In this article we will take a look at a very common question regarding people who want to invest in real estate in Italy.
The question is: do I need to set up a company for buying a house in Italy?
The answer is: it depends.
Let's see what are the most common cases and variables that must be taken into consideration before making this decision.
US LLC: not a good idea
The first thing to be said is that there is an option that is not efficient in all cases: to set up a US company to buy an Italian house.
This option has a lot of technical problems and most of the time is also not a wise decision from a tax perspective.
In particular, the idea of setting up a US LLC, or a S-Corporation, is a bad idea, as transparent entities are note easy to deal with, in particular if we consider the possibility of using the Foreign Tax Credit granted by the Convention to reduce the double taxation: the risk is that there can be a double taxation problem in the long-term.
What is the scope of the investment?
The second point to consider is that you must understand what is the objective of the investment:
1. is the Italian house a house for rent?
2. or is it a vacation house for the family?
3. or are you considering the opportunity to moving to Italy in a more stable way?
Moving to Italy
If you are taking into consideration the third option, you must consider the tax implications of your permanent move to Italy: for all this matter, please refer to the specific section of our website: Moving to Italy
If you are more keen on using the Italian house as a vacation house for you and your family, but you are not interested in considering the idea of moving your tax residency from the US to Italy (at least in the short-term), you have to remember that you cannot spend more than 183 days in Italy during the same solar year (1 January - 31 December): in this way you will maintain your tax residency in the US. But keep in mind that tax residencies is a very complex concept, that needs assistance. For any further information, you can call us or ask us to see our webinars section and ask us to see the webinar on-demand "Moving to Italy - fiscal effects of becoming a resident of Italy.
For the vacation house, you have two options:
a) to set up an Italian Company, that in most cases is a SRL, Società a Responsabilità Limitata, that is similar to the US C-Corporation.
b) to buy the house personally.
There are some advantages and disadvantages in both cases.
The main advantage of using a SRL to buy a vacation house regards the fact that the succession process, once the owner has passed away, it's somehow easier with the SRL, as the owner of the house is not a person but an entity. In this situation the heirs will receive quotes of the SRL, but the SRL itself will remain untouched by the death of the person.
On the other hand, the cost of setting up and managing a SRL is a little bit higher than a US LLC, but lower than a US C-Corporation.
The main advantage in buying the house personally is the fact that, in case of a future sale, if the sale happens after at least five years and one day from the day of the buying, then in Italy the capital gain will always be non-taxable; instead, if the owner is a SRL, the capital gain is always taxable.
For more details on the tax impact of capital gains from sale of houses in Italy and the US, please take a look at the following article.
In most cases, we can tell from our experience on the field that the best solution is the personal ownership for vacation houses: but, obviously, every case is different and we must consider every variable.
Buy a house in Italy for rent.
In this case, there are the two different options of:
a) starting an Italian Company;
b) buying the house personally.
Now, if the person making the investment has the objective of buying several houses to put to rent and not only one, obviously the idea of starting an Italian company is in the long run the best option, considering also the amount of financial resources involved.
In any case, we must take into consideration the fact that in Italy there is a specific Tax-Break for people renting house that is called "Cedolare Secca".
With this option, that is viable only for personal property and not for Company property, the owner will pay a flat tax rate of 21% on the revenue from the rents, without having the possibility to deduct any costs.
Also, there is the possibility to apply for "Cedolare Secca" to specific contracts for non-luxury houses that reduce the flat tax rate to 10%: in this case you must adopt a specific type of contract that is called "Contratto a canone concordato" and you must fix the rent into certain limits.
At a personal level, the alternative to the two options of the Cedolare Secca is the Italian ordinary taxation for rents: the taxation is with progressive tax rates on a taxable income that is the 95% of the revenue of the rents, without having the possibility of deducting costs or to apply for the depreciation of the houses.
Do you have to make renovations on the house?
Another variable is to consider if you have to make renovations on the house and the entity of these investments: sometimes the cost of the house itself, especially for small villages in the hills or in the countryside, is quite low, but the renovation costs can be higher.
In Italy we have also very interesting tax deduction connected to the renovation costs, that can vary depending on the type of renovation you want to make.
In any case, keep in mind that an amount of 50% of the investments can be tax-deductible in 10 installments over 10 years. This deduction is admissible only if you apply for the ordinary taxation of the rents and not for the "Cedolare Secca" options.
The last variable to consider is to see if you have any tax advantage in the taxes during the buying process: to see if you can apply the "Agevolazione Acquisto Prima Casa", please see the following article.
For any information, please contact us or send us an email with your questions or doubts: we can make a tax simulation of the entire process.