New Costa Rica Capital Gains Tax

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.