The Purchase of Real Estate Abroad and Income Tax – For a layman.

The Purchase of Real Estate Abroad and Income Tax – For a layman.

The least you need to know.

Summary: The initial steps in purchasing your property outside of Brazil. This article is intended to provide only basic information about what Brazilians need to know to buy real estate abroad and is not intended to exhaustively exhaust this subject.

Keywords: Buy a house. Property abroad. Non-resident. Income tax.

Brazilians still invest very little abroad. Opening a bank account, or investing with a brokerage outside the Country, or buying property abroad still seems to be something far from being achieved for most Brazilians. Especially now that the Real is depreciated against the US dollar. Despite that, during the subprime crisis (subprime mortgage crisis), which occurred in 2008, taking advantage of the low prices of real estate in the US and the dollar's low value against the Real, Brazilians went out for shopping.

While Americans suffered severely from the crisis, losing jobs and defaulting paying their mortgages, Brazilians took advantage of that moment to buy houses at very low prices. "While some people cry, others sell tissues." The 2008 crisis indeed affected the entire world, but it was the Americans who suffered the most. Those who did not suffer so much, such as Brazilians and Canadians, took advantage of the moment to invest in the US and dollarize part of their investments.

We cannot present here everything you need to know to buy a property abroad for obvious reasons. Each country has its own laws and rules and it would not be possible to bring here the peculiarities of each one. In countries like the United States and Canada, for example, the rules vary from state to state and even from bank to bank.

In this way, we are going to stick only to what Brazilians need to know about their legal and fiscal obligations with Brazil.

To make it easy to understand, we need to establish some basic premises. First, we must remember that civil residence is different from tax residence. Second, it is necessary to understand that there is a difference between the Brazilian who left the Country and is compliant with the Federal Revenue requirements, which is, they have made the Definitive Declaration of Departure from the Country – DDDC, and the Brazilian who has left the Country but is not regular with the Tax authorities, which means, they did not make the DDDC. Finally, let's divide them into four different types.

1. That one who is resident in Brazil and wants to buy a property in Orlando, Florida.

2. That one who is a resident outside of Brazil has already made the statement of permanent departure and wants to buy a property in Florida.

3. The one who is a resident outside of Brazil but has not yet made the statement of permanent departure and wants to buy a property in Florida.

4. And the one who is a resident outside of Brazil but wants to buy a property in Brazil.

To illustrate, let's use as an example a Brazilian who was born in Fortaleza, Ceará and wants to buy a property in Orlando, Florida. After all, it is known that Florida is the most Brazilian of all American states.

Going straight to the point of interest, we ask: What do Brazilians need to know to buy a property abroad?

1. That one who is resident in Brazil and wants to buy a property in Orlando, Florida.

That is perhaps the most common of all cases, the Brazilian who wants to buy a property in Florida with the goal to convert their investments in US dollars and have an extra income in a strong worldwide currency. In this case, what we need to know is that:

You are required to declare this property in your income tax if it has a total value greater than R$ 300 thousand reais, pursuant to item V, art. 2 of the Normative Instruction 2010 of 2021, or if, for any other reason, you are already required to make the Annual Adjustment Statement according to items I, II, III or IV of the same art. 2nd.

Art. 2 The individual resident in Brazil who, in the calendar year 2020, is required to submit the Annual Adjustment Statement for the year 2021:

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I - received taxable income, subject to adjustment in the declaration, the sum of which was greater than R$ 28,559.70 (twenty-eight thousand, five hundred and fifty-nine reais and seventy cents);

II - received exempt income, non-taxable or taxed exclusively at source, the sum of which was greater than R$ 40,000.00 (forty thousand reais);

III - obtained, in any month, capital gain on the sale of assets or rights subject to the levy of the Tax, or carried out operations on stock, commodity, futures and similar exchanges;

IV - regarding rural activity:

a) obtained gross revenue in an amount greater than R$ 142,798.50 (one hundred and forty-two thousand, seven hundred and ninety-eight reais and fifty cents); or

b) intends to offset, in the calendar year 2020 or later, losses from previous calendar years or from the calendar year 2020;

V - had, on December 31, possession or ownership of assets or rights, including bare land, with a total value exceeding R$ 300,000.00 (three hundred thousand reais);

Thus, it is understood that even if the property has a total value of less than R$ 300,000, you will still be required to inform the existence of this property in your income tax return if you are already required to file taxes for any of the other reasons listed in the law, such as if your annual income is above the minimum waived amount.

