Are You Selling Your Property in Costa Rica?
If you’re selling it for more than its declared value (i.e. more than you paid for it) then it will be important for you not to be blindsided by the capital gains tax you may be required by law to pay at closing.
So, you’ve invested in Costa Rica real estate and the market is looking good for you to turn a profit on the sale of your investment. Seller’s typically pay about 10% - 11% in closing costs that can include legal fees for the closing of the deed and/or liquidating and dissolving a company that holds the deed, real estate sales commissions, powers of attorney, and other miscellaneous fees.
But there is an extra “fee” that many Sellers neglect to factor into the sale – the capital gains tax and associated 13% IVA (Value Added sales tax) that by law they must pay to the government at closing. This will eat into your bottom-line profit and Sellers need to be aware of that fact to avoid any disappointment, frustration, and even anger as a result.
Capital gains tax occurs when the property is transferred, either through a direct sale of the actual title of the land, home, condo, or commercial property, or an indirect sale such as through the transfer of shares of a company (Costa Rican corporation) that owns the property.
An experienced real estate agent – like me – along with your qualified real estate lawyer can help you with calculating what you’ll owe - or whether you owe - based on the final sale price.
How do I calculate the Net Capital Gain?
The calculation is relatively simple: By subtracting the original purchase price, or declared value from the sale price, you’ll arrive at the magic number on which you’ll pay the capital gain.
Basic Example: Purchase Price/Declared Property Value: $200,000
Sale Price: $250,000
Net Capital Gain: $250,000 - $200,000 = $50,000
Sidebar: Costs associated with the sale, such as real estate agent fees and legal costs, may also be deductible when calculating the net capital gain. Consult your attorney. You can lower the net capital gain by factoring in certain allowable expenses, such as improvements made to the property. Always keep your receipts! Also, tax implications may differ for residents versus non-residents, so I always advise Sellers to consult with a qualified real estate or tax attorney who can provide guidance based on their specific situation.
How do I calculate the Capital Gains Tax?
Here’s where it gets a little tricky. The current capital gains tax law, Ley No. 9635 Fortalecimiento de las Finanzas Públicas (Law No. 9365 for Strengthening of Public Finances) came into effect on July 1, 2019 and gives Sellers either one or two options for calculating the capital gains tax.
If the property was purchased prior to July 1, 2019, when the tax law came into effect and is being sold for the first time after that date, the Seller has two options:
- Pay 15% tax on the net capital gain.
- Pay 2.25% on the total sale price.
So, if we use the Example above, the Seller can calculate the capital gains tax two ways:
15% of the capital gain of $50,000 = $7,550
2.25% of the total sale price of $250,000 = $5,625
In this case, the Seller can elect to pay the lesser of the two values.
For subsequent sales after the July 1, 2019, the Seller must pay the 15% tax on the net capital gain. Paying the 2.25% on the total purchase price is not an option.
Sidebar: For properties held within a financial investment fund, the capital gains tax is 20%.
The Primary Residence Exemption
If you’ve been living in your property for at least three years and have not been renting it out, you may qualify as a domiciled person and may claim the property as your primary residence. Properties sold as a primary residence are exempt from capital gains tax. If you’re selling a vacation rental property, or a second property outside of your primary residence, you will have to pay the tax.
Public notaries (Costa Rican lawyers are also notaries) are required to confirm this prior to registering a property transferred in the Registro Nacional (National Registry). The law considers a domiciled person to be any foreign person that spends more than 183 days a year in Costa Rica. The days do not have to be spent in Costa Rica consecutively.
Costa Rican corporations duly registered in the Registro Nacional and that are represented or owned by foreigners are considered domiciled in Costa Rica.
The primary residence exemption does not apply to commercial real estate. And it will be tough to claim if the home or condo is leased to a third party or is owned by a foreign corporation, trust, or any legal entity not legally domiciled in Costa Rica.
Your real estate lawyer will be able to advise you on how best to handle the capital gains tax to ensure that all of your tax obligations are properly documented and paid in full so you can avoid legal problems in the future.
Declaring and paying the Capital Gains Tax
The declaration and payment of the capital gains tax must be done using form D-162-1, Declaración Jurada del Impuesto de Ganancias y Pérdidas de Capital (D-162-1 Sworn Tax Declaration of Profits & Losses of Capital). This form is available on the Ministry of Finance’s ATV portal and must be completed in Spanish, most likely by your real estate lawyer.
Working with an experienced Costa Rica real estate agent and having a qualified Costa Rica real estate lawyer on your side will ensure Sellers a smooth sale experience saving you time and headache and avoiding any problems in the future related to capital gains taxes.
Click here or on the image to find out why you should list your property with me and the Tres Amigos Realty Group!