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.
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.
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.
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.
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!
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