Update!
We are in Sanremo right now, and we've been out to see eight properties. We like two of them.
In the first meeting with the realtors, we rattled off our requirements, but even as we voiced what we wanted, we began to question what it was we were really trying to do. Investment? Be residents? Vacation home? etc.
We've decided we want - a place we could happily live in for years, but in the meantime, rent it out. We like Sanremo because the costs are reasonable, it's a good sized town, the beaches are fine, and it has schools DS could attend. So we are starting with that. Here are the details:
Rental MarketWe've been strongly discouraged from renting to locals. They don't pay much in rent, and if they stop paying, there's little recourse to evict them. So that leaves us with holiday rentals. 3.5 months of the year are peak season. 2.5 months in summer, 2 weeks around Christmas, and 2 weeks around Easter. Rental rates at peak season are 400-500 euros a week. That's 5600 - 7000 euros a year. Then, on off peak times, rates are more like 200-300/ week. You can expect to have the place occupied about a month or two. So that's another 1600-2400. So total gross rent is 7200 to 9400 a year.
Back-O-Napkin-Calc on one of the properties we like:
cost is 180k euros. 2 bedrooms. 2 balconies with decent view of sea and surrounding neighborhood. Central location, but in good neighborhood - very rentable. No repairs necessary - it's in good shape. I would love to live there.
Cost: 180k + 4,200 VAT, + 1,200 some other fee, + 10,800k sales fees + 300 notoraio fees = 196,500 euros ($216k)
Income: let's say 7200/ year
Annual prop taxes: 600 euro (fed + local)
Maintenance : 800 euro
Prop management (10%) 720 euro
Income tax (23%) 1170
Income After Taxes and expenses: 4000 euro
Rate of return: 2.0% - not great - but better than our Malaysian CDs!
Income Taxes SituationI'm on the learning curve here, but this is my understanding so far:
As non-residents, income from the property would be taxed at 23%. This means we must be in Italy less than 183 days a year, and no more than 3 months at a stretch.
As residents, it gets complicated because Italy would tax our world wide income. That's not a big deal as long as our tax bill in the US exceeds what it would be in Italy. But if the inverse is true, then we'll owe income tax here. Here's my understanding so far on this topic. source: (
Deloitte Italy Tax Guide 2015)
Capital gains and qualified distributions: ~50% of this income is not taxed. The other 50% is taxed as ordinary income.
Ordinary income tax brackets:
0-15k: 23%
... to 28k: 27%
... to 55: 38%
... to 75: 41%
>75k: 43% (yikes!)
Interest income: flat rate of 26%
Deductions:
* 800 euros per adult, ~1100 per kid
Credits:
* Medical costs ( could be ~400 (19% of ~2000))
Okay, so, hypothetical, if this is our income:
Interest: 5000 euros
QDs/LTCGs: 10k euros
Passive RE Income: 30k euros
Italian tax: (assuming 5,000 euro deduction):
Interest:
5,000*.26 = 1,300
Ord Income:
15,000*.23=3450
13,000*.27 = 3510
2,000*.38 = 760
-------------------------
9020 euro, minus 400 in credits = 8620 ($9482) ... effective tax rate 19.2%
In the US... LTCGs/QDs
$11,000*.0 = $0 (if we stay in 15% tax bracket)
Ord Income: $38,500 minus deductions of about $25k (pers exemptions, child exemptions, tuition)
$13,500*10% = $1350
Total US tax = $1350.... vs Italy $9482.
Uh, er, uh. I've gotta be missing something here. Perhaps I'm missing some deductions or other allowances. It seems the price for living in Italy may be approx $8000 a year - pretty high. I also need to make sure our income in the US keeps us in the 15% bracket. But we're not working, and I think I've considered all income sources. Now, if I did a big 401k to Roth conversion, that could kick us over to a point where US tax exceeds Italy tax. But in any case. This is enough calculating for the morning. Time to get on with our lovely day in this lovely town!