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Property Investment for Expats in Brazil

Submitted: May 2014

Brazil welcomes foreign investment generally. Consequently, foreign ownership of real estate is permitted in Brazil, subject to some residual restrictions (e.g. large rural land or properties within 150km of the border).

Property rights are not badly protected, but courts are saturated and there is still some corruption at various levels. Regarding the cost of buying and selling property, you should expect 12%, which is broadly in line with international standards.

Housing statistics may be hard to come by in Brazil, especially outside of Rio and Sao Paulo. Consequently, making informed decisions is not necessarily that easy.

Brazilian housing market generally

Brazil is like many countries in the world in that respect: its property prices have really risen hard over the past years. Even though Brazilian interest rates are high, they are much lower than they used to be. Consequently, a large part of the previous rises can be attributed to monetary conditions.

Brazil cannot be viewed as having moderate housing costs overall. Yet, prices per square metre in central Rio stand below US$5,000. As Rio is the most expensive city in Brazil, you would expect prices to be even lower elsewhere in Brazil. The rental market may appear a bit more expensive though, as the rent for a 1-bedroom flat in central Rio can be expected to cost US$900 pcm.

In practice, the Brazilian market is one with strong interest rate variations. Should the rates go down in the future, the market will demand a lower yield. Accordingly, it will be happy to pay a higher price for property investment. Conversely, prices are subject to downside pressure if interest rates are going up.

An assessment of the Brazilian housing market must include many additional macroeconomic factors, including:

  • Mortgage availability
  • Housing supply developments
  • Demographic trends
  • Tax policy, and
  • Psychological factors

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment. Mortgaging may also be helpful if you wish to have some leverage in a buy-to-let investment. In such cases however, you are likely to be in good terms with your Brazilian bank.

Remember that:

  • Your net borrowing costs include not only interest but also many additional fees and taxes
  • Interest rates may go up in the future, as they are at record low levels.

For more information regarding mortgaging in Brazil, see ACCOMMODATION – Mortgages for Expats in Brazil.

Property taxes

Property taxes are levied by municipalities. In Brazil, there is one urban property tax (Imposto sobre a Propriedade Predial e Territorial Urbana – IPTU) and one rural property tax (Imposto sobre a Propriedade Territorial Rural – ITR).

For both property taxes, the tax base is your property’s rateable value. In practice, this is slightly lower than the property’s fair market value. For urban properties, the tax rate ranges from 0.3% to 1%. Regarding rural properties, there is much more progressivity, as the rates may vary from near-zero to as high as 20%.

Higher land taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much land tax and municipal rates you can expect to pay.

Letting your property

If you are renting out your property in Brazil, you must be aware of the applicable landlord and tenant law. Things are generally regulated by Law No 8245/91 (Lei do inquilinato).

Here are a few points you need to know:

  • The minimum rental period you should expect is 2.5 years
  • Rents can be freely agreed and revised, but the indexation must not follow a foreign exchange rate
  • Rents cannot be paid before the period they cover
  • Deposits typically cover an equivalent of three months of rent
  • A guarantee is often asked from tenants – the guarantor must have at least two properties
  • The eviction process can take a few months, but it’s not that long either – though things may vary from one state to another

As far as gross rental yields are concerned, they are generally reported to be between 6 and 8%. Of course, inflation is Brazil is high, so rents are expected to pick up in the future as well.

Financial returns

In addition to the rents you can cash in, you are likely to make capital gains over the long term. Inflation alone will in fact raise your rental income every year, which is likely to generate as much capital gains over the long term.

However, the property market is subject to various other factors, so capital gains should not be viewed as a guaranteed matter if you intend to invest for less than 10 years.

Taxation (basics)

In addition to property taxes, you must pay tax on your rental income, if applicable. Rental income is subject to the progressive rates of income tax (up to 27.5%) unless you are non-resident, in which case it is taxed at 15% (25% if you reside in a tax haven).

Capital gains are taxable at a rate of 15% as well, though there is some rollover relief if you use the proceeds to acquire another property in Brazil. See Investment Taxation for Expats in Brazil.

 

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