Government goes now for real estate valuations

Infobae.com - June 12th 2007

As from July it will be mandatory to notify the Government of the value of all properties offered in the market. This will allow controlling and detecting under-valuation in title deeds issued by notaries public. If the difference between the market estimate and the sale price of the property stated in the deed is higher than 20%, an “additional valuation” will be required.

The second half of 2007 will see a stronger control from the AFIP over the real estate business. Stages III (document control) and IV (information on valuation) of the State’s plan are being instrumented, just after the closing date for fiscal year 2006 of Income and Personal Property taxes. The aim is to detect under-valuation: those cases in which the market value is higher than the actual sale price.

A difference of up to 20% is “reasonable”, according to AFIP sources. But in those cases of a bigger difference there are many questions that need an answer, and Infobaeprofesional.com checked them up with real estate specialists.

AFIP answered on which reasons will be accepted that justify differences, how distortions are going to be proved and where information is going to be gathered.

Alberto Abad, head of AFIP, gave this information at “Fiscal Scenery 2007”, an event organized by Infobaesprofesional.com. He said that 12,400 real estate agencies and 15,700 physical persons (owners) –or societies offering five or more properties- are included in the AFIP Register and will be involved in Stage III, starting on July.

What’s next?
Abad answered: “Stage III consists of collecting information in the CITI Escribanos program (Register of real estate transactions). Notaries public will have to declare all title deeds, which include closing price, seller, buyer, description of the property, location, new owner and occasion. This data will feed one point of the fulfilment line.”

These data may seem enough but AFIP “will cross-check title deeds and sale orders”, says Abad. “A difference of around 20% can be considered reasonable, but if we find a bigger difference we will perform inspections.” This is another point of the fulfilment line: the sale order which marks the beginning of an operation, that is, the actual offer, not the valuation.

It is evident that recording an under-valuated property impacts on income and personal property taxation due to distortions in fund movements and collection of ITI (Tax on Property Transference).There has been a significant increase in the collection of the ITI in the last four months, now being three times higher than before AFIP strengthened controls.

How does the exchequer get to the valuation? Through several means: different sources that provide information to the system, investigations, notifications… The principal ones are:

1. Regime of information of expenses. There are 7000 owners’ associations and 86000 registered units administered by those who must declare under the Regime of Information of Expenses.
"We seek that all properties be included in the sworn declaration of Personal Property” and consequently this tax be paid.

2. Real estate agencies and quasi-agencies. Through stages III and IV the exchequer will also find out the sale price of a property offered via Internet. This is a market value that may need an additional control after cross-checking the price recorded in the title deed and the sale price. (This appraisal will be done by public or private offices on the basis of a table of referential values.)

3. CITI Escribanos: This regime is mandatory for notaries public, who are obliged to file all title deeds. The information on the deeds includes closing prices, description of the property, parties involved and other relevant data.

4. Sworn declarations: AFIP studies declarations of personal goods to verify that a property has been included and declarations of income to analyze funds movements or inconsistencies. Interannual comparison of records also reveals income level of the tax-payer.

5. Inspections: This is a classical mechanism used by AFIP to check tax payment.

6. Other offices: Public Revenue, Register of Immovable Property, Banks and others.

Why may there be differences?
A small difference between closing price and sale price is nothing to worry about. What, if it is higher than 20%? Specialists say that this does not necessarily means a wrong-doing: sometimes it is not a case of under-valuation.

In many cases the difference is due to the actual negotiation process. A sale price is sometimes asked knowingly that the closing price will eventually be lower and will match the price requested by the owner.

Armando Pepe, head of his own real estate agency, said that “in some occasions the seller states that he will not accept less than, for instance, USD 90,000. Then, I go out and ask for 100,000.” This is the case in which the property is offered at a sale value higher than expected.

"The situation changes if the owner wants USD 70,000 for a property worth USD 65,000. We end up selling it at the price requested by the owner.” he added.

