the Sales Price) . The Seller is responsible for the payment of these taxes, unless otherwise agreed to in the Contract.
Once all taxes are paid up to date, you MUST obtain your Paz y Salvo (Good Standing) from MEF. You will also need one from IDAAN or your Water Department (Alcaldia if in Boquete). The Seller usually is the one who provides these documents. Once you have all of these, they should be converted into a Public Document (Escritura Publica) and duly notarized in a Notary’s office. The Notary keeps the original contracts and in exchange gives you a document that is registered at the Public Registry, known as “Notarial Closing” (cierre notarial). You should take into account the expenses of these closing transaction, which shall include the witnesses, the documentary stamps (timbres), notarial pages and notary fees.
With your “Closing” in hand, you should go to the Public Registry and ask for the fee to register the document. In average, it’s about $5 for the first $1000, and $2.50 for each additional $1000 of the sales price. So, if you buy a Property for $100k, you should be paying around $262.60 in registration fees. For some properties, there are additional documents that are required such as Good Standing (Paz y Salvo) from the HOA (if applicable), Actas (Affidavits) from the Board of Directors accepting the sale/purchase if the Property is titled under a juridical person (corporation/foundation, etc.).
If you make sure you verify your lawyer takes all these steps you can rest assure you will obtain your Title in a secure and considerably timely manner.
So here are some Q&A’s from a Panama law firm that specializes in expat/foreigner transactions.
Q: Is it safe for foreigners to buy Real Property in Panama?
A. Absolutely. Buying Property in Panama is really safe. There are over one dozen laws established in Panama solely for the purpose of protecting foreign investors, not to mention the fact that private property in Panama Is protected under the Constitution of panama. Thousands of foreigners own property in Panama.
Q: Is it legal for foreigners to buy Real Property in Panama?
A. Yes, it is legal for foreigners to buy properties in Panama titled under their names, although it is recommended that foreign buyers acquire Property under the name of a Panama corporation for the protection of the asset and for property tax reasons. In Panama, the ownership of a Possessory Rights of a Property, (different form tile of ownership) should be under the name of a Panamanian corporation, where the foreign person is a shareholder of such or a foundation or trust where they can be named as shareholders or beneficiaries.
Q: What is the process of a Real Estate Transaction?
A. First, find the Property. You are better off dealing with a Panama Licensed Real Estate Broker, and or a qualified lawyer. YOUR lawyer (never the Seller’s) should be in charge of the Due Diligence over the title of the Property. The lawyer should be the one in contact with the Seller/Seller’s representatives to get all the documents.
Your lawyer must prepare the Letter of Intent to buy where it is typical that a 10% deposit is placed in escrow. This letter should establish a period for Due Diligence and establish the necessary escrow account. Once YOUR lawyer has confirmed all is clear, then you should proceed with a Contract, Closing and Disbursement. Payment shall be made the Public Title has been transferred and registered to the BUYER.
Q: Is it safe to buy shares of a Panamanian Corporation that owns title of a Real Property in Panama?
A. Yes, as long as you have done a thorough investigation of the corporation and due diligence on the Property. It is important to hire an attorney that is experienced and qualified to handle these type of transactions and to insert the appropriate clauses such as the guarantee that the corporation does not have any pending lawsuits, claims, or obligations except those established by the law in reference to the purchase and sale of the property, a clause that makes the SELLER responsible for previous actions by the corporations or its members and a clause that guarantees the BUYER is buying 100% of the shares of the corporation and 100% of the title of ownership on the Property, certifying the SELLER owns such, etc.
Q: Who is typically responsible for the closing costs of RE transactions?
A. Typically each part pays its own closing costs. The Seller pays the taxes, transfer fees, his own lawyer fees for reviewing the contract and the Buyer pay its own lawyer fees for drafting the contractual documents, due diligence, escrow, etc. However, in some cases, the parties negotiate that one side pays all expenses, it all depends on the negotiation and terms agreed upon.
Q: What are the average costs of a Real Estate closing in Panama?
