Protect Your Deposit on Your Property Purchase in Italy
When you are placing an offer to buy a property in Italy, it’s important to use the right wording in the agreement, otherwise you could overpay in taxes or worse– risk losing the deal and your deposit! The deposit is a sum of money paid as a mutual guarantee against a breach of the contract, or as a consideration in case of withdrawal from the contract.
The buyer essentially makes only one deposit payment before closing on a house, which typically amounts to 10% of the purchase price, but legally and fiscally there are 3 different ways to treat this payment.
3 Ways to Treat your Earnest Money Deposit
Unless the parties specify otherwise, when buying a home in Italy, the earnest money deposit is always treated as an advance payment, or “acconto prezzo” in Italian. Unfortunately, this method doesn’t give any legal protection to either party and the buyer must also pay relatively high taxes on it. Under Italian law, however, there are two additional ways to treat the deposit when purchasing a home: the “caparra confirmatoria” and the “caparra penitenziale”.
“Caparra Confirmatoria”
In the “caparra confirmatoria,” if the buyer backs out the seller can cancel the contract and keep the deposit. If, on the other hand, the seller backs out, the buyer can cancel the contract and demand double the amount of the deposit paid!
The buyer may also seek eventual damage claims, like for the repayment of a home inspector or land surveyor. Alternatively, the buyer can ask the judge to enforce the contract and proceed with the purchase of the property anyways.
“Caparra Penitenziale”
In the “caparra penitenziale,” if the right of withdrawal is stipulated in the contract for one or both parties, the deposit has the sole function of compensation for the withdrawal. In this case, the withdrawing party loses the deposit or must return double what he or she received. The deposit is generally kept in escrow with the real estate agency. The parties can decide to have it refunded at closing or used towards the purchase price.
Registering the Agreement in Italy
When the parties sign a preliminary agreement, they are obliged to register the agreement with the Italian IRS, the “Agenzia delle Entrate” within 20 days and pay a hefty 3% tax on the “acconto” if not specified otherwise, or a more reasonable 0.5% tax if the deposit is treated as a “caparra confirmatoria” or “caparra penitenziale”.
The best and safest way to treat your deposit when buying a home in Italy is as a “Caparra Confirmatoria”. It is very important to have a licensed real estate agent representing you who knows the law and drafts the agreement accordingly.