Buying or selling property in Costa Rica but unsure about the tax consequences? In a recent chat online at www.tico times.net, Sergio García, a tax expert for KPMG in Costa Rica and a former columnist for El Financiero, took questions about the nation’s real estate tax system. Here are some excerpts:
Q:Who ordinarily pays the fees for the transfer of property, the buyer or the seller?
SG: The law does not specifically address that issue. In practice, however, unless agreed otherwise it’s 50/50. Some official interpretations confirm that practice.
A couple of years ago the Municipality of Santa Ana gave property owners the opportunity to voluntarily increase their property values without asking any questions. Did this work for them? And have other municipalities done the same since?
This initiative was successful. Property owners declared reasonable values for their properties. The municipality got more revenue without the effort of going to property owners, making appraisals, entering into procedures to adjust value, etc. Other municipalities have had similar initiatives: they have been “lenient” with voluntary declarations from property owners they consider reasonable.
What is the risk to me as a buyer if the seller insists on registering the property at a lesser value?
The problem you might have is that you would be liable for any taxes that the tax administration may consider due. It would now be your problem.
Can I lose title to my property if I haven’t paid the real estate taxes on it in years?
You do not (immediately) lose title to your property just for not paying taxes. The municipality has to start a legal procedure to collect the taxes due and it may seize your property to sell it and then collect the taxes due. You would have a chance to pay the taxes before the property is sold.
As a columnist for the weekly El Financiero, what was your favorite topic to write about?
My topic of choice is how the tax administration oftentimes comes up with aggressive interpretations of the law to collect more taxes. Sometimes those interpretations cross the line and are, frankly, illegal. I tried to put my 2 cents in and try to keep respectful of the law.
What is the transfer tax on a property sale?
There is a 1.5% tax on the transfer of real estate property in C.R. This includes not just the land but also anything permanently fixed to the ground. There are other elements you should consider, namely stamp taxes and notarial fees. The whole package is close to 3%.
You mentioned the tax office can be too aggressive.How could they improve?
Everybody who works for the government has a duty to respect and uphold the law and the Constitution. The problem is that the folks at the Finance Ministry get a lot of pressure to collect more taxes. One of the solutions proposed is to create a more comprehensive regulation to the income tax law. Also the courts should observe closely the activity of the tax administration.
Is there any personal income tax benefit from having a mortgage on a property?
You may deduct the expenses associated with that mortgage as long as the property is used to generate taxable income (for example, if you rent it out). You could not deduct the interest and expenses for your personal home if, for example, you only receive a salary.
I understand Costa Rica doesn’t have a capital gains tax. Is that correct?
That is partially correct. Capital gains are not taxable. However, if the goods you are selling are depreciable, or if the sale constitutes your habitual activity, the capital gain would be taxable. So, for example, if you sell a property, the gain on the land (not depreciable) would not be taxable, but the gain on the building would be taxable.
How can I find out if back taxes are due on a property I want to buy?
You should ask the seller to provide you with a statement of accounts for the property. This document should be issued by the municipality.
Where do you go to pay your property taxes? Do they take credit cards?
You have to go to the municipality. To the best of my knowledge, none of them take credit cards. That would be a good suggestion, though, to make the collection simpler.
Are there other distinctions in the tax system as compared to those in other countries?
Well, as you may remember, the government has been talking about a substantial tax reform over the last six years or so. One of the amendments that was discussed was that capital gains would in fact be taxable. It was proposed that it would be possible to adjust the tax basis for your property based on indexes.My crystal ball is broken, so I cannot tell you what is going to happen with this initiative, but I do not think it will gain momentum again, at least until the end of the Arias administration.
If I have my own company and have a home office, then can I deduct my mortgage payment and home insurance payments as legitimate business expenses on my personal income tax?
Short answer: yes. However, you are not allowed to deduct the amount of the mortgage and home insurance payments that pertain to your residence. You should only deduct the portion of those payments that is associated with your home office. You should therefore somehow make an allocation of those payments. Just try to use a reasonable method.
How do they determine the value of your taxable property?
In principle, the municipalities and their appraisers have access to technical documents that provide guidance on the value of the land in different territories and the valueof constructions considering materials used, use, etc. In practice, they usually talk to the person that delivers the declaration, take a quick look at it and, using their flare, see if they consider it reasonable.
What are the property taxes on concession land? Are they different from titled land?
The property taxes on concession land are basically the “canon” or fee that the municipality imposes for the concession. Those are dictated by the municipality at the time they grant the concession. If you do not pay your concession fee, you can actually lose your concession. They are different from titled land, where you pay 0.25% of the value of your property.
What important property tax changes might be implemented this year?
In my opinion, there will not be any important property tax changes implemented this year. The Legislative Assembly currently has a number of priorities (such as CAFTA and crime), and making changes to property taxes do not appear to be one of those. Some municipalities may take initiatives to go out and make massive appraisals, but those would not be actual changes in the system.
Can I deduct the interest payments on the loan I took to buy a company that owns property, to rent some of that property?
I’ll get a bit technical: there is no tax consolidation in Costa Rica. The income of a company does not flow through to the shareholder. Therefore, interest expenses associated with the purchase of shares could not be deducted from the rent income. The problem is that the shareholder is the one that has the expense and the company is the one that receives the income. I do suggest that people seek assistance at the time of purchasing properties, so that they can avoid these types of pitfalls.
Regarding recent news that concession canons rose sharply in the Malpaís area, is this likely to happen elsewhere in the country?
I think it will happen in other municipalities. All municipalities watch the value of the properties in their jurisdiction go up, and they will certainly want their share. I think that the important thing is that concessionaires get a due process of law and be able to make sure that the canon is not excessive.
I own, with title, a piece of property in Gandoca Manzanillo (a wildlife refuge south of Puerto Viejo) and I have never paid taxes. I was told it is not collected from a protected area. Can you confirm that is true, please?
According to the law, some protected areas are not subject to property tax. I would like to have more information of the legal status of your property before I respond. I would like to invite you to write me at [email protected] kpmg.com and I will get back to you.