With the election of former World Bank economist Pedro Pablo Kuczynski as president, the strongest growing economy in Latin America, and the recent reduction in capital gains taxes for non-domiciled owners from 30% to 5%, whether you live in the country or not, it is a great time to purchase property in Peru. Although the timing is right and the only restrictions to foreign ownership are near international borders, because the purchase process differs from countries such as the US by so much more than the language in which sales contract is written, it’s important to know the facts.
First of all, foreigners new to the country interested in purchasing a property in Peru will mostly likely be required to do so entirely in cash. Even with proof of sufficient and steady income, a perfect credit rating in your home country, and the ability to make the required down payment of often 40% or more, it takes several years to establish the credit required to quality for a bank loan in Peru. That being said, sellers will often accept lower all-cash offers and with average home loan interest rates near the double digits, even Peruvians who easily qualify for a loan, if able, often choose to purchase entirely in cash. According to law these cash transactions must be conducted via bank-to-bank wire transfer or a Cheque de Gerencia, which is the Peruvian equivalent to a certified bank check.
Unlike in the US where home inspections are always performed prior to completion of a sale and would be buyers unhappy with the results of an inspection, can walk away with their earnest money returned, in Peru inspections are rare and the 10% “arras” money put up to secure the property, is at risk if buyer doesn’t produce the balance of the sales price within the agreed upon time frame. On the other hand, in the event that the seller chooses not to complete the sale after signing the agreement, he or she is liable to the buyer for twice the amount of the established arras. Of course, any exact terms regarding inspections, earnest monies, financing etc., that are mutually agreeable to both parties can supersede these typical practices and conditions, but regardless the famous caveat “buyer beware” is very applicable to a real estate transaction in Peru.
At Live in Lima Relocation and Real Estate Services we always encourage our clients to hire an experienced real estate attorney whether they be foreigners buying their first place in Peru or Peruvians who have bought and sold many properties before. However, in practice most residential property transactions in Peru are completed without a lawyer representing either party and the “arras;” or earnest money contract, and the “minuta;” the sales contract itself, are typically drafted by the real estate agents involved in the sale and made legal when executed at a “notaria.”
A Peruvian notaria is not at all like a notary public in the US who perform limited signature verifications. When involved in a real estate transaction Peruvian notarias, in addition to the verification of documents and signatures, work in conjunction with Sunarp, the governmental agency responsible for the official registration of the property. Together they essentially perform the duties of a title company in the US ensuring that the sellers are the rightful and complete owners of the property and are thereby eligible to sell it.
After the title is determined clear but before the actual closing when the “escritura;” the document Sunarp uses to register the new property title is created by the notary, the seller must have paid the property taxes through the remainder of that calendar year and if exempt from capital gains taxes submit an exemption form. The buyer, unless purchasing directly from the construction company in which case he or she is determined to be the first official owner of the property, must first pay a tax amount equal to 3% of the total sales price known as “acabala.” Conventionally the buyer is also responsible to pay all notary fees related to the sale, which although vary from notary to notary and by the value of the property changing ownership, typically range between S/.1500 and S/.2500.
We hope that you find the above basic information helpful, but if you have additional questions about the transaction process, property ownership, taxation, or would just like some general advice from seasoned professionals who have practiced real estate in both the US and Peru don’t hesitate to contact us.
Written by Tim Brace, founder and general manager of Live in Lima, an expat owned, full service, relocation and real estate services company, based in Lima Peru. www.LiveinLima.com.