Tax Implications for Expats Owning Property in Costa Rica

Purchasing property in Costa Rica is a dream for many people around the world today who are seeking adventure, natural beauty, and a laid-back lifestyle. However, it is important to understand the tax implications of owning property in a foreign country before purchasing to ensure that you are making the most of your investment. Costa Rica's tax laws might seem complex at first, but with proper planning, you can minimize your tax burden and ensure a smooth financial experience.

Understanding Costa Rica's tax laws is crucial for several reasons. First, it allows you to minimize your tax liability. By knowing what deductions you can claim and which tax treaties apply, you can keep more of your hard-earned income. Second, it ensures you're filing the correct tax forms. Failing to do so can result in penalties and delays. Finally, proper tax planning helps you avoid penalties for late payments or non-compliance.

This guide will provide an overview of the key tax areas that expats must navigate when owning real estate in Costa Rica.

Income Taxes on Rental Income

If you plan to generate rental income from your Costa Rican property, it's considered income sourced in Costa Rica and is subject to taxation. The tax rate on rental income ranges from 10% to 25%, depending on the total income earned. As an expat, it’s important to declare all rental income to avoid penalties and ensure compliance with local tax laws.

How Rental Income is Taxed

Rental profits, which are calculated as your gross rental receipts minus allowable deductions are taxed at progressive rates ranging from 10% to 25%.

Annual Taxable Rental Income (in colones)

• The first 3,804,000 colones (around $6,000 USD) of annual net rental income is exempt from income tax.
• Income between 3,804,001 and 5,706,000 colones is taxed at 10%.
• Income between 5,706,001 and 9,510,000 colones is taxed at 15%.
• Income between 9,510,001 and 19,020,000 colones is taxed at 20%.
• Any annual net rental income over 19,020,000 colones is taxed at the highest 25% rate.

Allowable Deductions

Property owners can reduce their taxable rental income by deducting certain expenses. Allowable deductions include property management fees, maintenance costs, repairs, insurance, utilities, and depreciation. Keeping detailed records of these expenses is essential for accurate tax filing.

Expats must file an annual tax return declaring their rental income by March 15th of the following year. It's advisable to work with a local tax professional to ensure all income and deductions are accurately reported.

Property Taxes

In Costa Rica, an annual property tax called the "impuesto territorial" is levied on all real estate, including land and constructed properties like homes and commercial buildings. Costa Rica’s property tax rate is typically 0.25% of the registered value of the property, as determined by the municipal government.

Property tax bills are issued annually, usually in November or December, and must be paid in full by January 31st of the following year to avoid penalties and interest charges. Some municipalities offer discounts for early payment as well.

To learn more about corporate taxes for those who purchase properties from the security of a corporation in Costa Rica, please visit this in-depth article about Property Taxes in Costa Rica.

Luxury Property Taxes

The standard annual property tax rate in Costa Rica is 0.25% of the registered value for most residential properties. However, there is a "luxury home tax" applied to higher valued properties, which is 0.55% of the property’s appraised value. This luxury tax kicks in for properties with a registered value above 121 million colones (around $205,000 USD), so the maximum total property tax rate, even for ultra-luxury homes, is capped at 0.55% of the registered value.

Although there are many properties for sale in Costa Rica that are well above $205,000 in price, these properties avoid being valued high enough for the luxury tax for the following reasons:

1. Registered property values tend to lag behind current market values, especially in desirable areas.
2. There are processes to appeal excessive registered valuations.
3. For new construction, builders often strategically segment properties to keep individual valuations below the luxury threshold.

So in practice, it takes an extremely high-end luxury property for the 0.55% rate to apply. Most expat-owned homes and investment properties tend to stay under that luxury valuation level through the factors above.

Transfer Taxes

When you purchase real estate in Costa Rica, you'll be subject to a transfer tax called the "impuesto de traspaso." This tax is calculated based on the registered property value and is paid to the local municipality where the property is located.

The transfer tax rates can add up to around 4%, depending on the property value and whether you qualify for any exemptions as a permanent resident or pensionado (pensioned retiree). This tax applies not only when buying, but also when selling Costa Rican real estate holdings.

