Costa Rican lawmakers recently passed legislation that will levy a new property tax on houses valued at more than 100 million colons, or approximately $180,800 at today's exchange rate. Dubbed "the luxury home tax," the proceeds are to be used specifically toward the fight to eliminate shanty towns in Costa Rica.
"The 'Luxury Home Tax' is actually called the 'Solidarity Tax For the Strengthening of Housing Programs' or 'Ley Impuesto Solidario Para el Fortalecimiento de Programas de Vivienda' [in Spanish]," according to Roger Petersen of Attorney Property Services, a company specializing in Costa Rican real estate transaction laws. "All funds raised by the tax are earmarked for housing for low income citizens," he said. The solidarity tax is to be paid in addition to other property taxes owed to the government.
Poverty in Costa Rica is not as extensive as in neighboring countries
The new tax is expected to raise about $45 million a year and is going to be in place for 10 years, according to The Beach Times
, an English weekly in Guanacaste, Costa Rica. It will be used to build affordable housing in order to help impoverished families out of the shanty towns. There are roughly 390 shanty towns and government estimates put the number of families living in inadequate housing at 40,000.
Poverty in Costa Rica is not as extensive as other countries in the region, according to Brad Butler, owner of Emerald Forest Properties, a real estate company specializing in Costa Rica. "Poverty exists but [it is] not as pronounced here in Costa Rica as in other Central American countries. Poor districts are present but not viewed as a problem, only a defect in [a] system in need of attention and repair. Officials enacted this tax and ear marked it to assist impoverished families [in order to] improve the quality of their lives," he said.
Costa Rica luxury tax details
The amount of the luxury tax owed depends on the market value of the home, excluding the value of the land on which it is constructed. Residences valued between 100 million colons ($180,800) to 750 million colons ($1,356,000) will be charged 0.25 percent of their market value, according to Petersen, who also runs the website costaricalaw.com. Homes appraised above 750 million colons ($1,356,000) but below 1.25 billion colons ($2,260,000) will pay 0.35 percent. Homes valued at above 1.25 billion colons ($2,260,000) but below 1.75 billion colons ($3,164,000) will be taxed at a rate of 0.45 percent. Anything valued above that will be charged 0.55 percent.
In cases of condominiums, the value of each one will be appraised separately and common areas used for recreational purposes will be factored in proportionally, according to The Beach Times. The law leaves it to property owners to figure out taxes owed and declare it to the tax authorities. Inspectors will check to ensure accuracy.
"The tax would be paid on a yearly basis and would be due on January 1st of each year," said Petersen.
Impact on investors' wallets
Luxury tax in Costa Rica applies not to the land, but to the property built upon it
It is important to remember that the tax excludes the value of the land on which the homes are built. In other words, it only applies to the value of the structure on a particular lot. "The tax does not apply to the land, just the construction located upon the land," said Petersen.
"If your land is valued at $184,000 and your home $184,000, you would pay only $460 a year," said Butler. Thus, even if the total market value of the home is actually $378,000, the tax payment owed would only be $460. The majority of homes fall out of the taxable category, according to Emerald Forest Properties. Therefore, the tax is unlikely to affect as many people as some fear.
Although the concept of paying additional taxes is a negative one to many investors, the overwhelming majority will likely owe nothing. "If you do the math, it is nothing," according to Butler. "To be able to assist the less fortunate in a country as rich as Costa Rica for such a small amount of tax is a positive move by far, not negative," he said.
Neighboring countries are using the new tax as a tool to lure people looking to move to Costa Rica their way instead, according to Emerald Forest Properties. "If newcomers and investors alike do not do their homework, then they may move on without ever fully knowing that is it nothing to speak of on an annual basis," according to Butler. "I personally do not see it having a bearing on people who have their hearts set on moving and living in Costa Rica," he said.
Whether or not the measure will actually address the problem of shanty towns is far from clear. "It is a start, as long as the tax ends up where it was intended," Butler said.