Save on Property Taxes in Costa Rica
When purchasing a property, you have two options for how to make the payment of taxes: in the name of an individual or a company. Let's take a closer look at each option.
Option 1: Real Estate Capital Income
Under this option, the income from renting out the property is subject to a 15% tax rate. However, there's a silver lining. The Income Tax law allows you to deduct expenses, giving you a reduction of 15% of your gross income. This deduction doesn't require any proof and there are no other deductions allowed. So, in the end, you'll be paying a net rate of 12.75% on your monthly rental income.
It's important to note that you can't deduct expenses related to the operation, such as maintenance or depreciation. This tax needs to be paid monthly and you'll need to use Form D-125 to file it. Additionally, you'll need to issue electronic invoices for your rental income and charge a value-added tax (VAT) of 13%. The customer pays this tax, but you'll need to refund it monthly to the tax authorities.
Option 2: Income Tax (Traditional Income)
If your company has at least one employee working in the economic activity, you have the opportunity to switch to the traditional income tax regime. This means you'll pay an annual tax based on a progressive scale of taxes, with a maximum rate of 30% on your net profit. The great thing about this option is that you can deduct your operating expenses, which can be really beneficial. One expense that can eat into your profits is depreciation, which is typically around 2% of the cost of ownership per year.
Under this option, you'll calculate and pay your taxes annually using Form D-101. However, keep in mind that if you choose to switch to this regime, you'll need to inform the Ministry of Finance and stick with it for at least 5 periods.
It's important to weigh the cost-benefit of this decision, especially considering the high cost of social charges associated with having an employee.
Just like in the previous option, you'll need to issue electronic invoices for rental income and charge a value-added tax (VAT) of 13%. The customer will pay this tax, and you'll need to refund it monthly to the tax authorities.
Both options also allow you to lower the VAT payable on rental income by deducting the value-added tax paid on purchases of goods and services.
So, take your time to evaluate which regime suits your company best. It's a big decision, but understanding the benefits and costs will help you make the right choice.
When it comes to selling the property, we need to talk about capital gains. Basically, it's a 15% fee on the profit you make from selling the property. This fee is calculated by subtracting the original cost (also known as the book value of the asset) from the sale price. However, there's a catch. This rule only applies to properties acquired after July 2019, thanks to a tax reform in Costa Rica.
Now, if you bought the property before the reform came into effect, you have another option. You can choose to pay a 2.25% fee based on the sale price instead. It's up to you to decide which option works best for you.
Calculating this gain can be a bit tricky. You need to do it in colones, the local currency. To convert the original cost to colones, you'll need to use the exchange rate at the time of purchase. And to convert the sale price, you'll use the exchange rate on the date of sale. This might lead to some exchange differences, either in your favor or against you. Also, don't forget to take into account the depreciation of the original cost. But here's a little tip: you can increase that cost by using the consumer price index of the Central Bank. This helps because it boosts the cost and reduces the profit. Over the past few years, the consumer price index has been fluctuating between 2% and 4% annually.
Now, if the property is in your name as an individual, you're in luck. You can freely use and bring back the funds from the sale without having to pay any additional taxes. So, go ahead and enjoy the fruits of your labor!
Remember, these are just the basics. It's always a good idea to consult with a professional to make sure you're on the right track. Happy selling!
When you sell a property, you'll have to deal with the Real Estate Transfer Tax. This tax is calculated at a rate of 1.5% based on either the sale price or the fiscal value of the property, whichever is higher. It's important to note that both the buyer and the seller are responsible for paying this tax.
If the property was purchased under the name of a legal entity, such as a company, everything remains the same except for one thing. When you want to dispose of the property and bring back the money from the sale, you'll need to pay a 15% withholding tax for dividend payments.
However, there's a way to minimize this 15% dividend tax. It can be offset by the capital contributions made during the property purchase, which can be reimbursed to the partners without incurring the mentioned tax. Let me give you an example to make it clearer. If the property costs the company $200,000 and the partnership's capital is $12, the remaining amount can be considered as additional capital contributions by the partners. This additional capital can be repatriated without any taxes.
It's worth mentioning that some tax specialists argue that companies that only pay real estate income tax, such as rentals of houses or condominiums, should be exempt from this dividend tax due to certain technicalities in the Income Law. However, this is a risk that the investor must decide whether to take or not.
If the company doesn't pay dividends but returns the contributions as long as they exist, it's crucial to document these returns in the minutes of the shareholders' meeting. This documentation should include the date, attendees, and the amount of the return. This serves as a backup in case of any issues with the Tax Administration.
Lastly, it's important to note that if the property is used as the owner's personal home, there's no need to pay capital gains tax on the profit made from the final sale.
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Written by: Lucas Cascante | Edited by: Beatriz Merced