Project Update: Timing, Residency, and Taxes

We’ve spent most of the last 6-7 weeks waiting for the formal permission to build. We had to wait out August because most of Italy, including the planning “department” of Colmurano, which is really just one guy, is off work. Then the earthquake naturally delayed routine building projects, as many structures needed to be inspected for damage.

Application for permission to build in Italy
Application for Permesso di Costruire
Click image to enlarge

Our formal application was submitted on September 9. It is a surprisingly short document, only 8 pages with diagrams. (The brevity is probably because we are applying for a variance to an already approved project rather than a whole new project.)

Latest word is that approval is imminent, supposedly next week.

Residency and Taxes

Off and on, I’ve been trying to understand the issues and make a decision about whether we should try to become residents of Italy. The only reasons we’d do it are to save money on the purchase and construction and to eventually be eligible for the extremely low-cost/high quality health care. The reason not to do it may be the amount of Italian income tax we’d need to pay.

To start, I do finally understand our options for spending time in Italy, but the tax situation is still murky.

We can stay up to 90 days in a 180-day period without any paperwork or a visa. In this case, we get no tax break or face any Italian income tax.

To stay more than the 90 days, we need to become “elective residents.” This requires that we get a visa in the US and then register with the comune when we arrive. I don’t think this would qualify us for a tax break, but if we stay more than 183 days in a year appear to be subject to income tax.

We could become “formal residents.” This is a much more complicated process and seems to require some years of elective residency. This certainly makes us eligible for the purchase and construction savings, but also certainly requires us to pay Italian tax.

How much tax? Unclear. I’ve gotten referrals to a couple of accountants, but I can’t seem to get them to understand my issue. They just tell me about the purchase and construction taxes, which I understand.

Some Pure Speculation

I did find a KPMG site and a Deloitte site which gave me some insight, so at least I know the range of issues involved.

Importantly, it defines a resident who is subject to taxation as staying more than 183 days. Will this limit how long we can stay in Italy each year? A new issue arises.

Some types of income, certainly earned income, is taxed at a top rate of 43% plus local taxes of 1%-4% on income over 75,000€. (The lowest rate is 23% but is near 40% for most income levels.)

On investment income, dividends appear to be taxed only on 60% of the amount, but at the above rates, so about 25% in total. For capital gains, the tax rate seems to be 26%. There is also a “wealth tax” of 0.2% on investment holdings and a tax on real estate owned that is outside of Italy of somewhere between 0.4% and 0.8%.

All of this doesn’t consider deductions or exemptions, which I can’t begin to understand.

We might be subject to capital gains tax on US real estate we sell. There may also be an estate tax, were that to become relevant.

The income tax portions of this can be claimed as a foreign tax credit, but subject to limits, one of which is the amount of US taxes owed.

Clearly, we need to find someone to sort this out soon, as we need to make a residency decision within a few weeks.

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