All of us living in Costa Rica have been following the latest
news on the imminent approval in Congress of a new tax bill
introduced by the Chinchilla administration which contains
substantial amendments to our current tax legislation. Much of the
latest discussion in the media has focused on the discouraging
effect of these reforms for foreign direct investment, with an
emphasis on free trade zones. It is however a bit disconcerting to
me that less attention has been granted to an equally important
sector of the economy for our country: the real estate
How important is the real estate industry for Costa Rica? A
great lot. During the last decade, foreign direct investment in
real estate grew from nihil to becoming the second most relevant
source of FDI for our country, not far behind the
manufacturing/export industry, and certainly more significant than
tourism. It peaked, just before the recession burst the bubble, at
an amazing USD $650 Mn by the end of 2007, amounting for 40% of the
total FDI. During that same period, Guanacaste was the province
with the fastest growth in both construction and the second home
market. Logically, this was also the province that suffered the
most of the world economic crisis, as the real estate industry was
–because of its dependence on foreign investment- the
most seriously affected. Today, entering into 2012, this industry
is barely and slowly recovering and hope is just timidly beginning
to build up again in the heart of Guanacaste residents.
Dramatically and ironically the new Tax Bill severely targets
the real estate industry and scares FDI away. Let me explain just
how it does that.
Let's start with the tax on capital gains. Today,
non-recurrent real estate sales are simply not taxed, while
recurrent sales (typically, by a real estate developer) would be
taxed at a scaled rate. With the proposed amendments, all real
estate capital gains would be taxed, with either 15% (single
non-recurrent sale) or more likely 30% (if it's recurrent or
linked to its business activity). Therefore, less incentive to
develop or to buy real estate, as prices would go up to make for
the new taxes.
But that's not all. In the case of leases, with today's
law those would normally not be subject to capital gains. However,
once the new law is in place, monthly rent received from even a
single leased property would be subject to a 30% capital gains tax.
Worse still, any short term rents, and long term rents over $1,200
monthly would also be taxed with 14% Value Added Tax. A direct hit
to those second home owners and investors who usually rent their
condo or house for the most part of the year!
If you're not worried by now, just wait until you hear this:
All real estate related services (such as property management, real
estate agency/brokerage, and legal) will be taxed with VAT at 14%,
thus causing real estate transactions and ownership itself to
become more expensive, and our market also less appealing to
Last, but not least, the Bill also doubles the transfer tax on
real estate from the now current 1.5% of the purchase price to
I'll let you draw your own conclusions.
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