Learning Uruguay

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Profit tax on property sales (a trip to the dentist)

Posted by urufish on June 19, 2007

 income-tax-tom.jpg

Last week I went to the dentist because one of my caps had a run in with a toffee candy and the cap lost.  He said the tooth broke off in the cap and I would need a pin, but first, a root canal.  We agreed to have it done today.  I took my wife with me this time because I felt an accurate translation was needed, just in case.  That started out well but it didn’t turn out quite the way I expected it to.

He put in the freezing and after a few minutes, started to drill away.  In my previous life, my dentist would yap away with his assistant and with other employees as they came and went out of the room.  Sometimes, he would decide to talk to me and I would do the ‘hmmmmm’ and ‘ummmmm’ thing… sometimes interjecting with hand movements.  This was a whole different ball game.

A few minutes into the drilling, he started talking to my wife and from that point, pretty much ignored me for the next 30-40 minutes.  I was quite aware of the fact he was working on me cognitively.  I thought of two things.  He’s so dammed good and he’s done this so many times, he can do it by feel or he’s going to realize at some point, that he’s drilling the wrong tooth.  Turned out it was the former, but that was something I wont forget for a long time.

What was he talking about?  He was talking about the new property taxes.  I really tried hard to understand what he was saying, but it was fast.  He was pretty worked up and there was no way I could keep up.  I figured I was lucky if I picked up half the nouns and strung together enough questions to ask my wife to fill in the blanks later on when the rubber mouth wore off. 

Turns out he was talking about his house–the place we were at.  He has an office in the front of the house that he uses for Montevideo patients.  In the city, most of his time is spent teaching at the university but he has a small, old office in the house for his ‘favourite’ city patients.  He was saying that he bought the house many years ago for USD$20K.  He has to put about USD$30K into it to fix it up if he wanted to sell it.  It would sell for around USD$140K.  He would have to pay tax on USD$120K, the difference between what he paid for it and what he could sell it for.  He said they dont let you deduct money you spend on improving the property.  It’s black and white.  Selling price minus purchase price.  He told his wife they’re going to have live there until they die because there’s no way he can afford to sell it now.  

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7 Responses to “Profit tax on property sales (a trip to the dentist)”

  1. Irv-

    So how much is the tax on 120K?

    The principal is just awful, but knowing what the percentage rate is required to grasp it.

    Thanks!

    Steve
    http://www.coastaluruguay.com

  2. roberto said

    It is 10% or 12%.

  3. urufish said

    Roberto, if you can point us to the document on the web, that would be nice.

    I just came back from a meeting with my escribano and this issue came up.

    He thought that selling property at a lower price, to reduce the tax payable isn’t sustainable because it passes the burden to the purchaser. He thinks that it will become a negotiating point between the buyer and seller.

  4. roberto said

    Some information in spanish can be found here:

    http://www.dgi.gub.uy/gxpsites1/hgxpp001?5,20,240,O,S,0,MNU;E;226;3;232;7;240;2;242;5;MNU;,

    Then the tax % to use are here:

    http://www.dgi.gub.uy/gxpsites1/hgxpp001?5,20,416,O,S,0,PAG;CONC;229;1;D;5409;1;PAG;,

    There is a very good FAQ section on this site.

  5. Brazzie said

    This new capital appreciation tax will have a significant effect on the real estate market if no account is made for inflation.

    Imagine you buy a house for 2,500,000 pesos (100,000 USD), live in it for 10 years and decide to trade up. Also consider that the average inflation is 6%, like last year. (http://www.larepublica.com.uy/lr3/larepublica/2007/01/04/economia/239137/la-inflacion-en-2006-cerro-en-638/)

    In this case, to trade up you will need to pay around 237,000 pesos (9,500 USD) in capital appreciation taxes ((1.06^10) – 1)*2500000*0.12

    That is a lot of money in Uruguay. And for a lot of people, it will not be economical to buy a better home. Money will be better spent improving it.

  6. urufish said

    Last night, very late (I dont know how Uruguayans do it), my accountants answered some of my questions…. This is prelininary information but it sounds hopeful.
    First, if the property was purchased before July 1st, you can elect to pay a flat 1.8% tax on the total sale.
    My other accountant said that yes, you can deduct legitimate costs such as renovation and other things like taxes, to reduce the profit.
    If I blend these two together, and the translations are accurate, (which is subject to review in the next couple of days), it sounds like the doctor isn’t in as bad shape as he thinks he is. In his case, the 1.8% would work for him OK. In my case, where I put as much $ into renovation as the property was worth, facing a 10-12% fee on 50% of the property sale price, the 1.8% would be a relief, but in reality, if my #2 accountant is right, I would probably pay nothing, beause I’d be lucky to get back what I’ve put into it so far.
    One CAVEAT in the above though. He says the only way to prove the renovation (work on the house) cost is through the BPS filings. Ahahhahh. If you didn’t take out a BPS license on the project, you cant claim the credit. That’s the case in my apartment. Almost no one takes out BPS on an apartment because they’re not visible to the inspectors that walk the streets (or perhaps they are but they look the other way–dunno). Since the BPS can be almost as much as the 10-12% tax, dont know if it would make sense to pay it retroactively to get the relief on the sale end. But since BPS is on labour only, it would depend on what your material cost was.

    Hope I’m not confusing you all. I could have waited a month or two and had a dozen meetings with accountants and got this all straightened out up front, but I think it’s fun taking you all through the learning process with me. It’s like being her eh?

  7. This tax thing is not the end of the world.

    I don’t like paying the BPS upfront unless the deal is short-term. If the deal is a flip/fast turn, paying the BPS might be OK if the ROI is there. If you plan on holding, spending money today to save taxes years down the road is tough to justify unless the liability is significant.

    Steve
    http://www.coastaluruguay.com

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