We created some examples to help to clarify this point of view.

Example 1: Joao da Silva, residing in Brazil, works and has an annual income of R$ 80 thousand reais per year and then decides to buy an apartment studio in Florida that has a value of only R$ 100 thousand reais. In this case, will Joao have to file taxes? Yes. Because even though the value of the property itself is less than R$ 300,000 and does not require you to file a tax form, your annual income of R$ 80,000 does. Thus, Joao will have to make the statement of annual adjustment because of his salary income, must pay the taxes due over the income earned, and in the same statement, inform the Federal Revenue Service about the existence of this property in Orlando, Florida.

Example 2: Carlos de Sousa, residing in Brazil, retired, has not worked and has had no income for more than five years. However, throughout his life, Carlos accumulated R$ 100 thousand reais in savings and also bought a property in Florida, where he goes on vacation to spend some spare time, and whose total value is R$ 250 thousand reais. In this case, will Carlos have to inform ownership of property? Yes, he does. Because even though he does not need to file taxes due to his lack of income, Carlos will need to present the declaration because he has assets and accumulated values in savings that all together sum R$ 350 thousand reais, therefore an amount higher than the R$ 300 thousand reais waive bracket.

Note that in both cases, Joao and Carlos are required to inform the Revenue agency about the existence of the property, the only difference between them is the reason that demands them to make the statement and file the forms.

So, when an individual will not need to declare/inform the purchase of a property abroad? Only when the person is released from making the declaration and the property acquired has a value equal to or less than R$ 300 thousand reais.

Example: Maria das Graças, resident in Brazil, does not work, has no income, but has accumulated a savings of R$100,000 reais from her allowance. Maria then decides to buy that apartment studio in Orlando, where she intends to use as a vacation home. If so, does she need to inform ownership of property? No, she does not. Maria is not required to report tax because she has no income, assets, or savings values above R$300 thousand reais. In this case, there is no triggering event that compels her to make the annual income tax statement. The R$ 100 thousand reais property is the total value of her equity, therefore it is within the exemption limit.

Finally, it is essential to remember that making the Declaration (Statement) of Annual Adjustment (DIRPF), or making the income tax return, cannot be confused with paying income tax. In other words, you may be required to file a tax return but not be required to pay taxes. These are two different procedures, one deals with an accessory obligation (to declare, to inform) and the other one deals with the primary obligation (to pay/to collect).

We went a little deeper into this point as this is the most recurrent topic. These are the cases of Brazilians living in Brazil and buying properties abroad that generate more problems and questions. I hope this part was clear and didactic enough for the readers. If you have any questions, leave your question in the comments below and I will do my best to help.

In order to explain topics 2 and 3, we first need to understand what a declaration of definitive departure is and the difference between those who did it and those who did not do it. Therefore, we recommend reading the article: "Declaration of definitive departure from the country - For layman."

2. That one who is a resident outside of Brazil has already made a statement of permanent departure and wants to buy a property in Florida.

In this case, this Brazilian is in a regular situation with the Federal Revenue, as in addition to living abroad for more than 12 consecutive months, he has also informed "The Lion" (as the Brazilian Revenue Agency is also called) of his definitive departure and his status of a non-tax resident. Here the Brazilian will not have much to worry about. Once the DDDC is made, the individual is not required to make any other annual declaration, as the Declaration of Definitive Departure from the Country – DDDC was his last tax report in Brazil.

Thus, we understand that there is no need to declare/inform the Federal Revenue Service of Brazil of the ownership of this property in Florida. Nor will you need to pay any tax related to the property for the Brazilian revenue agency.

