Costa Rica Property Taxes on Capital Gains

Costa Rica property taxes underwent a change on July 1, 2019.  A 15% tax on the capital gains is now imposed when a property is sold. The new tariff is part of the broader “Law to Strengthen Public Finances” that was passed the previous December. Why was the new law enacted? Costa Rica real estate has developed rapidly for many years. However, the infrastructure in many regions has not kept pace.  Costa Rica property taxes are extremely low—just 0.25% of the declared value—so municipalities have had little funding to use for improvements. The new law is designed to bring in more tax money to address the ever increasing infrastructure needs.

Costa Rica property taxes on capital gains

Are there any exceptions to the new capital gains tax? Yes. Residents of Costa Rica who sell their primary residence are exempt. If you reside in Costa Rica at least 183 days in a year and the home you sell is your habitual residence, the sale will be exempt from paying capital gains tax. However, if you sell any additional property in Costa Rica—commercial or investment real estate–the capital gains tax would be collected. If your primary residence is outside of Costa Rica, and you sell a vacation home in Costa Rica, you will have to pay the tax. If that’s the case, you should apply for a tax exemption in your home country so that you don’t pay the capital gains tax twice.

Playa Hermosa

What if you sell a property that is subject to capital gains tax but you owned it before the new law went into effect? In this special case, the law allows you to pay a one-time alternative tax. Instead of paying 15% of the increase in value, you could choose to pay 2.25% of the total sale price. Each seller will determine which option results in a lower tax bill. For example, suppose you bought a vacation condo for $200,000 before July 1, 2019. Some time later, after the new law has taken effect, you sell it for $250,000. Your capital gain, assuming no improvements were made to the property, is $50,000. Your options are to pay 15% of the gain (15% x $50,000 = $7500) or 2.25% of the sale price (2.25% x $250,000 = $5625). In this scenario, the alternative 2.25% tax is lower.

What are the implications of the new law? For example, could a Costa Rican resident sell his primary residence, buy another, and then sell it without paying capital gains? Theoretically, yes. The law does not stipulate how often or how many times someone can apply for the exemption. As long as the two requirements of Costa Rican residency and primary residence are met, the transaction should be tax free.

Capital gains tax Costa Rica

Another effect of the new tax law is that it is now it is much more important to document the value of any property that is not exempt from capital gains tax. In the past, official property values were kept as low as possible, sometimes artificially, in order to minimize property taxes. Now that the capital gains tax is in effect, the strategy changes. Property buyers should ensure that their “escritura” (deed) reflects the true purchase price. In addition, they should keep receipts to document the cost of any improvements they make such as remodeling or additions. If the property is later sold, these expenses will be added to the purchase price of the property to determine the cost basis for calculating the capital gain. Keeping track of the cost of improvements is imperative in order to reduce the tax burden.

A further consequence of the new law comes into play if a foreign property owner sells his Costa Rica property. The law requires that the buyer set aside 2.5% of the purchase price. This measure ensures that the capital gains tax is paid by the non-resident property owner.

Costa Rica Tax

What effect, if any, will the new tax law have on the Costa Rica real estate market? It’s still too early to tell. But one thing that won’t change is that Costa Rica is a great place to live and own property – as well as vacation!

New Costa Rica Tax Laws

New Costa Rica tax laws went into effect on July 1, 2019. What is it, and how does it affect you? The law is officially known as law 9635 or the “Law to Strengthen Public Finances”. Many refer to it as the IVA (impuesto de valor agregado) for its initials in Spanish. This value added tax is the aspect of the new law that will have the greatest impact on the average person in Costa Rica.

Costa Rica Tax, Hermosa

Since 1982, Costa Rica has imposed a 13% sales tax on most goods and products. The new IVA replaces the general sales tax. Under the new regimen, not only goods but also more services will be taxed at the 13% rate. Any individual or commercial entity, whether public or private, is now responsible to collect and remit to the government 13% of the value of any goods or services they produce, sell, or distribute.

Playa Del Coco, Tax is cheap

What do the changes mean for the average resident or even visitor to Costa Rica? The new tax law means that when you contract the services of a professional—for example, doctor, lawyer, engineer or realtor, you’ll be obligated to pay an additional 13% for their services. By the same token, anyone providing such services is required by law to withhold the IVA and remit it to the tax authorities (in Costa Rica, the Ministerio de Hacienda). Realtors, by the old law, were already required to do this.  I have been filling out these forms for over 11 years now on a monthly basis, whether I collect the 13% or not.

Costa Rica taxes

Are there any exceptions to the new tax law? A few. Water and electricity consumption, if below the amount used by a small household (30 cubic meters and 280 kWh respectively) are exempt. So is housing rental if it’s less than $1000 per month. Certain organizations, including the Red Cross and the Fire Department, aren’t required to collect the new tax. Free trade zones, care for the elderly, and public university tuition are also tax free. So are public transportation and books. Livestock auction services will not be taxed, so that prize bull you’re planning to buy won’t cost you any extra. Other services will be taxed, but at a reduced rate. Some examples are: airline tickets and healthcare services 4%; medical products, insurance premiums, and machinery used for production 2%; basic food staples and equipment used in agriculture 1%.

Living in Playa Hermosa, Tax

I wanted to know to about cross border services, that is, services provided by an entity based outside Costa Rica, like the web hosting service that hosts this web page. They are also subject to the new IVA. Accordingly, Netflix, Amazon Prime and similar international services are required to pay the tax regardless of the medium or technological platform. I wonder if GoDaddy knows this??

Playa Hermosa, Propety tax

Why we the tax laws in Costa Rica changed? Many have asked, and some Costa Ricans have protested its recent implementation. As indicated by its name, the Law to Strengthen Public Finances was designed to increase tax revenue and control costs. The law also includes lesser known modifications to the capital gains tax, (which will be a completely different blog) public administration salaries, and fiscal responsibility laws. The objective of all the aforementioned changes is to reduce the government’s deficit from 6% to 4%.

The new IVA law stipulates that the collected taxes be remitted monthly by the 15th. How will Costa Rica ensure compliance? Businesses and individuals who provide services must register with the government if they have not already done so. In 2018, a requirement to issue electronic invoices (facturas electronicas) and report them to the tax administration went into effect. Though the old tax law hadn’t changed yet, it provided the authorities with a means to track commercial transactions. In addition, credit and debit card processors and Costa Rican banks are tasked with cooperating with the new law.
Noncompliance can be punished with fines and/or interest. Authorities are also empowered to close a business found to be in violation. In extreme cases where tax fraud is suspected, criminal prosecution is a possibility.

Costa Rica Taxes

So what’s the bottom line? Well, if you own a property in Costa Rica it will cost a bit more. If you only purchased in Costa Rica because it was less expensive than where you live, well then you purchased for only one reason and it is the wrong reason. Nice thing is property tax is still only 0.25% of the registered value. What are your property taxes back home? So as I have told many that have been freaking out “build a bridge and get over it”. Here the reality of life in Costa Rica will continue as usual with little change, it will just cost a bit more.