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Increased Real Estate Taxes in Chile

One of the worst outcomes of the landslide election in favor of the Chilean Left in 2014 was the reality of paying higher taxes. Now it is coming to fruition in some areas, although for most people coming in from abroad the effect will be minimal. Unfortunately, those few newcomers that will be engaged in the building or real estate development and trading businesses in Chile will be impacted more.

The best feature of the current regime is its fall into the abyss in terms of popularity (with socialist President Bachelet’s approval rating recently declining to just 26% from around 70%), is that the policies are affecting and hurting so many people from the middle class that it is now unlikely that the Left will return to power for at least a decade.

Until the present administration, Chile has had no capital gains taxes for individuals (except companies, which treat capital gains like any other gain) so long as their real property was held for longer than one year. Such individuals were not considered “habitual” buyers and sellers of real property and thus not in the real estate business.

Now there will be capital gains taxes, starting on January 1, 2017, for everyone. However, there is an exclusion of 8,000 UF, which is just under 200 million pesos or about US$317,000, considering together the total gains from the sale of post-2004 purchased properties sold in any given year.

Upper middle class apartments in northeastern Santiago currently sell for 7,000 UF to 9,000 UF, and in Viña del Mar/Concón about 30% to 40% less, meaning that one’s property value will have to double or more to surpass the exclusion. Thus, in practice, most people are not going to be affected by this tax. And if they are prudent tax planners, they will sell (and perhaps immediately repurchase) property when their capital gain is closing in on 8,000 UF.

Moreover, those who inherit appreciated real property will receive a credit for the inheritance tax against the capital gains tax, so as to avoid double taxation. Nowhere is a rate for the capital gains tax given, so I must assume that it will be the same as one’s marginal income tax rate, which will certainly be much higher once a sizable capital gain is added to his income in any given year. The top marginal personal income tax rate in Chile under the tax reform will be 35% (for incomes over 1,440 UF annually or about US$56,000). For many people, the capital gains tax will be well-worth avoiding. There are several articles detailing the new tax, including the Chilean Library of Congress site. Look it over (warning:  it’s in Spanish!).

What is more onerous is the implementation of the 19% value added tax (IVA) on the sale of properties (excluding land value), effective January 1, 2016. This new tax will likely raise the price consumers pay for newly built homes by 8% to 12%, according to an article in La Nación, with higher rates in the range being applied to middle class purchasers of homes (without considering land value) between 2,000 UF and 3,000 UF (currently US$80,000 to US$120,000). The reason that the consumer will not simply pay an additional 19% is not due to a strict inelasticity of demand, which might well be the case in the marketplace, but rather because the contractor or building firm receives a credit toward the IVA it pays during construction. That credit has been limited, and will decline over the next few years, under the 2014 leftist tax reform. Still, the IVA credit does lower the overall price impact to consumers to no more than a 12% increase. See the chart in this article for details on the calculation.

Buyers and sellers of raw land or unimproved building lots will not have to pay IVA. Only buildings and things that add value to the land are taxed. What is unclear from my reading is whether sellers of used homes will also have to charge IVA to buyers. Apparently not! If not, great, but that tax differential will cause a significant distortion in the housing market, making a wider disparity between used and new home prices. From what I can tell from

From what I can tell from the Chilean Library of Congress article mentioned above, at first the only people affected by the IVA tax are “habitual” sellers of real estate: contractors and builders that build-to-sell, rather than individuals. However, the law is somewhat ambiguous, and it could be interpreted to include real property traders, and maybe real estate firms and brokers (although my wife assures me that such is not the case since they are not the owners of the property).

