What are the On-going Tax Liabilities Associated with Costa Rica Property Ownership?

As a purchaser or a potential purchaser of real property in Costa Rica, a number of online real estate oriented articles deal with matters such as the “Closing Costs” of the property purchase itself. However, after you become a property owner, and not taking into account the incorporation and annual maintenance costs of a Costa Rica holding company to hold the registered property title should you choose to proceed in that manner, what are the other annual tax liabilities that you can expect as a property owner?

Municipal Property Taxes

The one annual tax expense that will be incurred with all property ownership, is the Municipal Property Taxes, which are payable to the Municipality where the property is located. These taxes are calculated to be .25% of the currently assessed Municipal Property Value for both the land and the improvements. The Municipality will assess these Property Taxes annually, but they may be retired in installments on a quarterly basis, without penalty. Many Municipalities offer a discount in the Tax amount assessed, if the entire year’s Property Taxes are paid in advance in the month of January.

It is incumbent upon the property owner to declare the fair market value of the property with the Municipality, once every five years to establish the Property Tax Assessment Value. Penalties, along with property tax arrears, may be assessed by the Municipality for failing to make this required Property Value Declaration. The Municipality may accept the value declared by the property owner, or make an independent assessment of the property value. This Property Tax Assessment by the Municipality may be appealed by the property owner if the owner is not satisfied with the assessed value amount.

Municipalities have the legal authority to annotate the property title for Property Tax arrears, and ultimately, foreclose and sell the property in order to collect the arrears owing.

Luxury Home Tax

The Luxury Home Tax is an annual Tax payable for properties having construction improvements valued at 145,000,000.00 Colones, or greater. This translates into approximately $285,000.00 U.S. in improvement value, at the current Colon to U.S. Dollar exchange rate. Properties with an assessed improvement value below this threshold amount, are exempt from paying the Luxury Home Tax. This Tax is payable annually to the Central Government Tax Department, by January 15th of each year.

The important thing to distinguish with this Tax is that to meet the threshold for the Tax to apply, it is the improvement value, without the cost of the land being included, that establishes the liability to pay the Tax. Once the improvement value has met the Tax threshold amount, the land value is added, and the Luxury Home Tax is payable on the total value of both the land and the improvements, based on the following sliding improvement value scale, in Costa Rica Colones:

  • 0.25% from ¢145 million to ¢364 million
  • 0.30% from ¢364 million and up to ¢731 million
  • 0.35% from ¢731 million and up to ¢1.096 million
  • 0.40% ¢1.096 million and up to ¢1.463 million
  • 0.45% on ¢1.463 million and up to ¢1.826 million
  • 0.50% on ¢1.826 million and up to ¢2.193 million
  • 0.55% on ¢2.193 million and above

The calculation of the Luxury Home Tax is a complicated matter, which is declared by the property owner on the Tax Department Form D-179, with the calculations entered on the Form being made by an Engineer or an Architect. An annual depreciation factor applies to the improvement value assessed. This means that a property that was originally assessed as having to pay the Luxury Home Tax, as having met the tax threshold improvement value amount, maybe excluded over time from this Tax liability, by virtue of the application of the improvement value depreciation factor.