Capital gains tax on real estate transactions: things you need to know!
by Gonzalo Rojas B. Partner | Dec. 22, 2023 | Article, Real Estate
Over the last few months, Quatro Legal’s real estate department has been constantly getting questions and concerns from property owners, investors and realtors, about the impact of the capital gains tax on their investments, as well as the process to complete its filing. Moreover, the Tax Agency has been actively reaching out to Public Notaries and Sellers inquiring about the capital gains filing – or lack of filing to be precise. I have noticed that not everyone understands how this tax works and have decided to avoid it. However, defaulting on the payment of a tax is always a bad idea.
Therefore, based on my experience in the real estate market and the most frequent questions I get on this matter, I came up with the following Q&A on how the capital gains tax works on a real estate transaction. Hopefully, this will orient all readers and make real estate transactions a lot smoother.
When did the capital gains tax come into effect? With the enactment of Law 9365, “For the Strengthening of Public Finances”, as of July 1st, 2019, a capital gains tax was created, which levies capital gains on movable and immovable property. This has a huge effect on real estate transactions and real estate investments!
How is this tax calculated? A capital gain arises from the difference between the value of an asset at the time of purchase and the asset’s value at the time of sale. If this value is positive, said amount should be subject to a 15% tax. To calculate the amount of capital gain, owners must consider the purchase value of the asset plus the value of the investments and improvements made to it minus its sales value. If the resulting amount is positive, the tax rate must be applied to the resulting difference and the tax return must be filed and paid.
The formula looks like this:
(Purchase price + value of the investments and improvements – sales value) * 15% = Capital Gain Tax
Are there any exceptions to avoid payment of 15% capital gains tax a on real estate transaction? For real estate transactions, the law provides two exceptions to avoid the payment of the 15% of capital gains tax:
- “Home exception”: If the property being sold is the Seller´s primary residence or home, Seller may apply for this exception and be exempt from payment of capital gains tax. For these purposes, according to Law 9365 and its regulations, a “primary residence” is the property where the Seller resides. The tax administration has established that the property shall have as primary purpose to safeguard, feed, protect, serve as home and be inhabited regularly by the owner. It is not relevant whether or not the property is registered on a personal or corporate name; however, in this second case, the corporation must be owned by the occupants. The “Home exception” does not apply to commercial real estate and maybe questionable for homes or residences that are leased to third parties as part of economic or business activities and that is not regularly inhabited by the owner.
If the property is owned by a “non-domiciled” person, either physical person or corporation, such as a foreign corporation, trust or any kind of legal entity, not duly and legally domiciled in Costa Rica, at the time of sale, the Buyer must retain 2.5% of the price of the property and ensure that any capital gains tax is covered and paid by filing the property tax return to the Tax Agency. Public Notaries shall be obligated to confirm this as part of their obligations to register any property transfer deed in the National Registry.
Law 9365 considers as domiciled person all foreign persons that spend more than 183 days in Costa Rica regardless if the person enters and leaves Costa Rica.
Costa Rican corporations duly registered at the National Registry represented or owned by foreigners are considered domiciled in Costa Rica.
- “One-time exemption”: Another option is for Sellers that owned property before the law came into effect on July 01st 2019, to opt to use a one-time exception by which the Seller shall pay 2.25% on the purchase and sale price by filing the property tax return and making the payment to the Tax Agency.
The formula looks like this:
Purchase price * 2.25% = Capital Gain Tax
How are capital gains filed and paid?
This tax must be filed and paid by the Seller. The process of filing and paying – or not paying – the capital gains tax implies proper legal and tax advice, since non-payment or incorrect payment may imply sanctions by the tax administration. Also, since it must be done through the ATV (“Administración Tributaria Virtual”) tax agency platform, a user identification number and password must be obtained by the owner to access the ATV Platform. This information may only be obtained by the owner of the property in case of physical persons and the legal representative in case of corporations.
Once access to the ATV platform has been obtained, preparing, filing and paying the capital gains tax must be done via the D-162 form which is hosted on the ATV platform. The D-162 form requests general information of the tax contributor, the property and the amounts indicated above. Once the form is uploaded, it can be paid through any banking platform or directly at the bank with the owner’s identification number.
The D-162 form must be filed before the first 15 natural calendar days of the following month after the purchase was consummated by the owner. Therefore, if the property was bought in January, the Seller has until February 15th to file the D-162 form.
It is important to understand that the non-compliance of these obligations implies paying sanctions ranging from one base salary (about $800) to 1% of the owned amount calculated each month, or fraction of months.
For more information please email me at firstname.lastname@example.org. Will be glad to assist you!