As always, new taxes and tax increases distort market conditions and induce inefficiencies. One thing that is clear is that anyone that buys a property, or signs a promise to buy it or a rent-to-own contract by December 31, 2015 will not have to pay the value added tax. Thus, my best advice is to conclude your real property transactions by year end, unless you hold to a contrarian position that the tax distortion (quite possibly) will cause a major decline in demand for real property, and thus reduce prices. The problem with the contrarian position is that it assumes that demand from foreign buyers coming to Chile will also fall. This possibility is undermined by the fact that Chilean property already looks like a bargain to serfs from Northern Hemisphere countries, and still would appear cheap even if the price were 12% higher. Hence, I remain unconvinced that overall demand will fall enough to reduce prices, but it could happen.

My interpretation is that foreign buyers will be unfazed by the tax hike. There will be a flurry of local people buying property before year end, especially in new developments and apartment buildings. After that, I see a significant distortion in moderately prices (2,000 UF to 3,000 UF) homes since middle income earners will find it harder to qualify when the property they want costs 12% more. Contractors in this market will likely have to sell for less and have lower profits, and thus will not continue to expand to build in middle class areas. That’s too bad since much urban blight has been removed in places like Viña del Mar, Valparaíso, Temuco, Puerto Montt, Concepción and central and western Santiago by putting up new apartments and tract homes in previously run-down areas. Now, under the tax reform, much more of Chile will remain blighted. It is also too bad for people employed in the construction sector since many of them will lose their jobs.

Moreover, the new tax law doubles the onerous tax paid to take out a mortgage, making loan acquisition more expensive for the middle class (since upper class and poorer people generally do not or cannot take out mortgages). The resulting higher unemployment and harm inflicted on the middle class does have a silver lining in that the current regime’s coalition is sure not to remain in power in either Congress or the Presidency. The tax reform policy will end up being a vote-losing action.

For most people, and especially newcomers to Chile, the effect of the new taxes can be avoided with careful planning and by not becoming a “habitual” trader of real estate. While this new limitation is bad, the truth of the matter is that few people coming to Chile will be affected unless they buy a new home starting next year. They will simply have to pay more, certainly if they buy from a firm selling units or homes, but perhaps also if they buy through a real estate agent (using a loose interpretation of the new law). Thus, it might behoove them to buy and remodel a used home offered “by owner” instead and make certain that they will avoid the value added tax. After they own a property, they should make sure to sell it prior to exceeding the 8,000 UF exclusion on the capital gains tax.

As a side note, the corporate tax rate is also be scaled up from 21% currently, increasing by 1.5% annual increments, to its final resting level of 27% in 2019. Another stupid blunder of the leftist President and Congress! This tax might have a more dramatic effect on newcomers than the real estate tax hikes.

Finally, something to bear in mind about any new tax that is easily avoided at first is that it will likely become more onerous in the future. Once the camel’s nose is in the tent, it does not take long before the whole camel is inside as well. Let’s hope that by ousting the Left next election, Chileans will also sweep away the new taxes and reforms with it!

 

Be sure to become a member of Escape America Now and gain access to the monthly webinar. Details at www.esccapeamerianow.info. Visit AllAboutChile.com for discussion and forums about the country.

Dr. Cobin’s book, Life in Chile: A Former American’s Guide for Newcomers, is the most comprehensive treatise on Chilean life ever written, designed to help newcomers get settled in Chile. He covers almost every topic imaginable for immigrants. This knowledge is applied in his valet consulting service – Chile Consulting – where he guides expatriates through the process of finding a place to live and settle in Chile, helping them glide over the speed bumps that they would otherwise face in getting their visas, setting up businesses, buying real estate, investing in Chilean stocks or gold coins, etc. The cost is $49.

Dr. Cobin’s sequel book, Expatriates to Chile: Topics for Living, adds even further depth on important topics to expatriates who either live in Chile already or who have Chile on the short list of countries where they hope to immigrate. The book deals with crucial issues pertaining to urban and rural real estate transactions, natural disasters, issues pertaining to emigration and its urgency, money and the quality of life, medical care and insurance, business opportunities, social manifestations (including welfare state and divorce policy concerns), Chile in the freedom indices, social maladies (lying, cheating, stealing and murder), as well as discussion of a few places worth visiting and some further comments about Santiago.