But what about the status of the Brazilians who have lived abroad for more than 12 consecutive months, who have made the declaration of definitive exit of Brazil but still have real estate and income-earning in Brazil. Even so, we understand that those individuals will not need to inform the income or ownership of their properties as they are not required to make the annual tax report. However, it is important to mention that these Brazilians will have to pay taxes related to assets and income earnings in Brazil. This payment will be made differently, and in most cases, the amounts are withheld directly at the source of income and taxed at a single rate, not being able to pay the taxes in installments.

3. The one who is a resident outside of Brazil but has not yet made the statement of permanent departure and wants to buy a property in Florida.

In this case, the problem is that, even though the Brazilian is actually living abroad, he has not yet stated his definitive departure from the Country to the Federal Revenue Service and, therefore, he is still considered a tax resident in Brazil. In this case is when the problems start to arise, as the Federal Revenue Service requires a universal declaration of assets and earnings of individuals residing in the Country, which includes assets and income in Brazil and abroad. This means that, in addition to being demanded to state your income and assets, you will also be taxed as if you were a resident in Brazil.

It is noteworthy that, being in an irregular situation, even the fact that you have already made the income tax and paid taxes to the Revenue Service of the country where you reside does not exempt you from your responsibilities with the Federal Revenue Service of Brazil. At best, you will be able to deduct part of the tax paid if there is a non-double taxation agreement between them.

In this way, we see only one solution for this problem, to regularize your situation with the tax authorities. How? By making the statement of annual adjustment and/or the declaration of definitive departure from the Country retroactively. In this declaration, you will have to inform all your assets and income earned in Brazil and abroad, regardless of the amount of annual income and property value.

The consequences of being in an irregular situation with the Revenue Agency due to not making the declaration and/or omitting assets and income earning are several, ranging from committing administrative infractions, passing through civil offenses and even to the typification of crimes. The penalties are varied and range from only paying a fine until being sent to imprisonment.

Here we need to pause briefly to remember that it is always imperative to consult a specialized professional to analyze your case and give you specific guidance to solve your problem. Each case is different, and your situation is probably not the same as your friend's. Maybe you even need more than just one professional for your case, such as a Lawyer, an Accountant and even a realtor.

4. And the one who is a resident outside Brazil and wants to buy a property in Brazil.

For the analysis of this point, let's assume that the Brazilian left the Country and duly made the statement of definitive departure from the Country. In other words, they are not required to report income tax to the Federal Revenue Service of Brazil.

In this case, the individual can go to Brazil, buy the property, and return to Orlando without worrying about informing the Federal Revenue Service about this purchase. However, this does not mean that you are free to pay taxes. The purchase must take place in accordance with the law and the property must be registered at the respective real estate registry office and pay the fees due. In addition, you will be subject to the collection of Urban Property Tax - UPT, Transfer of Assets Tax - TAT (at the time of transfer of the property domain), and even other potential taxes that are related to the object (propter rem), i.e., which focus on the asset and are intrinsic to it. As an example, we could mention a possible tax on public lighting or a tax on public garbage and sewage service collection.

We emphasize that your disengagement from providing information to the Federal Revenue Service of Brazil does not exempt you from complying with any obligations you may have with the Revenue agency of the country you are living. Furthermore, the fact of having dual citizenship, Brazilian and American, in general, does not change what was explained above.

In conclusion, it is essential to remember that, for questions relating to the purchase and sale of real estate, I suggest seeking the help of a realtor, for questions regarding reporting and the payment of taxes, I advise the professional services of an Accountant and for any other problems that may arise, I recommend the legal support of a specialized lawyer.

Sources:

1. Website of the Federal Revenue of Brazil.
2. SRF Normative Instruction No. 208, of September 27, 2002
3. RFB Normative Instruction No. 2010 of February 24, 2021.
4. Law No. 8137, of December 27, 1990.
5. Law No. 9,718, of November 27, 1998.
6. Law No. 7713, of December 22, 1988.
7. Decree No. 9,580 of 2018
8. DISIT/SRRF 08 Query Solution No. 262, of July 30, 2009
9. COSIT Consultation Solution No. 63, of March 29, 2021.
10. IRPF 2021 Questions and Answers.