Capital Gains in Costa Rica begins on July 1, 2019. For many years property owners in Costa Rica never had to worry about capital gains when selling their Costa Rican real estate. The existing law only applied capital gains tax to real estate developers that were in the business of developing and selling real estate. Everybody else was exempt. Recent changes to the Costa Rican tax laws implemented an across the board Capital Gains Tax (Ganancias de Capital) and in this article, I will review the impact of that law on the sale of real estate in Costa Rica.
How much is the capital gain tax ?
The law imposes a capital gain tax of 15%. However, if the property was acquired PRIOR to the law being implemented which is July 1, 2019, then the taxpayer has the one-time option to sell the property and pay a 2.25% tax on the sales price of the property.
Who has to pay capital gains ?
The law exempts from capital gains your primary residential home. So the family home which is your habitual residence will be exempt from capital gains. As such, capital gains must be paid when you sell any commercial or investment real estate that is not subject to the capital gains exemption.
Watch out for foreign domiciled property sellers ?
To avoid a foreign property owner that does not have a domicile in Costa Rica from selling their property and not paying the capital gain the law requires the BUYER to hold back 2.5% of the sales prices of the property to ensure that any capital gains tax is covered. The law refers to a “non-domiciled” property owner.
Who is a non-domiciled property owner ?
To find the answer we need to look at Article 5 of the Income Tax Regulations which defines who is considered to be a domiciled person for tax purposes. This is the same standard that will now be applied to determine who would be considered a non-domiciled person. For individuals, you are considered domiciled if you have spent more than 183 days in Costa Rica. If you traveled in and out of Costa Rica on sporadic occasions that would not necessarily disqualify the status. The tax department will look at intent and can verify the entries and exits from the country with the immigration records for foreign individuals. For corporate entities. Costa Rican corporations that are registered in Costa Rica pursuant to Costa Rican law are considered to be domiciled in Costa Rica. Evidence of a local domicile or place of business within Costa Rica will be considered when determining the domicile of corporations.
So the rules of the game are changing in Costa Rica. For now many of us are still trying to sort out how this will impact the local real estate market and property sales. As the tax department clarifies and publishes more directives we will continue to keep you posted.