The ABC on Capital Gains and Losses applied to Real Estate
Pursuant to a tax reform introduced by Law No. 9635 (the Law for Strengthening Public Finances) on Law No. 7092 (Income Tax Act) on December, 2018, the Capital Income Tax was introduced to the Costa Rican tax system. In light of that, and according to the aforementioned law, there are three basic kinds of capital profits, with new dispositions applying to each one of them, i.e. income perceived from real-estate-related transactions, movable assets, and earnings and losses of capital (as specified in section ’27 ter’ of the aforementioned law). Therefore, and for the purposes of this particular article , we have decided to go through an ABC to explain the main considerations you may have when doing business related to real estate in Costa Rica.
First, let’s explore what they are. The revenue produced in Costa Rica obtained from capital deriving from real estate involves economic activities such as leasing and subleasing, the creation or assignment of rights constituted over Real Estate and rights of use and enjoyment of the properties, these are all are taxed according to the Law, whether such revenue is received in money or in kind. Such tax must be paid monthly.
The taxable event, also known as the ‘situation’, that gives room for the implementation of the tax, happens when the taxpayer receives or shall receive the amounts resulting from an economic transaction in the aforementioned circumstances. The amount that shall be paid, or taxable income, will be determined as the difference between the total income and deductible expenses. The expenses can be calculated up to 15% of the total income without needing proof, as stated in the Law (this 15% constitutes a sort of good faith presumption from the government itself in such a sense).
After obtaining the due amount, the difference will be applicable to a tax rate of 15% of the resulting amount for the tax on capital gains and losses. Afterwards, it is required to file a tax return for the real estate capital within the first fifteen days of the next month in which the transaction took place; and then pay the corresponding tax.
To illustrate the above, let’s look at an example. Let’s assume that I am the owner of a property located in Desamparados, San José, and I am leasing it for USD $500.00, I could deduct a 15% for expenses according to the Law and the taxable amount would be USD $425.00; therefore, I would have to pay a 15% tax on on USD $425.00, obtaining as a result USD $63.75 corresponding to taxes for the capital deriving of real estate. Now, this must not be confused with the VAT Tax that applies also to housing leases, which is 13% and applies according to the amount of the monthly payment (for instance, it applies starting with monthly payments of at least ₡675,300.00 which is around $1,165.00 USD).
Moreover, the Revenue Service (‘Ministerio de Hacienda’) has enabled a system to file the tax returns online, which can be accessed through this link. In order to do so, you must create an account first.
The mandatory form for capital gains and losses obtained from real estate income is called “D-125 Declaración Jurada del Impuesto de Rentas de Capital Inmobiliario”, meaning “D-125 Sworn Declaration of Real Estate’s Capital Tax”. The form has the following points to be considered:
1. Period of the tax return and taxpayer identification. In this section, you must include the corporate number of your corporation or the ID number you have registered before the Tax Administration.
2. Revenue information (perceived Real Estate Capital). In this space, you include the total of income perceived from real estate, and before continuing to submit information, the system requires to include information of the source of income, as well as the amounts that are being declared. As part of this step (and following the example previously provided), it is required to fill in the information concerning the tenants as well, regardless if the lease itself has commercial or housing purposes. This also means that for the purposes of the Revenue Service, it does not matter if the income is taxed or not with the VAT tax (established through Law no. 9635), just the amount of the income itself.
3. Deductible expenses.
Afterward, the system calculates the taxable income (including the said automatic 15% reduction) and allows the taxpayer to know the amount due. Payments must be made through the Banks or financial entities duly authorized by the Revenue Ministry. If the filings take place after the deadline of the established terms, interests may apply to the debt, as well as sanctions and other kinds of penalties.
Now, and as it was stated previously, regarding the taxable event, if such circumstance or event does not happen, there is, of course, no obligation to cover the tax (still, this does not mean that the taxpayer ignores filing the declaration each month, even if it states zero income for a particular period).
Moreover, we would like to cover some possible questions and answers to specific topics, as follows.
What happens to the nonresidents doing business in Costa Rica?
According to section ’28 ter’ of the Law, the income perceived through a Real Estate transaction by foreign nationals not residing in Costa Rica or without the permanent establishment, generates different obligations than the aforementioned.
In this way, in real estate transactions involving non residents, the acquirer is compelled to withhold a 2,5% of the total income as a guarantee of paying the tax corresponding to the capital deriving from that real estate transaction. Consequently, he will be responsible for withholding the 2,5% of the income and then shall file the tax return for a 15% tax rate calculated on the basis of the total income received.
For this reason, we consider it is appropriate to take this retention that must be done into consideration in case you are facing a closing with a foreigner that owns Real Estate in our country.
What happens if you sell your house?
This is one of the exemptions that the law establishes regarding the payment of this tax, as long as the house that is being sold is the usual residence of the taxpayer. This exemption applies when the house has been registered under the name of a corporation as well but, in this case, the shareholders would have to prove that the house was destined for residency purposes of the shareholders. Moreover, the Tax Administration is entitled to oversee and inspect if these conditions are met, and can request proof and other documents. This is stipulated in section 28 bis, point 7.
In a nutshell, the one who is compelled to pay the earnings over the capital is the seller, since he is the one who perceives said earning.
Is there a way to use another regime for declaring this income?
Yes, according to section 28 of the Law and section 3 ter of the Regulation of the Income Tax (Executive Order No. 18445-H) there is a possibility to apply to change the regime under which you are obliged to file and submit the tax returns.
Before doing this procedure, you shall be enrolled as an employer before the Caja Costarricense del Seguro Social or the Social Security Administration with at least one worker, and then commit to maintain this regime for a five (5) year term. In this way, you will be registered as a taxpayer of the Income Tax instead of the Capital Real Estate Income Tax, when doing business such as leasing, subleasing, creating and assigning of rights over real estate.
Please be advised that the above mentioned only is a simple explanation of how the capital deriving from real estate is subject to the addressed tax and that we are not providing specific advice to the current situation you are dealing with. If you’d like to explore the different approaches to cover your situation, we recommend getting in touch with an Accountant or Attorney of your choosing.
As of today, and given the consequences derived from the COVID-19 pandemic, the government recently issued what is now known as the “Tax Relief before the COVID-19” (Law no. 9830) with the intention of helping companies, businessmen, and independent workers through a three month extension (starting on April, precisely), which applies to the payment of certain specific taxes: added value (simply known as “VAT”, which refers to Law no. 9635, already mentioned before), utilities, consumer’s selection tax, and duties for the introduction of merchandise to the country.
Nevertheless, this “tax relief” law does not apply to the tax that has been addressed here, since it´s paid on a monthly basis and in section 2 it´s clearly stated that:
“(…) the taxpayers referred to in section 2 of said law (referring to Law no. 7092, also mentioned before) are exempt, for one single time, to make the partial payments of the tax over profit that would apply for the months of April, May, and June of 2020. (…)
The payment of the remaining taxes contained in Law 7092, Income Tax from April 21st, 1988, remains in force, whether it´s made via self-liquidation by the taxpayer or ‘retention at the source’”.
Should you have any further questions please let us know. We are willing to help you with all your real estate transactions here in Costa Rica.