We have more complete estimates on some of the work. Plus we have made some additions to the plan that will add to the cost.
The total increase over October is 3%, putting us at about 15% over the original target.
Here is where we stand:
Italian taxes
Don’t Dive Too Deep
At first, Kevin had thought that the pool design and execution would be done in a late phase, when we’re working on landscaping. As he and I talked about it and the contractor weighed in, it became clear that it makes a lot more sense to deal with the pool in the first stage of construction. We’ll have the excavating equipment on site, the house won’t be there to make access difficult, and the concrete can be poured along with the structure of the house.
Kevin said that two (reasonable) sizes for the pool that were standard in Italy are 4×10 meters (13×33 feet) and 5×8 meters (16×26 feet.) The first seems long and narrow, and the second a bit stubby. As we considered it, Anne discovered that the “recommended” proportion, at least in the US, is twice as long as wide. So we proposed 4.5×9 meters (15×30 feet.)
All of these work out to about 40m2, but Kevin thought a pool of our measurements might be more expensive, since it isn’t standard, but he went off to price the options.
Let me interrupt my fascinating post with two pieces of trivia: Kevin said the guideline for pool size is 5m2 for each person in it. Second, I realized later that the 5×8 pool might have been right. Its proportion is 1:1.6, very close to what’s called the golden rectangle for its aesthetic appeal and interesting mathematical properties. For example, to name one, as I recall, the ratio of height to width of the Parthenon is this golden ratio.
As far as other design parameters, we asked for a shallow and a deep end, a stone pool surround/patio where we can do a pergola or something for shade, and a poolside shower. Also, we want the pool oriented so the best view lines up with the best views.
Kevin came back with an estimate that fit the budget: about 40,000€, which seems like a lot for a pool, but what he had told us to expect. This seems to be an all-in cost. Here’s what he wrote:
That includes the structure, liner, cover, filters, pumps, drainage, plumbing, electrical, technical area, border, tiles (you will choose), labor, materials, solar shower, two lights inside, dual depth 140/180, etc. The filtration will be an advanced system that uses very low amounts of chlorine. It will come with a guarantee on works & liner and will be the subject of a contract.
Well, all in except for taxes. A pool is considered a “luxury item”, so it carries a IVA (tax) of 22%, rather than the 10% on the rest of the construction. So it’s really about 50,000€. It’s a lot to pay, but we’d like to have it, and if we’d want to rent the house in the summer, we’d need it.
When I translated the “dual depth 140/180” for Anne and Emma as a shallow end of 4.5 feet and a deep end of 6 feet, they both said, “that’s not a deep end.” So back to Kevin to see about another foot or so in that end.
Certainly, it would cost more. True, Another 30cm would add 5,000€ or so for the construction. Also, any pool deeper than 180cm needs to be surrounded by a fence at 4,000€.
But that’s not necessarily the deal killer. This is: a pool deeper than 180cm requires a lifeguard. We could use it without one, but we couldn’t rent the house.
We also wanted to make sure the pool was oriented to the views.
That resolved, we should be set on the pool.
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October Budget Update
Following on a discussion about the budget where Kevin’s numbers were higher than I expected, so he sent me a “line-item” budget with the revised numbers.For the whole project, including land but not taxes. The new figure is 12% higher than the high end of the original range.
The biggest changes came in three places, all of which make sense:
- The largest unfavorable variance is in professional fees. I had assumed that these were included in the total, but it’s possible they were supposed to be an addition. They total 7% of the budget.
- The build cost of the project is also higher, by 4%. I expected an increase in this number when I found out the house turned out to be 205m2 rather than 190m2.
- Finally, because the professional fees (taxed at 22%) and the build cost (taxed at 10%) are higher, taxes also increased.
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.
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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The Legalities of Buying A House in Italy
To move the whole process along, so we can get to construction as soon as possible, we’ve started on two paths that will converge with a preliminary written purchase agreement.
Path 1 is the design process. It got off to a quick start and we’ve developed a plan we like within about a week from the end of our trip. Path 2 is the writing of the agreement and all the background research that needs to be done as due diligence. Path 2 depends on Path 1, because one of the key purchase contingencies is a positive “opinion” from the town planning department, saying that our design is suitable and the house and a pool can be built on the property.
One important element of this approval will be the “look and feel” of the house and property. Local and regional planning codes are designed to maintain the integrity and beauty of the landscape.
This morning, the spoke via Skype with Giovanna, a lawyer who Kevin recommended. She’s based in Civitanova Marche and does real estate law. Plus, she speaks English and Italian.
My First Conversation with Giovanna
We covered the basics, like our need for the codice fiscale, the tax ID number. But, contrary to what I have been reading online, she recommended that we wait to open a bank account. She said we didn’t need it at this stage. Wire transfers would be fine. (A topic to revisit.)
Her description of the selling process mirrored my understanding.
Taxes and fees also seemed in line with my research, but she raised an important point about becoming a resident. While we could have a VAT/IVA rate on the construction costs of 4% as a resident vs. 10% as a non-resident, we would also become responsible for income tax on all our income worldwide. Hmm. Would we be saving a little on the building tax, only to pay more later in income tax? (Later, I dashed off notes to our accountant and our financial advisor, asking them if they knew an expert on Italian taxation. A long shot, but we need advice. Stay tuned.)
Before we wrapped up, I asked if she wanted me to make a deposit to secure her services. She said she would be prefer to be paid at closing, in accordance with her previous email, which estimated her total fee as €3,500 – €4,000.
After our call, but confirmed by email our desire to use her as our legal representative on the property purchase. I think we’ll need her further, for the arrangements around the construction, but first things first.
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