ILN: BUYING AND SELLING REAL ESTATE - AN INTERNATIONAL GUIDE

[BUYING AND SELLING REAL ESTATE IN COSTA RICA]

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Taxes on Real Property The local Municipality collects taxes on the ownership of Real Property with jurisdiction over the area in which the property is located. There is an annual tax of 0.25% of the property value declared before the Municipality and, in most cases, payment is collected on a quarterly basis. Owners are responsible for the payment of this tax and noncompliance could result in fines, interest, and possible encumbrances upon the property by the local Municipality, leading to possible foreclosure of the property in severe cases. Also, when transferring real property, the Tax Administration and the Public Registry charge a series of taxes and duties that must be paid in order process and register the deed, as follows: Transfer Tax: 1.5% of the highest of: a) fiscal value; b) purchase price. Registration Fees : 0.9% of the highest of: a) fiscal value; b) purchase price. The indicated taxes and fees represent 2.4% of the property fiscal value or purchase price (highest of) and they must be paid before the deed is submitted to the Property Registry. Since Public Notaries are private parties who are authorized to perform public functions, their fees are set by the Costa Rican Bar, in conjunction with the legislative power through a specific legislation, which is updated periodically. At this time, Notary fees for the drafting, issuing, and submitting for registration a deed for the sale of a real estate property are set at 1.25% of the property value. Transfers of real estate by individuals are not subject to income tax However, if an individual sells a real estate which is directly linked to a lucrative activity carried on by this individual, then the proceeds of that sale could be considered as taxable income. The applicable principle is that the law excludes capital gains from gross income, unless the gains are derived

from goods or rights that are part of the taxpayer´s lucrative activity, or when the gains come from an ordinary activity. The transfer of real estate is not subject to VAT because it is a transaction subject to the transfer tax (1.5% of the sale price) according to Law No. 6999, Real Estate Transfer Tax Law, of September 3, 1985, and its reforms and the Law No. 7088, Tax Readjustment and Resolution 18th Central American Tariff and Customs Council, of November 30, 1987, and its reforms. Nevertheless, services associated with the transfer of real estate such as notary fees, brokers fees, etc. are subject to a 13% VAT. There are also some properties that are subject to a tax commonly known as “luxury home tax”. Every 3 years, homeowners must perform a luxury home tax valuation with the purpose to determine if their house, condominium, or apartment in Costa Rica is subject or not to the Luxury Home Tax. The Tax Administration should first publish the new valuation parameters required to calculate this tax, at least 45 days before the year end. If the new parameters are not published pursuant to the above set dates, the values and amounts for the previous year will apply. The amount of the tax will depend on the appraisal done to the home. The parameters of the tariff may start with 0.25% up to 0.55% depending on which parameter the home is value. Starting July 1st, 2019, Costa Rica has new rules related to capital gains. Capital gains derived from the disposal of a property are taxed at a 15% tax rate. Owners that became property owners prior to July 1st, 2019, have the alternative to pay 2.25% of the purchase price instead of 15% on the gain. There is a whole new chapter that regulates the taxation of capital income and capital gains of Costa Rican source. It is highly advisable to retain the services of a tax advisor and/or an accountant

ILN Real Estate Group – Buying and Selling Real Estate Series

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