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Archives for June 2019

New Costa Rica Capital Gains Tax

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Well, it’s official now, or almost. As of July 1, 2019, there will be a new Costa Rica capital gains tax of 15%.

Many, especially realtors, are aghast at the nerve of the Costa Rican government for doing such a thing. The real problem the government faces, however, is a burgeoning budget deficit. At least the current administration of Carlos Alvarado, unlike the do-nothings of the recent past, is doing something about it.

Capital gains taxes have never been very popular with the upper echelons of whatever society that decides to enact them. After all, the rational goes, the ordinary income that bought the investments, the sale of which generates the tax, has already been taxed! At least, that is the general argument from the right. From the left, the idea for the tax is a way to “soak the rich.”

In the U.S. the capital gains tax has long been a hot-button source of vehement contention between the left and right. Any attempt to raise the tax is decried by the right as socialistic and any to lower it by the left as catering to the rich. The tax in the U.S. is a much more complicated mess than what is being proposed in Costa Rica, with vast differences in the rates on long versus short-term gains and a myriad of loopholes. It is one of the areas most cited in the progressive outcry against “crony capitalism.”

So, who will be most affected by the new Costa Rica capital gains tax?

For starters, a personal residence is exempted from the tax. Now, hold on you loop-hole-loving capitalists…that doesn’t mean your second and only home in Costa Rica will qualify as a “residence.” To be honest, the particulars of what constitutes a residence haven’t been completely ironed out, but I would suspect that the Costa Rican government will be wise enough to close any loopholes that would allow second homes owned by North Americans in Costa Rica to escape the tax.

The average middle-class Costa Rican doesn’t own anything other than a residence, so the tax really isn’t aimed at them. It is aimed at the upper classes who own investment properties. And it is especially aimed at foreign investment in Costa Rican assets, the types of investments made with foreign-sourced income that never received any form of taxation in Costa Rica to begin with, thereby throwing water on the double-tax argument.

As I stated from the outset, the tax will be 15% of the gain from the sale of a capital asset. Capital asset certainly encompasses either real estate, or the shares of a Costa Rican company owning real estate. It will be important to be able to document clearly the cost basis in the asset being sold. Many owners of properties in Costa Rica have for years declared a far lower value for property tax purposes than the property in reality has. Those folks are going to have a hard time boosting their cost basis in order to lower the tax, which is 15% of the difference between that cost basis and the realized sale price.

The government has provided a one-time “exemption” for properties that were owned prior to the enactment of the tax, or prior to July 1, 2019. For those, the owners can opt to pay a 2.25% tax on the gross sales price, as opposed to 15% on the gain. For instance, if you sold a property for $200,000 and had a $150,000 cost basis, it would generate a $7,500 tax on the $50,000 gain (at the 15% rate). However, if you made the one-time election, you would only pay 2.25% on the $200,000, or $4,500.

The new Costa Rica capital gains tax must paid 15 days after the closing of a sale.

Will this tax put a damper on North American real estate investment in Costa Rica? I don’t think so. In fact, Costa Rica is simply joining the ranks of many other Latin American countries that have already implemented such a tax (like Colombia, Ecuador, Panama, etc.).

I believe that the typical life-style-related reasons North Americans often make such investments will overcome the future sting of having to one day pay the tax. However, what it might in fact do is put a damper on the real estate flipping that often goes on in Costa Rica’s hottest real estate markets.

Costa Rica, like any other sovereign nation, has the right and indeed the obligation to take care of its internal affairs, even if doing so might affect outsiders negatively. Even though I’m a realtor down here, I applaud the move by Costa Rica to get its affairs in order. It will remain to be seen, however, if the implementation and, more importantly, enforcement of this new Costa Rica capital gains tax will actually make a difference for the good of the country.

Costa Rica Expat Creativity

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I never was much of a creative person until I moved to Costa Rica. Before I came I’d been a tax lawyer and then owner of a small M&A advisory firm. Not very creative stuff, unless reducing corporate tax bills strikes you as being a creative effort. I guess it can be. However, get too creative with that stuff and you might wind up with more creative time than you ever bargained for, behind bars!

What is creativity anyway?

One way, maybe the most common way, to answer that is that creativity is making something from nothing. But in reality that rarely ever happens. Usually there is some sort of something there and the creative person comes onto the scene and adds to or changes it, making what was seem entirely fresh and new, original even.

