Business & Finance 10.08

Business & Finance,
9 October 2008

So, you bought a studio apartment in Bulgaria, expecting permanent cheap access to the sun, with property widely tipped to increase in value while the cost of flights fell to the ground. EU accession and guaranteed rental as advertised by the sales agent, a payment schedule spread out over a number of years, and no hideous stamp duty to deal with. A warm light breeze all round.

Since then, XL.com are the latest cheap flights outfit to go bust; house values in Ireland and around the EU have decreased; and the cost of credit in this country is set to change dramatically.

One real difficulty arises for a property buyer when they are attracted by sales agent promises of "guaranteed rental" - in fact the property is usually priced at an artificially high price, in order to facilitate this "guaranteed rental", and effectively the purchaser pays for the advertised "income". Many agents will advise not to engage an Irish lawyer, because it will "slow you down", and instead recommend their own lawyer.

Tom McGrath, a Dublin-based solicitor and notary public who has specialised in foreign property for the last six years, speaks of being "inundated" in recent years as the Irish appetite for foreign properly grew and grew. He speaks of two types of client coming to his practice: those who seek advice before they commit any money to a foreign property; and those who seek a solution to a tangled mess of unpaid costs and defaulted payment schedules. There is an "astonishing" amount of Irish buyers who will go almost blindly into a foreign property purchase, he notes.

An apartment in Bulgaria incurs stamp duty paid when the title deed is signed, at 2-3% of the property value. McGrath says there are still Irish customers out there who are incredulous they must pay local municipal taxes annually. If not paid, penalties accrue and amount to an expense when reselling.

McGrath says the practice of underdeclaration of the value of a property was once widespread in foreign purchases. Underdeclaration is illegal and leads to a larger tax liability when the property is resold. In Spain, there are inspectors who actively investigate the value of properties as compared to the declared price.

Willie Kearney, accountant at Foreign Tax Returns in Dublin, says a double tax agreement between Ireland and Bulgaria means that if you pay capital gains tax in Bulgaria, you will receive a tax credit in Ireland for the tax already paid. He outlines that VAT on property in Bulgaria is automatically included except for a plot of land for development or a house on its own land, which is more complicated.

Many Irish buyers will have released equity from their Irish mortgages to finance a property abroad, using an Irish-based bank. McGrath and Associates have announced a new service for Irish banks, "whereby we can register the charge they have against a property in Spain, and we can look into the possibility of providing the same service in other countries". This, they say, increases the return to the Irish bank in the event of default or payment difficulties.

When renting out a property in Bulgaria, note the amount of tax (10%) due on rental income should be withheld by the letting agency, and passed on to the Bulgarian tax authority from them. Even so, a tax declaration must still be filed with the Bulgarian tax authority by the following April 15th, through a Bulgarian tax adviser. If you open a Bulgarian bank account, you must declare it and any deposits in your annual tax return in Ireland. Foreign Tax Returns in Dublin process tax returns in partnership with a Bulgarian company for €300-€350.

If you are looking for a mortgage in Bulgaria, be aware that although many sales agents advertise financing, few Bulgarian mortgage providers will deal with a foreign buyer, and few, if any, will release equity for you on a Bulgarian property. You will need to engage a Bulgarian national to represent you to the bank, and mortgage interest is not allowable as an expense when declaring income on a property.

The considerations for any buyer are the legal costs involved in engaging an independent, experienced lawyer. Other costs mount up rapidly - from translators and furniture packages to sometimes costly aftersales services. And rental prospects are relatively slim in an overcrowded market with a short high season.

InterPropertyManagement official Anton Vasilev called the last season "tragic" for studio apartments, with no interest in them.

While Bulgarian property is growing in value - at a recently reported 31%, what is the growth in terms of resale? The resale market has been slow in Bulgaria, though many letting agents report Russian buyers showing increased interest in Bulgarian holiday property.

If you have bought a property in Bulgaria, you can expect to get "a small tax liability", Mr Kearney says. There are those who buy to invest, and those who buy to have a holiday home.