Law 8683 taxes are due Jan. 15. Many expats and foreigners having a property with a house on it in Costa Rica are confused about this tax. Some pay it when they should not be doing so. Most people refer to this assessment as the luxury tax.
It applies to homes of more than 128 million colons or approximately 239,000 U.S. dollars at the current exchange rate. The kick-in-the-pants is that if a house qualifies for the tax, the computation of value adds the land and the construction it sits on as well as other factors into the equation. Adding everything up makes it very expensive.
Allan Garro of Garro Law is an expert on Law 8683. He said in an interview that the law took effect Dec. 1, 2008. The tax covered houses of 100 million colons and above back then, he noted. Many people have scrambled to find ways to avoid the tax by using depreciation schemes to devalue constructions. The tax people caught on quickly and began using different valuation parameters to close the loopholes. Overall, the tax has been a disappointment for generating new taxes, added Garro.
Hacienda’s tax department is trying to find creative ways to catch cheaters on this tax. They are currently working closely with municipalities, insurance companies and other resources to cross check filings. Last year, property valuations were increased throughout the country throwing more properties into the taxable zone.
The key to understanding this tax, or any tax in Costa Rica, is simple. One needs to understand the term hecho generador. This term means the act that generates the tax due, similar to, cause and effect.
The cause that creates this tax can be broken down into two basic acts:
1. A house construction over the threshold amount. The tax department publishes the new amount every year.
2. The use of the construction as a primary or secondary residence or for recreational purposes.
This means owners of homes that are sitting vacant, uninhabitable, or used for business do not have to pay this tax.
The by-laws of the law cover these exceptions, not the law.
Why is this important to anyone meeting the threshold requiring him or her to pay this luxury tax? Because if one understands the details of the law, it is possible to reduce its impact. Anyone qualifying should be fair and pay, but why pay more than what is legally due?
For example, many expats buy second homes in Costa Rica for future retirement. However, until that day comes some rent out their properties to tourists. This is a business activity, thus the property is exempt. Now the caveat: this requires filing tax forms and paying taxes as businesses do.
Too many people renting are hiding the fact they do so. They are not abiding by the law. Hacienda knows this. The country needs all the money it can get. Tax collectors are combing the land, especially in touristy areas where villa rentals are common, to weed out the cheats. What makes this even scarier is penalties for those not abiding the law are hefty.
Residential housing on farms qualifying for Law 8683 taxes get hit hard because all the land around the constructions is taxed too. What is a gentleman farmer to do if he or she is not running the farm as a business?
One option is to subdivide off all the land not needed for the housing area. Doing this exempts it from the tax. Another idea is to plant something or have some livestock on the land and try to make a small farm operation. Agricultural property is exempt.
Anyone affected by the law should read it and pay especial attention to the by-laws. Article 1, paragraph 2 and Article 6 are very important references. Costa Rica’s tax department Web site has the full Law 8683 and the by-laws in Microsoft Word format.
Another great reference is Hacienda’s database for finding property valuations throughout the country. On this page, one can find maps, broken down by cantons with values for rural and urban land.
This is the same information Hacienda uses for Law 8683.
When in doubt as to whether the owner of a house must pay the tax, it is best to consult a professional engineer savvy in Hacienda’s parameters and valuations. They are complex. It is necessary to revalue a property every five years.
It is also possible to get out of the system if one qualifies for an exemption. This is also difficult, but an experienced professional can make the appropriate application at the tax department.
For those who have to pay luxury home taxes, what a better way to start the New Year. Reading the fine print of Law 8683 could end in a substantial tax savings for those who qualify.
Garland M. Baker, a certified international property specialist, is a 45-year resident and naturalized citizen of Costa Rica. His firm’s team provides multidisciplinary professional services to the country’s international community. Reach him at firstname.lastname@example.org. Baker has undertaken the research leading to these series of articles in conjunction with A.M. Costa Rica. Find the collection at http://crexpertise.info, a free reprint is available at the end of each article. Copyright 2015, use without permission prohibited.