A. Closing costs will vary in each transaction. Like in the case of a Property that is titled to the Sellers individually, and the Buyers are a Corporation then you should expect a fee of $1200 for title search and due diligence, fees to the Public Registry around $200-$300, fees for the escrow account between 0.5-1% of the escrow amount, establishment of a Panama corporation, around $1,000 plus taxes. However if the Property is titled to a Panama corporation and the buyer is acquiring the shares, then the transaction is relatively simpler because there is no registry of transfer or transfer taxes, in this case, the fees should run about $1200 for the lawyers and escrow fees and Public Registry fees.
Q: How long does it normally take to register the transfer of title of a Property in the Public Registry of Panama?
A. It could be as fast as 2 days if you pay a Rush fee, however, it normally takes round 3 weeks depending on the backlog of the Public Registry
Q: From start to finish, how long does it typically take to conduct a Purchase/Sale of Real Property in Panama?
A. Average time from start to finish, without bumps on the road should be about 6 to 8 weeks, however, this is contingent on many factors that initiate with the negotiations between the Buyer and the Seller and subsequently the lawyers involved.
Q: What can I expect to pay in legal fees for these types of transactions?
A. Typically around $1200 for legal fees of a regular transaction. This fee includes the drafting of the Letter of Intent, Contract, Due Diligence, Transfer of Ownership and Closing. Notary Public fees depend on the Notary chosen. Taxes are usually paid for by the SELLER. Escrow account fee between 0.5-1% of the amount
Q: Are Escrow Companies typically used in RE transaction in Panama?
A. Escrow companies are relatively new in Panama, many Panamanians are not familiar with the term “Escrow”, although it is a term rapidly growing and becoming a standard in all RE transactions with more and more foreign buyers acquiring properties here, one of the first and most reputable companies is Panama Tile & Escrow, Inc. You have to make sure the Escrow Company is duly registered and is legally authorized to provide this service.
Q. Do Real Estate Purchase/Sale Contracts need to be in Spanish to be legally binding in Panama?
A. No. The law does NOT require the purchase/sale contract is in Spanish for it to be legally binding, however, if there was to be a dispute over the transaction in any court of the Republic of Panama, then the Court will require an official translation to Spanish made by an authorized public translator (licensed). A good lawyer shall be able to provide you with both an English and Spanish version of the contract, translated by a licensed translator to make sure you fully understand all the terms and conditions of your contract.
Q: What is an acceptable initial deposit in a RE transaction with a Letter of Intent?
A. Generally, a Seller will accept 10% as an initial deposit. This shows good faith to the Seller, but this is something that may vary according to the negotiated terms.
Q: Can a U.S. Citizen use their IRA or 401K funds to buy a Property in Panama?
A. Yes. There are several financial companies in the US like Pensco, who retirement account services to ease the transfer of IRA or 401K funds into an investment account that can be managed and used from anywhere in the world.
If you hire an attorney with experience in foreign transaction, he will provide you with a list of companies that specialize in these types of financial services.
Q: Are lease/purchase options legal and allowed in Panama?
A. Yes, but most Sellers are not familiar with the concept and do not understand them, you will likely have to educate the Seller on the concept so they can agree to a Lease/Purchase option. Remember though, all Lease contracts must be registered with MIVI for them to be legally enforceable in Panama
Q: Is it legal to close public beach access if I own a beachfront property?
A Panama laws offer public access to beaches, oceans, lakes and rivers, except if the access is within 1000 meters of your property, you must allow public access according to the law.
Q: What are the responsibilities of a Real Estate investor that flips properties?
A. Limited. The most important liability is with capital gains tax, which many people avoid with the use of Panamanian Corporations. As long as you deliver on your promise as per the terms of your contract, you are virtually free of liability.
Q; Are there RE Taxes in Panama?
A. RE taxes are charged only to Properties exceeding a Tax Assessed value of $30,000 as per the Public Registry. Maximum annual RE tax is 2.1% on the propertie’s registered/established value on properties over $75,000.
Properties with possessory rights are not subject to RE tax as technically the title belongs to the government?
Q. How can the Capital Gain Tax be legally reduced?
A. The most common strategy used in Panama is to keep the Property titled under a Panama corporation, and instead of transferring title to the buyer’s name at the time of the sale, what is done is that the corporation is sold in its entirety to the Buyer. The shares are issued to the Buyer are these do not require to be Registered, nor there is a record of the Sale. At the time of the transaction, the new Buyer simply changes the BOD and takes control of the corporation.
