Foreign Investors, for the resale of a property in Italy take cake with the five years rule

The sale of a property by an individual (who is either resident or non-resident in Italy) who purchased the property other than for a business or professional activity, may result in them earning taxable income in Italy. This generally occurs where the sale: (i) takes place within 5 years of the purchase; and (ii) generates a capital gain, i.e. when the consideration (sale price) exceeds the purchase cost.

From a timing perspective, the five-year period for the purchase of the property starts as follows:

  • for properties purchased from third parties – from the date of the purchase deed;
  • for properties purchased directly from a builder – from the date of completion of the works (i.e. date of declaration of completion of works); and
  • for properties received by donation – from the date of purchase by the donor (and not from the different date of the gift).

Further, the five-year period usually ends at the date of the notarial deed for the sale of the property, regardless of when consideration for the purchase of the property is paid.

There are some specific cases in which the resale of a property carried out before the five-year period will not generate a taxable capital gain for the transferor. For example, capital gains derived as follows are not taxable:

  1. sale of properties used as the main residence of the transferor or their family members (including separated spouses pending a divorce decree) for most of the period between purchase and transfer;
  2. sale of buildings and non-building land acquired by inheritance.

The term ‘main residence’ means one in which the owner or his/her family members habitually reside.

Therefore, for example, a foreign investor who buys a property for their son/daughter to live in while they are studying in Italy, and decides to sell it after 3 years, doesn’t pay taxes on the (potential) capital gain. However, selling a holiday home within 5 years, because it isn’t the “main residence” of the investor or his/her family members, could be determine a taxable income for the transferor.

Furthermore, take care with the sales of blocks of land. They don’t follow the above rules (i.e. taxability of the transfers made within the five-year period) but remain taxable even when five years has elapsed.

Therefore, if a sale is made within five years of the purchase/construction and does not fall into any of the exclusions, the taxable capital gain is determined as the difference between the consideration received and the purchase price (or the cost of building the property).
In relation to the relevant costs, certain expenses incurred by the owner and inherent to the property being sold may increase the purchase/construction price, such the notary’s fee, registration and cadastral taxes, mediation costs, renovation expenses, and the like.

Regarding the taxation methods used, the seller can opt for two types of taxes:

  • IRPEF which requires that the capital gain contributes to the seller’s income in the tax period in which the consideration is received. It must be included in the seller’s tax return and is subject a progressive tax rate of up to 43%; or
  • a substitute tax of 26% that completely exhausts the tax on the capital gain due by the seller, that the notary public can be asked to apply at the time the sale contract is signed.

Finally, for non-resident individuals who have invested in Italy, capital gains can be taxed both in their country of residence and in the country where the income/capital gain is realised, i.e. the place where the property is located. For this reason, it may be necessary to take into consideration the provisions of any bilateral convention against double taxation between Italy and the state of residence of the investor.

In such cases, solutions may need to be found to eliminate double taxation, for example through the recognition by the investor’s country of residence of a tax credit for the taxes paid in Italy in relation to the sale of the property.

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