It may also be that the property is put in the market because of financial reasons. Armando Pepe said that “people’s interests are an important factor. They may want to sell a property at once because they need the money either to face an operation or to put it into a new business.”

Jorge Toselli, president of JT real estate agency, said that “the closing value declared in title deeds is nowadays between 80 and 90 percent of the sale price.”

How will AFIP exert control on the differences? Pepe has doubts about the table of referencial values. He thinks “this is not the case of a car: in the same area the value of an apartment differs if it is on the 2nd floor or on the 35th floor.” The realtor considered that this is something to be taken into account.

Toselli also considered that creating a table of references is going to be difficult. Like Pepe, he said “properties are not cars: there are more variables”.

Guillermo Rivanera, vicepresident of Tizado Propiedades mentioned that “the calculation will be complicated if we take the case of a building built 30 years ago in which a whole floor has been refurbished: it’s not as easy as pricing cars.”

Referring to the difference between sale and closing values, Rivanera mentioned that “there always are offers and counteroffers”, meaning that differences are inherent to the real estate market.

The actions to be taken by AFIP during this year will be:

- List the properties recorded above certain value, sift the search and determine yearly period, type of tax-payer, area, tax-payer risk qualification (SIPER) and other items and check if the amount is included in the sworn declaration of personal goods.

- Track funds movements made by a tax-payer who bought a property and which was the origin of those funds, cross-checking with the justification of assets in the income tax. The amount involved should be correlated with the tax-payer’s income level or granting of a loan or other options.

- List the units of a luxury building and compare the data given by the building administrators with the market value per square meter. This is how the above mentioned referential table would be put together. Some of the properties could be those bought in 2007 and could be compared to the 2007 sworn declarations of personal assets.

- Identify undeclared operations when the values recorded do not match or correlate with the market prices.

- Collect information from third parties, check governmental offices such as Public Revenue on valuations, investigate ownership through the National Register of Immovable Property, ask banks about funds movements of current accounts and detect inconsistencies through real estate agencies.

Gustavo Director, from PKF, considered that one type of control could be to analyze bank data on current accounts credits and verify if the funds movements sustain the amount paid for a property

Before and after June 30th
Once the four stages of the plan against evasion are enforced, AFIP will compare the market prices and the closing prices in title deeds. June 30th is going to be a breaking point, Alberto Abad said.

Before June 30th: The value of a property bought by a tax-payer, even before the 2001 crisis, may now be out-dated or have no relation with the present market prices. AFIP assumes that up-dating of assets declared as Personal Goods will take place when funds from the sale of the property come in (in case this happens). It is also expected that the actual sale value is declared. For the time being, AFIP will not focus on valuations of properties acquired before enforcement of this plan.

After June 30th: Those who buy a property after the launching of the plan will be obliged to show market values without distortions, since AFIP will focus on the comparison between the sale and closing values.

Since AFIP will oblige realtors listed in the Real Estate Transactions Register to inform sale prices of properties offered in the market and will then compare them to the closing prices informed by the notaries public, inconsistencies will come out.

These operations will be applied the new control plan.

Will cash be accepted?
There is no doubt that bancarization brings more formality to transactions and it also helps identifying funds involved. AFIP is holding meetings hoping to achieve the support of partners like banks and real estate agencies, the final objective being to eliminate the use of cash when closing an operation.

At present they are studying an instrument that will guarantee both the sale and closing of the operation. It will also allow the exchequer to find out the actual closing value, sources of AFIP said.

It will not be easy to put into practice, though. Regards bancarization, Armando Pepe said that “people are still afraid of banks. There aren’t current accounts in dollars yet and this makes it difficult. Both buyers and sellers prefer cash”.

Toselli mentioned another aspect not to be overlooked when deciding the payment method, given AFIP’s intention of impulsing bancarization: “The Civil Code allows the buyer to choose the payment method”. Hence, the possibility of eliminating cash was not only upsetting when announced but will need a legal amendment.

Samanta Linares