When you buy a property, you usually have to pay an advance to confirm the willingness to buy, in order to "block" the seller and make sure that the house is not sold to others. In this article, I will summarize the main differences between a sum paid as a down payment or a confirmation deposit in a preliminary real estate sale.
First of all, let's specify what one is and what the other is.
What is the Confirmatory Deposit
Pursuant to Article 1385 of the Civil Code, it is defined as follows:
“If at the time of the conclusion of the contract a party gives to the other, as a deposit, a sum of money or a quantity of other fungible things, the deposit, in case of fulfillment, must be returned or charged to the performance due. "
The second paragraph also specifies that:
"If the party who gave the deposit is in default, the other can withdraw from the contract, keeping the deposit; if in default it is the one who received the deposit, the other can withdraw from the contract and demand double the deposit "
The closing article reads:
"However, if the non-defaulting party prefers to request the execution or termination of the contract, the compensation for damage is governed by the general rules"
The confirmatory deposit is therefore a "legal" way of protecting oneself in a sale for both parties, and serves to ensure that the seller and buyer respect the agreements made.
Price Down Payment Definition:
When we talk about the down payment, it refers to all those sums paid before the final sale to the seller. These amounts do not provide protection from a legal point of view, but are only advances on the final balance.
In the event that the final sale is not concluded for reasons attributable to each of the parties (regardless of whether it is the seller or the buyer), these advances must be returned and cannot be withheld or requested to a greater extent.
Differences Between Confirmation Deposit From A Price Deposit?
To distinguish how a sum of money paid before the purchase of a property is charged, it is always good to sign a preliminary deed (privately or by the notary) in which it is specified WHAT the money is paid for. In the case of a confirmation deposit, I suggest you also insert the reference to the civil code (Article 1385). If a preliminary agreement is not signed, it is sufficient to specify in the reason for the transfer, or in the receipt of the payment of the amount paid, the security to which it is paid.
Registration Tax On The Deposit And Price Down Payment
In addition to not being protected in the event of non-fulfillment by the counterpart in the presence of a simple down payment, the taxes that must be paid during the registration of the deed (whether preliminary or sale) also change.
When the sales contract or preliminary is registered with the revenue agency, the state requires a registration tax on the amounts paid (which can be included in the final registration tax in the event of a sale subject to registration tax). The tax to be paid on the confirmatory deposit is 0.5% of the amount paid, while on the down payment it is 3%.
Let's take some examples:
Tizio buys a house from Gaius for € 300,000 at the preliminary and pays € 60,000 in advance. The cadastral value of the house, on which the final registration tax will be calculated, is € 100,000.
Total registration tax to be paid to the notary 100,000 x 2% = € 2,000
At the preliminary stage, the parties establish the entire amount is considered as a confirmatory deposit, so when registering the preliminary Tizio must pay the sum of € 300 (60,000x0.5%) to the state.
On the day of the deed, Tizio will therefore only have to pay € 1,700 to the notary to pay the amount due.
The problem arises for properties with low cadastral rents where large sums are paid as a down payment or in sales from construction companies subject to VAT, as happened to me recently:
purchase and sale amount: € 200,000
VAT to be paid upon act as a first home: € 8,000
preliminary with a deposit of € 20,000 + € 40,000 down payment.
Taxes to be paid at the preliminary € 100 registration tax on the confirmatory deposit and € 1200 registration tax on the down payment !!
In this case the sums would have been non-deductible, entailing an additional expense of € 1200 for the buyer for nothing.
I then agreed with the sales manager to charge the entire sum of € 60,000 as a deposit, thus determining a total tax of only € 300, saving my client a whopping 1300 € !!!
