Capital gains now here in Costa Rica, Not new for most of us
For years, people have enjoyed a Capital Gains Free Real Estate market in Costa Rica. Law 9635, called the “Fortalecimiento de las Finanzas Públicas” or just the “Plan Fiscal,” the fiscal plan in English, became law Dec. 4, 2018. Many parts of the legislation were on hold until today, July 1, 2019. One of those parts was the imposition of a capital gains tax on the sale of assets.
Last Thursday the tax department published its final revision to the regulations of the law. Here is an outline of the essential facts concerning capital gains:
The new capital gains tax is 15 percent of the profit of a transaction. For assets acquired before today, people have the option to pay 2.25 percent of the total sale price of the property. All assets obtained after today are subject to the 15 percent tax. Legitimate homeowners can exempt the home they live in it as a permanent residence. More about the specifics of that exemption further down.
The calculations can be a bit confusing, so here is an example;
John and Jane Expat bought a property with a house on it 20 years ago for $50,000, and they can prove they put roughly $25,000 in improvements into both the land and the home. It is their second household for vacations and not their primary residence.
If the couple sells it today for $100,000 making a profit of $25,000, John and Jane have a capital gains tax choice. They can pay 15 percent on the profit of $25,000 for a tax of $3,750, or they can elect to pay 2.25 percent on the total sale price ($100,000) for a tax of $2,250 for a savings of $1,500.
Many people who bought homes and property in Costa Rica over the years have not kept good records regarding improvements and cannot prove what they have spent to reducing capital gain. This circumstance is an excellent reason to use the one-time, reduced percentage option because it is a no questions asked tax rate.
Those who bought and stayed here to live here can sell their residence and pay no capital gains taxes. The burden of proof is on the taxpayer. Permanent tourists would not qualify nor would people who rent out their residence most of the year and live somewhere else but have permanent legal residency in Costa Rica.
After today, no property transaction will be registered in the national registry if the paperwork does not have a tax form attached proving capital gains taxes were paid. The form is attached to the transfer deed submitted by a notary to transfer the property.
Law 9635, contains many reforms. One notable change is that the fiscal year used in the past of Oct. 1 to Sept. 30, becomes a calendar year Jan 1st to Dec 31st.
- Capital gains can offset capital losses if they both happen in the same month since both need to be declared and paid the month they happen.
• A refund is possible if capital losses are more than capital gains during the same fiscal year. Refund requests must adhere to some pretty strict rules, so a good accountant should file the forms.
• Capital losses can offset gains for a period of three fiscal years for credit, not cash. There is fine print to obtain the offset, so professional assistance is a must.
Tax officials have still not made up their minds regarding non-active companies. In the regulations, they fudged and wrote this statement, translated into English and paraphrased by Kevin Chavarria, certified public accountant: “…non-active companies must fulfill their formal obligations. For this, before the start of the next fiscal year, the tax department will divulge to the public by publication in a nationally circulated newspaper what they are required to do.” Chavarria states the next fiscal year officially starts on Jan. 1.
Parts of this article were taken from Am Costa Rica News. This is just an overview of the changes and not the complete picture.
I will have follow-up information in the coming months as I will have the opportunity to speak with Lawyers and Accountants.
For most all of us a 15 percent capital gains tax is nothing new and is still a better deal then many of the areas we are originally from. For those that didn’t expect any tax on their Costa Rican property the 2.5% one-time option is great news. Be sure to use reputable contractors and property managers that provide a receipt. And keep records of your expenses related to your property, just like you do at home.
Contact me Theo Veenstra, Remax Ocean Village & Letsbuycostarica.com for more information on this tax and buying or selling your property in paradise!!!!. Make your contact HERE