- 1 Real Estate Investment in Italy: Evaluating Tax Implications and Long-Term Planning
- 2 Rental Income Evaluation
- 3 Advantages of Establishing a Property Management Company in Italy
- 4 Example of Evaluating a Real Estate Investment Company in Italy
- 5 Tax calculation for Evaluating an Italian Property Management Company
- 6 Conclusions: on the Evaluation of the Convenience of Establishing an Italian Property Management Company
Real Estate Investment in Italy: Evaluating Tax Implications and Long-Term Planning
Investing in real estate in Italy can offer attractive opportunities, particularly for non-resident investors seeking long-term returns. However, understanding the complex tax implications and long-term planning strategies is essential before making a decision. This article outlines the key factors to consider when deciding whether to form a real estate investment company in Italy, including analysis of real estate investment, rental income, and transferring properties to a company.
Real Estate Investment Analysis
When considering real estate investment in Italy, it’s important to evaluate whether the investment is long-term or short-term. Individual investors who intend to hold onto properties for more than five years can benefit from a specific tax regime that exempts capital gains upon property sale. However, this regime does not apply to companies, where capital gains are taxed at the corporate level.
If you plan to make a long-term investment beyond ten years and want to simplify the process of passing on assets to the next generation, transferring properties to a company can be beneficial. By doing so, you can avoid paying property and land transfer taxes that apply to real estate succession.
Rental Income Evaluation
Before establishing a property management company, it’s essential to assess the rental income potential of the investment. Partnerships and corporations both have management costs that impact the final profitability of the investment.
Individuals must evaluate their income outside of rental income and the corresponding marginal tax rate. Identifying lease agreements eligible for the “cedolare secca” tax regime is also critical. This alternative tax regime offers tax rates of 10% or 21% on total rental income, but it has limitations and cannot be applied in certain cases, such as simple property management companies or LLC (SRL) property management companies.
Transferring Properties to a Company
Transferring personally-owned real estate properties to a company comes with tax costs. When a partner transfers real estate properties to a partnership or corporation, a transfer tax of 9% for residential buildings, 7% for commercial buildings, and 12% for land applies. Property and land transfer taxes, notarial fees, and appraisal costs also contribute to the overall expense.
Advantages of Establishing a Property Management Company in Italy
The evaluation related to the possibility of establishing a property management company is indeed complex and varies from individual to individual based on numerous factors. In the variables we’ve just discussed, managing real estate through a company presents several challenges to overcome. Because of this, you might be discouraged from considering this option. However, before you make a final decision, it’s essential to clearly analyze the primary advantages of managing real estate through a company. These advantages pertain to two key scenarios:
1/ Asset Protection
With corporate management, there is undoubtedly greater protection for the investor’s assets. This protection arises from the separation of real estate ownership, which becomes mediated through the ownership of shares in the company. For example, it won’t be possible for real estate assets to be seized; instead, it would be the shares in the LLC or a simple property management company that could be subject to seizure. While this asset protection advantage is not particularly significant, better results could be achieved through the establishment of a family trust or a trust fund.
2/ Generational Transfer
The ability to transfer a portion of the properties through the fictional shareholding in an LLC or similar structure comes with reduced tax costs compared to individual property transfers. This approach can allow you to avoid or reduce gift and inheritance taxes for direct descendants or spouses, even for estates exceeding one million euros, provided legal conditions are met. Additionally, it allows for control of the company, with a shareholding of over 50%, for a minimum period of 5 years by the recipient or heir, ensuring the continuation of business operations in corporate form.
On the other hand, if you decide to invest as an individual, there are advantages related to property rental:
Operating as an individual allows for certain tax advantages. For example, you can benefit from exemptions on capital gains from the sale of properties held for at least five years. Additionally, for rental income from residential properties, you can choose the flat tax option, known as “cedolare secca,” which typically offers more favorable tax rates compared to a corporate tax structure.
A company involves management and establishment costs, and these costs can vary based on the specific corporate structure. For example, an LLC has costs associated with hiring an accountant, and if there are shareholders, there may be board of directors expenses. There are several cost elements to consider, and these costs can erode the profits derived from business operations. If you are an entrepreneur, it’s essential to monitor outgoing costs. A simple partnership generally has lower ongoing costs than an LLC but higher costs compared to direct management.
Example of Evaluating a Real Estate Investment Company in Italy
To delve into the matter, let’s start with a concrete case of an individual who contacted us to evaluate their situation. The initial situation is as follows:
The individual personally owns two real estate properties generating an annual gross income of 32,000 euros. This investment has allowed them to acquire two more properties (through a mortgage loan) that are estimated to generate an additional 45,000 euros in gross income. In this scenario, the person wants to understand whether it’s advantageous to continue owning the properties personally as a private individual or to establish a property management company.
This is essentially a quite common situation, and for this reason, I found it useful to discuss it in this article.
