Question: I am in the process of buying an apartment in Italy and my real estate agent told me I will pay 10% sale taxes (VAT) but I can pay less tax if I use cash and declare a lower price on paper. She said this is common practice in Italy. Is it safe?
Answer: The actual purchase price for Italian residential property transactions can be three to four times higher than the property value on record, i.e., the cadastral value, which in Italian is called the “valore catastale”. The Italian cadastral value is similar to what you would call “rateable value” in the UK or “assessment value” in the U.S.
In the past, a discrepancy between the actual purchase price and that declared in the deed would have reflected an illegal – although very common – action by the parties involved. This practice of under declaring the purchase price was done in order to pay lower transfer taxes. In particular, the parties used to declare a lower purchase price in the title deed, closer to the cadastral value, and this sum would typically be paid by traceable means such as a check. The difference would then be paid by cash or other unconventional means to avoid the money transfer being tracked and thus taxable. As a result, there was an incredibly large amount of money exchanging hands each year without being controlled by the government. This was particularly true for luxury property transfers, where buyers would easily evade paying EUR 100,000 in taxes per transaction.
To address this situation, the government changed the laws in 2005 in an attempt to discourage the widespread practice of under declaring the purchase price. The goal was to reduce the volume of untraceable money transfers as well as collect accurate information on real estate market prices. According to the 2005 law governing residential property transactions which is still in force today, the parties are now allowed to pay taxes based on the property cadastral value, on the condition that in the purchase agreement, they declare the purchase price actually paid. This is called the “prezzo-valore” option. In order to benefit from the “prezzo-valore” option, the parties are required to expressly inform the notary prior to the formalization of the final deed. If the transaction is formalized without opting for the “prezzo-valore”, it is not possible to activate it at a later date.
It is important to be aware that the “prezzo-valore” option is not applicable to all property transactions. For instance, it is applicable when the buyer is a private person and the transaction is subject to registration tax as opposed to value added tax (VAT). Therefore, it is typically not possible to make use of this option when buying new homes from developers, given that these transactions are typically subject to VAT.
All notaries are expected to advise the parties about this option whenever it is applicable.
When budgeting a property investment in Italy, especially if it is a luxury property investment, it is advisable to bear in mind the above and find out if it applies to the particular transaction. Even more advisable would be to ask a professional legal consultant who could advise on the specific circumstances surrounding the transaction with respect to the “prezzo-valore” option as well as other cost reduction advantages that might apply. Such opportunities could be based on factors such as the location of the desired property or even the buyer’s nationality. As the Italian legal environment is always evolving, to maximize opportunities and always remain within the law, it is important to be advised by a qualified professional.
Italian lawyers of Studio Legale Metta work on hundreds of property transactions per year and use their vast experience and strong tax knowledge to advise their clients, saving them as much as possible on their current transaction while legally protecting their investment for the future.
Current Italian property transfer tax rate is 9%, or 2% in the event of First Home Tax Reduction.
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