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Tax Dodger Amnesty in Argentina Enables 15% Discount on housing for some Buyers

Tax Dodger Amnesty in Argentina Enables 15% Discount on housing for some Buyers

(Joe Blogs ) said he plans to tap the secondary market in “Cedins” — central bank-issued certificates given to Argentines in its tax amnesty program. In exchange for turning in untaxed foreign currency, people get dollar-denominated Cedins they can trade or use to buy housing. The notes are now selling at a 15 percent discount.

“I’m interested in doing a transaction withCedin because it’s so much cheaper,” said (Joe Blogs ), who’s looking for a $100,000 studio apartment in an upscale neighborhood such as Recoleta. “It’s my chance to own and not rent.”

The government started the Cedin exchange to get dollars as capital flight accelerated and to boost housing sales that had plunged because of currency controls. Two years later as Argentines gain trust in the unorthodox exchange program, the Cedin market is gaining steam — trading volume has jumped by six times in the secondary market. That’s giving support to a distressed housing market.

“We’re a long way  from out of this crisis,” said thebroker who is helping(Joe Blogs ) find an apartment. “But Cedins should help revive sales a bit. It’s becoming more and more accepted.”

40% Inflation

Argentines have exchanged $1.3 billion with the central bank and $239 million between December and February, the most for a three-month period since late 2013. Of the total, $913 million in Cedin have been used for real estate.

The remaining $387 million make up the burgeoning secondary market, where trading volume has averaged about 6.6 million pesos of transactions daily in the past month compared with about 1.1 million pesos when the plan started in July 2013.

Cedin were trading at 84.6 cents on the dollar at 12:45 p.m. Buenos Aires time, according to the stock exchange.

President Cristina Fernandez de Kirchner prohibited Argentines from buying foreign currency in 2012 after the nation’s foreign currency reserves plunged by the most in a decade. The ban was a blow to real estate in a market where most sellers don’t accept pesos and deal only in dollars. Argentines hold property to protect their wealth with inflation as high as 40 percent in the last year and a plunging local currency.

The South American country is struggling to overcome its worst housing slump since its 2001 default. Sales of new and existing homes in the province of Buenos Aires fell 8 percent in 2014 from a year earlier to the lowest since 2002, according to the province’s notary college. Sales are down 18 percent in January, according to their latest data.

Mortgage Rates

Mortgages have accounted for less than 10 percent of total lending since 2008, when inflation started accelerating to more than 20 percent. Banks are reluctant to approve long-term loans at fixed rates, while consumers don’t want the risk of floating- rate loans since the cost might soar. In that time, no more than 20 percent of housing sales were done through mortgages.

The amnesty program got off to a slow start in a volatile economy where people hold dollars for security.

“It was hard for Cedins to take off as everyone saw them with mistrust,” said Gonzalo Alcantara, who trains professionals in Cedin transactions through his company Cedinhoy.com. “That’s changing now that there’s more proof that they work and that there’s an opportunity in the market.”

As more Argentines came forward with their untaxed dollars to exchange them for Cedins, the government has extended the length of the amnesty program three times.

People who don’t want to buy property are also trading dollars for Cedins and then selling them in the secondary market, where they traded at a 15 percent discount last month. That loss is less than the cost of paying taxes on dollars.

10% Discount

Argentines use dollars, pesos or take a mortgage to buy Cedins in the secondary market from a securities or real estate broker. The notes are traded at the black market exchange rate, known as the “blue” rate. The unofficial currency market flourished after Fernandez tightened controls since it’s the only way to get dollars for many Argentines.

The blue rate is about 13 pesos per dollar, or almost 50 percent higher than the official rate of 8.79 per dollar.

After Argentines buy a property with Cedins and the real estate is notarized, the seller goes to the central bank to exchange them at full face value for dollars. The entire process takes about 72 hours.

Extending Program

An 80-year-old Argentine, who asked to remain anonymous after participating in the amnesty program, started investing in the real estate market when he sold his import company eight years ago. The Buenos Aires resident said he always makes purchases in cash since the cost of debt can make deals too expensive.

The average annual rate for a 10-year mortgage was 27 percent in February, excluding fees and additional costs, according to the latest central bank data.

In June the investor said he exchanged about $100,000 in untaxed dollars for Cedins to buy an apartment to rent. Then in November, when Cedins were trading at about 90 cents on the dollar, he bought $600,000 in certificates in the secondary market to purchase a property with his partner. They plan to demolish it and construct an apartment building.

Some brokers estimate that about 20 percent of there transactions will be done through Cedins this year, up from about 10 percent in 2014.

The deadline to exchange undeclared dollars for Cedins expires by the end of the month. Brokers and analysts said they expect the government to extend the program again for at least another quarter. The amount of dollars exchanged so far is less than 1 percent of the estimated $160 billion of undeclared funds Argentines hold abroad.

(Joe Blogs ), who keeps most of his money in equities, said he plans to buy an apartment with Cedins after reaping gains in a market that has risen 12 percent in the last two weeks.

“Many people in Argentina keep dollars under the mattress and that’s the only way they sleep well at night,” Cruz said. “But I’m totally fine with this concept.”

Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and investment tours.

www.gatewaytosouthamerica.com

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