Transfer Tax Rates and Calculation

The transfer tax rate of 1.5% is applied to the declared value of the property at the time of registration of the property transfer in the National Registry (Registro Nacional). Both the buyer and the seller can negotiate who pays this tax, although it is commonly shared. Additionally, there are the following transfer fees to be paid:

• National Registry Fee: 0.5% of the declared value
• Legal Stamps: Approximately 0.85% of the declared value
• Notary Fees: 1.25% of the declared value
• Property Taxes: 0.25% of the registered value annually
• Capital Gains Tax: 15% of the profit on the sale (if applicable)

Capital Gains Taxes

Capital gains taxes in Costa Rica were introduced as part of a comprehensive fiscal reform package effective from July 1, 2019. The rate is set at 15% and it applies to the profit made from the sale of capital assets, including real estate. The profit is calculated as the difference between the selling price and the acquisition cost (including any capital improvements and related expenses). 

There are exemptions to paying capital gains taxes in Costa Rica in the following special cases:

Primary Residence: The sale of a primary residence is exempt from capital gains tax. This means if the property sold is your principal home, you do not have to pay capital gains tax on the profit.

Previous Ownership: Properties acquired before July 1, 2019, have the option to pay a one-time capital gains tax of 2.25% on the total sales price instead of the 15% on the profit. This is beneficial for those who have owned property for a long time and may have significant appreciation.

Capital gains must be declared and the tax paid within 15 working days of the sale of the property. The tax payment is made to the Costa Rican tax authorities, usually through the services of a notary who handles the property transfer.

Note: Keep detailed records of all transactions, improvements, and expenses related to the property to ensure accurate calculation and reporting. Due to the complexity of tax laws and the potential for significant tax liabilities, it is advisable to consult with a tax professional or legal expert who specializes in Costa Rican real estate transactions.

Estate Tax Considerations

If you pass away while owning property in Costa Rica, your heirs or beneficiaries may be liable for estate taxes on the inherited assets. Costa Rica imposes a progressive estate tax ranging from 5% to 15%, based on the total value of the assets exceeding an exemption threshold.

Proper estate planning, such as establishing a living trust or transferring property ownership ahead of time, can help legally minimize or avoid excessive estate taxes for your heirs. 

Read the full article, ‘Preparing for the Inevitable,’ which goes in depth into wills, final testaments, and the probate process in Costa Rica.

Overview of Costa Rica's Estate Tax System

Costa Rica's inheritance tax is officially called the Impuesto sobre las Transmisiones Patrimoniales (ITP). This tax applies to the total value of assets/property inherited by each individual heir or beneficiary that exceeds an exemption threshold. The exemption threshold resets every 10 years. For the 2023-2032 period, the exemption is ₡108 million (around $183,000 USD).

Any inheritance value over the ₡108 million exemption is taxed at the following progressive rates:

• 5% on values from ₡108 - ₡324 million
• 10% on values from ₡324 - ₡540 million
• 15% on values over ₡540 million

There are no exemptions based on the relationship between the deceased and heir. All beneficiaries are treated the same for ITP purposes. However, there is an exemption for real estate that was titled jointly between spouses, in which case only 50% of the property value is included in the ITP calculation. 

The inheritance tax filing and payment is due 6 months after the date of death. Heirs are jointly responsible for the ITP liability. Proper estate planning, such as establishing a trust, can help minimize or avoid excessive ITP taxes for heirs inheriting property and assets in Costa Rica.

Avoiding Double Taxation

Double taxation occurs when the same income is taxed in two countries. Fortunately, tax treaties exist between Costa Rica and many other countries to prevent this from happening. Consulting with a tax professional can help you determine if a treaty applies to your situation and ensure you're not paying taxes twice.

Resources & Getting Expert Advice

While this guide covers the major tax areas, every expat's situation is unique based on factors like residency status, income sources, existing assets, and more. It's highly advisable to work with an English-speaking Costa Rican tax accountant (contador público autorizado) or attorney who specializes in expat tax matters.

The Costa Rican tax authority (Ministerio de Hacienda) provides useful resources and tax filing services on their website. However, due to the complexity of taxes for foreign property owners, most expats find it worthwhile to have professional tax representation.

Proper tax planning and compliance is essential for expats realizing their dream of owning real estate in Costa Rica. By understanding the various tax implications and getting expert guidance, you can confidently navigate the system while maximizing your tax efficiency as a foreign property owner in this tropical paradise.

 

Disclaimer: This article provides general information about Costa Rican tax implications for expat property owners and should not be considered professional tax or legal advice. Consult a qualified Costa Rican tax expert to understand your specific tax obligations and requirements. The author is not liable for any errors or damages arising from use of this information.