Overview:

Panama is an anomaly in Latin America when it comes to property rights and mortgage financing.  The fact that Panamanian property owners can readily transfer property titles, and the fact that those titles are sufficiently secure to be mortgaged by a bank, puts Panama above the rest of Latin America in its ability to capitalize its wealth. 

It is not the property title itself that enables capitalization, it is the underlying documentation and legitimacy of property rights that enables a property owner to receive financing from a bank.  The critical advantage to owning property in Panama is that Panama's property titles are standardized, accurately recorded, publicly available, and easily recognizable by the law.  So secure are property titles in Panama that a bank will accept the title as collateral for a loan.  This fact alone is taken for granted in Western nations, but it is a rarity in developing countries around the world.

In Lima, Peru for example, the procedure to form a legally obtainable home requires five stages of bureaucratic red tape, the first stage alone comprising an amazing 207 steps!  In Venezuela, a buyer with good credit must make a 75% down payment to obtain a mortgage. 

By contrast, Panamanians with good credit can obtain financing for 80% of the purchase price of their home, and titles are accurately documented in a Public Registry.  In other words, Panamanian real estate has additional value due to the strength of its property laws and the willingness of banks to recognize property as collateral, which enables owners to release valuable capital that would otherwise remain dormant. 

Leverage and Debt:

Leverage represents the degree to which debt may be used to make a purchase.  Buyers of real estate in the United States, Canada, Europe, and other Western nations use a high degree of leverage, often borrowing 95% or even 100% of the purchase price.  The degree of leverage used is a direct function of the interest rates offered by lenders.  Therefore, when interest rates dip relatively low, it enables buyers to maximize the amount of leverage used to acquire a property and maximize the total debt load to the buyer. In an efficient market, low interest rates will drive real estate prices higher, all other factors remaining equal.

While the Panama real estate market has been positively influenced by low worldwide interest rates, the degree of leverage used by most property owners in Panama is far lower than that of the Western world, though much higher than most developing countries.  Refinancing is not as common in Panama as in Western countries and buyers have been less likely to maximize the amount of leverage used to purchase real estate.  The link between interest rates and real estate prices is not as firmly established in Panama, which represents an undercapitalized value in the Panama real estate market.

Financial Capital:

Financial capital is the capital we are most familiar with, and Panama has plenty of it.  As one of the world's premier offshore banking centers, few other nations in Latin America possess the sheer volume of monetary deposits possessed by Panama's many resident banks.  Bank deposits in Panama can be borrowed to fund businesses, to purchase real estate, to buy stock, or to purchase inventories.  In addition, Panama's laws protect the free movement of capital, which means international investors are free to deposit or withdraw their money from Panama without restriction.

The availability of financial capital further separates Panama from its Latin American neighbors.  The propensity for development in a country with substantial bank deposits is much higher than a nation with limited banking facilities.  With such a competitive banking industry, investors and property owners in Panama are more likely to receive loans than their counterparts in most other Latin American nations. Related to real estate, the ability of Panamanian property owners to extract capital from their property ownership that helps fuel property price appreciation.

Taxes in Panama:
Personal income tax in Panama is based on a sliding scale, ranging from a minimum of 7% after the first $9,000, to a maximum rate of 27%. Regardless of your residency status, the tax is only applied to Panamanian-sourced income. Taxable income includes wages and salaries, other business profits, pensions/bonuses, income from copyrights, royalties, trademarks, stock sales, bonds, and securities. Deductions may be made on all medical expenses incurred in Panama, all donations made to charities, interest paid on home mortgages, education expenses, and loans for home improvements.

The country is renowned for its light tax burden. If you qualify for Panama's pensionado program (a "retiree" may be as young as 18 years of age), you are entitled to a one-time exemption of duties on the importation of household goods (up to $10,000), and an exemption, every two years, of duties on the importation or local purchase of a car.

If you buy or build a new house, you won't pay property taxes for up to 20 years, nor will you pay taxes on foreign-earned income. In 1994, Panama passed Law No. 8- the most modern and comprehensive law for the promotion of tourism investment in Latin America and the Caribbean. Since the law was enacted, dozens of the world's largest hotel chains have swept in to take advantage, including the Marriott, the Radisson, Holiday Inn, the Sheraton, and the Intercontinental.

But Panama's attractive tourism investment laws are not just for big business. With a minimum investment of $50,000 anywhere in Panama's interior you can benefit from:

• A 20-year exemption of any import taxes due on materials, furniture, equipment, and vehicles.
• A 20-year exemption on real estate taxes for all assets of the enterprise.
• Exemption from any tax levied for the use of airports and piers.
• Accelerated depreciation for real estate assets of 10% per year

The investment amount does not include the price of the land. And for projects in the metropolitan area, the minimum investment requirement is $300,000.

Income tax:
Personal income tax in Panama is based on a sliding scale, ranging from a minimum of 7% after the first $9,000, to a maximum rate of 27%. For temporary residents, the tax is only applied to Panamanian-sourced income.

Transfer tax:
Real estate transfer taxes in Panama are paid by the seller, and are 2% of either the updated registered value of the property or the sale price-whichever is higher. The updated value is the registered value, plus 5% per annum of ownership. If the property is bought by a corporation, it is customary for the shares of the company to be sold (instead of the property), thus eliminating the need to pay transfer tax.

Rental income tax:
If you receive rental return on your property, you will be liable for income tax up to a maximum of 27% (on returns greater than $250,000). However, if you invest in one of the special "tourism zones," you may be exempt from income tax for 15 years.

Property tax:
Properties with a registered value of $30,000 or lower do not pay property tax. For properties of a higher value they pay as follows: 1.75% from $30,000 to $50,000; 1.95% from $50,000 to $75,000; and 2.1% over any property value above $75,000. If you buy or build a residential property in Panama, you may be exempt from property tax for up to 20 years if the construction permit is issued by Sept. 1, 2006 and the occupancy permit issued and improvements registered by Sept. 1, 2007. On houses or apartments where the construction permit is issued after Sept. 1, 2006 the following exemptions will apply:

• Value up to $100,000: 15-year exemption.
• Value from $100,000 to $250,000: 10-year exemption.
• Value over $250,000: five-year exemption.

The exemption is transferable during the exemption period to any new buyer. The land itself is not exempted and would continue to incur property tax, if its value is above $30,000.

Capital gains tax:
Capital gains should be included in the annual tax return, and are taxed at whatever level the individual is being assessed for income tax. Unless you have owned the property for a minimum of two years and are not in the business of selling and buying property, you may choose to pay a flat 10% of the gross profit.

OTHER PROPERTY COSTS

Panama has the most appealing program of benefits for foreign residents and retirees you'll find anywhere in the world today. Good-quality health care and modern hospitals are available throughout the country, and many Panamanian doctors are U.S.-trained.

Here you will enjoy the benefits of a developing economy where you can still take a taxi across town for a buck or two, get your hair cut for a couple of dollars or enjoy dinner with a bottle of wine at one of the fine restaurants in Panama City for $30. There are also lots activities to enjoy, from jazz clubs to art openings to English-language theater performances.

• Bottle of decent wine: $6

• Coffee: $1.25

• Meal for two with wine: $30

• Movie, full price: $3.50

• Taxi from airport to downtown: $25

• Doctor visit: $40

• Utilities: $55

• Maid: $120

• Rent (Panama City): $600