Rental Properties Traditional Tax System Vs Special Tax System (85/15)

Traditional income tax:
Definition: It functions according to a schedule-based framework that taxes profit generated from a specific economic activity, independent personal work, or capital investment on an individual basis. This system prevents the taxation of individuals’ actual wealth increase, thus affecting the progressive nature of the tax.
Regulation: It is regulated by the current Law number 7092, “Income Tax Law” published in 1988.
Who should pay it: All individuals, whether physical or juridical, engaging in economic activity.
Calculation method: Under the traditional regime, incomes are summed up, payments are subtracted, and it’s calculated on the net income, according to the tables published by the General Taxation Directorate for each fiscal period.
Due date: In the traditional system, income tax is declared and paid annually, within two months and fifteen natural days following the end of the fiscal period.
Exposure to exchange rate: In this scheme, the exchange rate differential is taxable for both realized and unrealized gains generated on assets and liabilities.
Impact on short-term rentals: If a person’s rental expenses exceed 15%, it’s more advantageous to remain under the traditional income tax scheme. Conversely, for someone with minimal deductible expenses, utilizing the new real estate income regime is recommended.
Other obligations that apply to the traditional regime: The CCSS includes short-rental income as part of the income of independent workers. To calculate the income on which the fee is pad, the CCSS divides what the taxpayer declares as net income during the year by 12 months.

85/15 Income Tax:
Definition: It is a model of “global income,” replacing the previously mentioned “schedule-based income” model. This system aims for equality in treating active incomes by subjecting them to the same progressive scale, and proportionality in treating capital incomes.
Regulation/Reason for creation: Regulated as a partial reform to Income Tax Law No. 7092, on December 3, 2018, through the law “Strengthening Public Finances No. 9635.” It was created to ensure a fair, equitable tax burden in line with the country’s economic reality, addressing the difficulty in determining actual total wealth increase under the previous income tax system.
Calculation method: To determine the tax, all taxable incomes are integrated into two taxable bases:
A general base: Includes incomes from dependent personal work, pensions, incomes derived from economic activity, and real estate capital returns. After deducting legal costs and expenses, resulting net incomes are subject to a progressive adjustment with a minimum exemption threshold.
A special base: Includes real estate capital incomes and capital gains, with 15% of incomes granted as expenses and the remaining 85% subjected to a 15% tax rate.
Who can apply: Individuals or juridical entities earning incomes from rentals or movable properties.
Exposure to exchange rate: Under this model, only realized exchange rate differentials are taxable.
Requirements:
Employ at least one worker with a reported salary to the CCSS.
Submit a request to the “Ministerio de Hacienda” and maintain participation for a minimum of 5 years.
Due date: Monthly filing is required, using form D-125, with tax payment due within the first 15 days of the following month.

If you found this information useful or need further guidance, feel free to reach out to Lourdes Salas at lsv@quatro.legal