Tax calculation for Evaluating an Italian Property Management Company
To assess the advantages (or disadvantages) of establishing a property management company, it’s necessary to perform calculations that lead to a comparative evaluation of different possible scenarios. In particular, the scenarios we will simulate are:
- Receiving rental income as an individual, the sole owner of all real estate properties.
- Using and establishing a property management company in the form of a simple partnership.
- Using and establishing a property management company in the form of an LLC (SRL).
Let’s go through the calculations related to these scenarios. For simplicity, let’s assume that in scenario A), the rental income is received from individuals who do not operate as businesses, making the “cedolare secca” (flat tax) option applicable.
In scenario A), you’ll need to calculate the total rental income and apply the “cedolare secca” tax rates. This will determine the tax liability and the net income you’d receive as an individual owner.
In scenarios B) and C), you’ll need to consider additional factors, such as the costs associated with running a property management company (like hiring an accountant or notary fees), transfer taxes and registration taxes for property transfer into the company, and other operational expenses.
The calculation will depend on various variables, including the specific tax rates for the “cedolare secca” or the corporate tax rates, the costs of establishing and running the company, and the specific tax advantages or exemptions that apply in your jurisdiction. It’s important to consult with a financial advisor or tax professional to perform these calculations accurately, as the tax laws and financial considerations can vary widely depending on your location and individual circumstances.
Taxation in scenario A) – renting Italian properties as individual
|Gross income by renting
|Flat Tax (21%)
Taxation in Scenario B) Establishment of a Property Management Company in the Form of a Simple Partnership
The first cost to consider is related to establishing the simple property management partnership, which must have at least two partners. These partners will contribute their personally-owned properties, which will be subject to a 9% registration tax (based on the fair market value of the properties, determined through an appraisal). They will also subsequently acquire other properties directly.
Assuming that, in the example, the individual contributes two personally-owned properties with an estimated total value of 300,000 euros, the initial cost to be incurred is 27,000 euros (9% of 300,000 euros). For simplicity, we are leaving out the charges related to mortgage and cadastral taxes.
As for the taxation of rental income, the calculations to be made are as follows:
|GROSS INCOME BY RENTING
|SHAREHOLDER A 50%
|SHAREHOLDER B 50%
Taxation in Scenario C) Establishment of a Property Management Company in the Form of a Capital Company (Limited)
Just like when contributing properties to a simple partnership, when you contribute properties to an SRL, you must also calculate the cost of the 9% registration tax based on the fair market value of the properties. The same considerations as in Scenario 2 apply.
Here are the steps to consider for the taxation of rental income in this scenario:
Conclusions: on the Evaluation of the Convenience of Establishing an Italian Property Management Company
The solution presented in scenario A, which involves holding the properties as an individual, may initially appear to be the most cost-effective. However, this simulation can be overly simplistic. If the property owner needs to opt for personal income tax (IRPEF) due to taking advantage of the “bonus casa” related to the renovation or energy retrofitting of buildings, this scenario may become more advantageous. Additionally, with this scenario, the properties remain directly under the owner’s control, which comes with higher risks regarding the protection of personal assets from third-party claims.
Scenario B, involving the establishment of a simple property management partnership, might seem more costly in terms of taxation compared to scenario 1. However, it is essential to consider that if the partners make investments in properties through the “bonus casa,” this can offset the situation and make this choice more cost-effective. The cost associated with the transfer of properties in terms of registration tax should also be taken into account. This means that a simple property management partnership is more cost-effective when there are no properties to be transferred, and the company directly acquires properties from third parties. Planning the choice of this type of company before starting real estate investments is crucial. Additionally, properties held through a simple partnership have the advantage of being separated from the partner’s personal situation. It should also be noted that a simple property management partnership can hold non-income-producing properties since it is, by definition, a non-commercial entity. This aspect could be problematic in the long term for an LLC due to the regulations regarding “società di comodo.”
Scenario C, involving the establishment of a property management company in the form of an LLC (SRL), is suitable for situations where the contributed properties can generate significant rental income, especially if it involves investment in instrumental properties. In this case, the proportional taxation of the LLC can reduce the tax burden compared to the simple property management partnership. It’s important to note that high rental income is also necessary to address the issues related to regulations regarding “società di comodo.” The considerations made for the simple property management partnership regarding the cost of transferring properties owned by partners also apply here. Furthermore, it’s worth mentioning that an SRL property management company can be a single-member company (unipersonale), unlike the simple partnership, which requires at least two partners. Ultimately, the SRL property management company is advantageous when its primary purpose is not to personally receive profits but rather to reinvest them in further investment projects, both in real estate and other areas.
Before leaving, please consider forming a real estate investment company in Italy requires careful consideration of various factors, including long-term planning, rental income, and transferring properties to a company. Understanding the tax implications and evaluating the potential benefits and drawbacks of each approach is essential. Seeking guidance from experienced professionals like ILF Italian real estate attorneys can ensure informed decision-making and optimal tax efficiency for your real estate investment strategy in Italy.