Capital Gains: What Deductible Expenses Are Accepted To Offset The Tax?

The capital gains tax was created by law 9365 “Law for Strengthening of Public Finances” which introduced a capital gains tax on movable and immovable property.

In the case of Real Estate, the capital gain arises when there is a positive difference between the value of an asset at the time of purchase and the value of the asset at the time of sale.

When this value is positive, it is subject to 15% tax, unless exemptions can be applied (https://quatro.legal/capital-gains-tax-on-real-estate-transactions-things-you-need-to-know/) . To calculate the amount of the capital gain, the purchase value of the asset, and its sales value are taken into consideration, and the 15% tax rate is applied to any difference.

The capital gains tax declaration must be done and paid within the first 15 calendar days of the following month. It must be declared through form D162 “Declaration of Capital Gains and Losses” and paid through any Costa Rican bank platform.

Pertaining to the capital gains tax on real estate transactions, one of the most common questions clients ask, is “What costs may I deduct to reduce the amount to be paid?”

The capital gains tax system has specific provisions regarding what can be deducted from the capital gains to calculate the taxable amount. Article 37 of the Income Tax Law Regulations establishes the general rules for the valuation of the taxable income of capital gains and losses for transfers for valuable consideration. It determines that the acquisition value shall be constituted by the sum of the (i) the actual amount for which the acquisition was made; (ii) the cost of investments and improvements made to the assets acquired; and (iii) the expenses and taxes inherent to the acquisition that have been paid by the acquirer.

1. Actual amount for which the acquisition was made: the purchase price paid when the property was purchased as stated in the closing documents.

2. Improvement costs: Any documented expenses for improvements, renovations or additions made to the asset. These must be verifiable and directly related to enhancing the value of the property. It is important to mention that repairs are not taken into consideration for said purpose.

3. Taxes related to the transaction: Also, the taxes and fees related to the transaction can be taken into consideration and deducted from the sale price. This includes taxes and fees involved in the transfer when the property was purchased. If real estate commissions may be included, it will depend on the interpretation and the risk appetite by the contributor.

For any of the items mentioned above, the taxpayer must maintain reliable proof of all the deductibles expenses to support any claims in case of a tax audit as per the Costa Rican tax guidelines meaning unofficial papers, or simple copies of quotes will not be sufficient. The transfer deeds, pictures, electronic official invoices, and bank statements can be some of the supportive documents.

It is important that prior to filing the corresponding declaration you seek the advice of an attorney and an accountant who can verify the amounts to be paid and that the evidence being used is legal and can be used for deductible purposes.

For further inquiries or assistance with legal matters related to capital gains, feel free to contact Maria Fernanda Baudrit at mbp@quatro.legal