Take Andy Warhol’s Campbell’s Soup Can paintings, for instance. Definitely not original in the sense of something from nothing, but nevertheless a very famous series of creative endeavors indeed.

Shortly after arrival to Costa Rica, something sparked the creative impulse in me like living in the U.S. never did. In my case, the creativity came in the form of writing.

I started blogging back in 2005. I’d founded a tour outfitting company and kept most of my writing geared towards Costa Rica tourism-related topics. And then gradually I began writing about other stuff as well, stuff that just hit me early in the morning when I would usually sit down to write.

One of my first blogs was entitled 365 Reasons I Love Costa Rica, which later morphed into, simply, Costa Rica Guy. Many of the older posts appearing in this blog are from those initial efforts. The idea for 365 was to write a different reason every day for a year. But as I wrote the reasons began to gain more and more distance from Costa Rica as the seminal topic. I delved into philosophical stuff, political stuff, and environmental stuff, among other more trivial topics, always attempting to have a Cost Rica tie-in, often very loosely woven.

Later on I started a much more philosophical blog entitled Revolutionary Misfit. I have recently backed off writing in that one because the motivation to do so these days always seems related to politics. And, well, I’d rather spare myself. Nevertheless, there are years of posts in that blog that tell the story of how I came to think the way I currently do.

I believe that Costa Rica, or the expat life in Cost Rica, was, in large part, my muse. I’ve written before about how Costa Rica shifted my paradigm from being quite conservative (politically and otherwise) ideologically to, well, sort of a wild-eyed lefty, or progressive as I like to call myself these days. And that shift would often be evident in my almost daily writing.

About the same time that I launched the Misfit blog, I also began to write eBooks. I wrote a number of them, all still available on Amazon. None have reached any “best seller” list, to put it mildly. However, I’m proud of every word written. Getting all that out of the brain and into cyberspace can be a heart-wrenching, soul-revealing and vulnerability-enhancing endeavor.

Right now I have a memoir of my Costa Rica expat life ready to be edited and perhaps one day published. I’m in no hurry, however, and continue to mull over it and massage the content from time to time, maybe even add to it as my Costa Rica story continues to unfold.

My latest creative effort is a podcast. It’s called the World Changers Expat Podcast. The idea is to interview expats, not just in Costa Rica, but around the globe, who are using their creative impulses to make a difference in the world. I’ve so far recorded three episodes. The goal is one per month.

I’ve seen Costa Rica expat creativity displayed in all sorts of ways. Some do it through an art form (writing, painting, sculpting, music, etc.), arts and crafts, or some type of well-being therapy. Others do it by starting organizations geared towards helping people, animals, or the planet. A lady I recently sold a property to is getting creative via her Tibetan bowl therapy. All you have to do is go to the weekly market, or feria, in Tinamastes and you’ll see a whole bunch of Costa Rica expat creativity unleashed.

Of course, many of our resident expats were creative before ever coming to live in Costa Rica. Others, I’d venture to say, not so much. My Tibetan bowl friend was herself a real estate agent before Costa Rica. Now, there are some ways to “creatively” do real estate, but I’ve found that the pursuit of money and the material it buys, is a sure way to dampen the creative impulse. In fact, I was far more creative before I ever got involved in real estate and I’m now trying to find my way back to the level of creativity I was enjoying in Costa Rica before I became a realtor, despite my ongoing need to make a buck here and there.

I believe we humans are at our core a creative species. Perhaps the only species on earth whose creativity doesn’t merely flow from instinct, but from some deeper region of the brain and the consciousness it either produces, or acts as a kind a radio receiver, allowing us to tune in to a universal consciousness, or perhaps both.

The bottom line is that if you’re contemplating becoming a Costa Rica expat get ready to be inspired creatively. There’s something about this place that just does that. I don’t know if it’s the overwhelming natural beauty, or just the impact (perhaps “shock” is a better word) from living somewhere as strange to the senses (including sense of logic) as Costa Rica can often be.

Probably it’s a little of both.

Don’t plan on coming down here and just vegging out on ocean and mountain views. Open up your mind and let the creative juices flow. The world can stand to benefit from less human effort towards increasing “GDP” and more towards making the world a more beautiful and humane place for its inhabitants.

The world needs your unique brand of Costa Rica expat creativity.

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