Dr. Cobin’s next sequel, Living in Chile: Key Details of History, Culture, Politics and Places for the Serious Immigrant, goes into detail that mainly those people living in Chile already or serious immigrants will be interested in. It is also of special importance to libertarians that want to know something about the political and ideological undercurrents, past highlights (like having a free port much like Hong Kong or free banking), and people that want practical information and where they can retire on their budget. The travel section compliments the other books in the series so that those that read all three books can be sure to have covered the key places of the country from top to bottom.

This book is chock full of savory details that only a true immigrant and former American with many years of experience would know. Some things are only learned over long periods of time and observation. Take advantage of tapping into Dr. Cobin’s deep knowledge of the country and insights of importance to serious immigrants.

For a brief introduction consider Dr. Cobin’s abridged book (56 pages): Chile: A Primer for Expats ($19), offering highlights found in the two larger books.

Buy Dr. Cobin’s Public Policy books at Amazon.com:

Christian Theology of Public Policy: Highlighting the American Experience (2006)

Bible and Government: Public Policy from a Christian Perspective (2003)

A Primer on Modern Themes in Free Market Economics and Policy (2009)

Chile 7th Freest Place on Earth (Heritage Foundation)

     While the Fraser Institute has not yet updated its rankings for economic freedom in 2014, and Chile remains in 11th place in their list, the Heritage Foundation has done so and Chile is in 7th place. Be sure to check out Chile in the 2014 Index of Economic Freedom.    Chile is a freer place than most countries (ranked 7th by Heritage Foundation for 2014) and looks better and better all the time. You might consider investing in the country and even moving to Chile. Chile has a new sustainable community starting called Freedom Orchard. Check it out. Buy your “Plan B” lot in it, and diversify out of the decaying assets in “First World” nations.
Also, be sure to tune in to Dr. Cobin’s radio program: “Red Hot Chile” at noon (ET) on Fridays on the Overseas Radio Network (ORN). You can also join the thousands of other people who download the shows each month via the archive link on our Red Hot Chile page (recorded show updated every Monday morning).
Be sure, too, to visit AllAboutChile.com for discussion and forums about the country and what’s going on with Freedom Orchard.
Dr. Cobin’s book, Life in Chile: A Former American’s Guide for Newcomers, is the most comprehensive treatise on Chilean life ever written, designed to help newcomers get settled in Chile. He covers almost every topic imaginable for immigrants. This knowledge is applied in his valet consulting service – Chile Consulting – where he guides expatriates through the process of finding a place to live and settle in Chile, helping them glide over the speed bumps that they would otherwise face in getting their visas, setting up businesses, buying real estate, investing in Chilean stocks or gold coins, etc. The cost is $49.
Dr. Cobin’s sequel book, Expatriates to Chile: Topics for Living, adds even further depth on important topics to expatriates who either live in Chile already or who have Chile on the short list of countries where they hope to immigrate. The book deals with crucial issues pertaining to urban and rural real estate transactions, natural disasters, issues pertaining to emigration and its urgency, money and the quality of life, medical care and insurance, business opportunities, social manifestations (including welfare state and divorce policy concerns), Chile in the freedom indices, social maladies (lying, cheating, stealing and murder), as well as discussion of a few places worth visiting and some further comments about Santiago.
For a brief introduction consider Dr. Cobin’s abridged book (56 pages): Chile: A Primer for Expats ($19), offering highlights found in the two larger books.
Buy Dr. Cobin’s Public Policy books at Amazon.com:
Christian Theology of Public Policy: Highlighting the American Experience (2006)
Bible and Government: Public Policy from a Christian Perspective (2003)
A Primer on Modern Themes in Free Market Economics and Policy (2009)These and other resources can be found on the Escape America Now resource page.