There are strategies to avoid certain taxes using corporations, foundations and trusts that an experienced and savvy lawyer can educate you on and help you find one option that is more suited for your individual circumstance.
Q: Are there Inheritance Taxes in Panama, through which the government is entitled to a percentage of the inheritance awarded to my beneficiaries?
A. No. Inheritance taxes do not exist in Panama
Q: Are there any mortgage financing options for foreigners looking to buy RE in Panama?
Q. There are many banks in Panama who offer financing to non-nationals in order to buy Real Estate, some are Scotia Bank, BAC International, Banistmo, Banco General, BBVA, Banco Continental, Credicorp Bank, Multicredit Bank, BNP and others, however, unless the loan has a collateral asset such a CD, then the large majority of banks have limitations to give mortgages to non-nationales such as: 1) property must be titled though the Public Registry,
2) Property must be location in approved regions, normally approved developments
3) Property must have capital improvements such as a house, building, etc. that have a considerable value
4) the Bank will only finance up to 70% of the purchase
5) the purchase price must be under the appraised value (appraisal must be issued by an established reputable approved company)
Q; If looking for a mortgage, what documentation should a non-national present?
A: Most Panamanian banks that offer financing to non-nationals will require the following documents for a mortgage application:
1) copy of the passport (all pages)
2) copy of another form of identification such as a DL,
3) 2 letters of reference (financial)
4) 2 letters of reference (personal, commercial or professional),
5) copies of an invoice for public services that show an address,
6) Curriculum Vitae (Resume) with education and employment history
7) CPA certified Financial Statements for the last 2 years
8) Certified tax returns for the last 2 years
9) copies of documentation on the subject property (title, proof of registry)
10) Public Record Certificate
11) Appraisal by an approved company
Q: What are the interest rates for mortgages in Panama?
A. Usually, interest rates are a par with the US, however, the interest rates varies in the type of loan and circumstance and also the type of property, age of the property, terms of the loan, age and status of the applicant, financial status and collateral offered for the loan
Q: Are there special mortgage loans for retirees available in Panama?
A. Yes. If you have a Jubilado/Pensionado Visa and you meet the age criteria then you may be able to qualify for special discounts in the interest rates and fees for mortgages
Q: How much does a typical Property Appraisal cost in Panama?
A. Depends on the value of the property in particular, they can range between $50 to $1000. It varies with location, size of the property and complexity of the appraisal
Q: What’s the typical cost of a Home Inspection in Panama?
A. It varies, according to each property, however, range between $50-$300
Q. Is Title Insurance offered in Panama
A. Yes. Title Insurance is offered by international insurance companies, literally on any type of Property in Panama. Note that Title Insurance is not required for Mortgage financing, however, Fire or casualty insurance may be required on the improvements of a Property being financed
Q: What is the cost of Title Insurance in Panama
A. Depends on the Property itself, and the insurance company, but generally calculate about 1% of the value of the property or close to $1000. Title Insurance is usually paid upfront in full to the insurance company
Q: Is it possible for a non-national to venture into the RE Development business in Panama?
A. Absolutely. The Panama government welcomes foreign investors who develop Real Estate in Panama.
Q: If I buy a large lot in Panama, what is the procedure to obtain a Development permit from the government?
A. First step is to get a survey map by a Panama licensed surveyor. Then you need a Panama licensed architect to design a Master Plan and then you need a Panama Engineer to prepare the construction documents. Then, an environmental Engineer must conduct an Impact Study and this must presented with the entire project to ANAM for approval. Once approved, by ANAM, the project must be presented to the Municipal Engineer for the issuance of construction permits. Depending on the project, there may be additional steps required and or additional permits
Q: If developing a project, what can be expected as far as time and costs for residential developments in Panama?
A. Timeframe depends on the size and cost of the project, the location of where it will be developed and other factors involved. Some projects may take years to obtain all required permits and costs could exceed $50,000, others could take as little as 3 months and could thousands less, it is all driven by the project itself. Usually once ANAM approves everything, construction permits are relatively fast.