Here's 20 questions about the tax on luxury homes
By the A.M. Costa Rica staff

A news story Monday about the tax on luxury homes that went into effect Oct. 1 has generated lots of questions. Not all of them are answered easily. Here are 20.

1. Is this a tax on Gringos to drive us out of the country.

Nope, everyone with a home worth more than about $170,000 has to pay the tax. But most Ticos do not know about it either. Stand by to watch the sparks.

2. Where do we pay it?

The Dirección General de Tributación collects the tax. They probably will ask you to deposit it in a local bank like people in business do with the sales tax and others do with the income tax. Banco de Costa Rica and Banco Popular are good bets.

3.  Where can I get a form to fill out?

Tributación promises them for this week. But there is an example on line.

4. Is this the same as the municipal tax?

No, this is in addition to the municipal tax. However, the value you report to Tributación probably will come back to haunt you at the municipal level.

5. Are they taxing land?

The original bill only applied a tax to the property right around any home. The final version seems to tax everything that is not agricultural. One reader said everyone should put a big garden in where there is now lawn.

6. Why are they doing this?

The government said it will use the money to clear the slums throughout the county. Some of the money might even go for that. But governments have a way of diverting cash to other things.

7. Is this law constitutional? After all it only taxes people with more expensive homes.

That is up to the Sala IV, but magistrates are politicians, too, so we would  bet on constitutionality.

8. Will this affect the sales value of my home?

Yep.

9. How about all those Ticos who have not been paying anything in taxes.

Their day is coming unless they have powerful relatives. The law requires them to compute the replacement value of their dwellings less depreciation.

10. How much is the tax?

See the previous story and also see the adjacent graphic for representative values. The graphic uses the conversion rate of 582 colons to the U.S. dollar, but that relationship can change.

A.M. Costa Rica graphic
Representative taxes on homes under new law


11. How long will the tax last?

The law says 10 years, but don't bet on it ever expiring.

12. My home is owned by a corporation. Does it have to pay the tax?

The responsible party has to register the property and fill out the forms in the name of the corporation.

13. When do we pay?

Three months worth of the luxury tax is due by Jan. 1 along with the form specifying value. The amount for 2010 is due by Jan. 15.

14. Suppose I do not pay?

There are fines and penalties, and they will get you.

15. Do I have to pay a tax on my hotels and all the beautiful grounds and swimming pools we have?

The slum dwellers will be so grateful.

16. Do I have to pay a tax on my home, which is in a beach concession?

Yes. And include the value of the concession.

17. Are the values reported by my neighbors open to public inspection.

We do not know, and the law does not say. It would be a good idea, though.

18. What is value anyway?

The traditional definition is the price that a willing buyer would pay and a willing seller would accept when neither is being compelled. Tributación has chosen to adopt as value the construction costs for a dwelling and the ballpark comparative value of land.

Construction costs even when depreciation is figured in is not the same as value. Someone could build a very expensive white elephant and spend money they never could hope to recover on a sale. But to determine that price would require real training and access to real sale prices.

19. I live in Montana. How do I file the paperwork.

You better get someone here to help you or take a vacation here.

20. What is this story all about? Did I miss something?

You better see the news story Monday. Pronto if you own a home here.

1. Stable Government:
   
   Costa Rica is a democratic republic with three branches of government and has enjoyed one of the most democratic governments in Latin America. As of 1948, Costa Rica abolished it’s army and since 1949 has enjoyed its peaceful democratic existence, often being referred to as the “Switzerland of Central America”. The government is one of the people and one that very much sees the value of tourism. Over the past few years the government has incentivized foreigners to come and retire in Costa Rica. Stable government ensures that the money you put into your property is safe. Political turmoil will never be a reason for illiquidity in your Costa Rican investment and also provides reason why Costa Rica is a great place to buy. There are many other locations around the world that investors think of to go and buy, but stability is very important and should play a huge factor in anyone’s investment decisions.
   
   
2. Stable Currency:
   
   Investors want to know if their money is safe in Costa Rica
   Stability of the government has helped to maintain a solid and stable currency.
   The Costa Rican colon, also denoted as CRC is the official currency of Costa Rica. (Currently $1 USD = 516.245 CRC). Colones come in notes of 1,000 up to 10,000.
   US Dollars are also accepted as legal tender in Costa Rica. Both are widely accepted and exchanged throughout the country with approximately 90% of the places of business in the country accepting the US Dollar.
   
   
3. Tax Incentives:
   
   This seems to be the one everyone loves! As mentioned earlier the Costa Rican government has created one of the most attractive investment environments in Latin America.
   
   Capital Gains Tax= 0% in Costa Rica. The capital gains taxes are exempt for a business if the money is derived from an activity that is not the normal course of business for the company (This exemption is established through the use of SA, or Sociedad Anonima). Property Taxes in Costa Rica = .25%. This rate is significantly lower than most places in the world. As a result people are buying in Costa Rica which increases demand and ultimately increases value. There are not many places where you can buy a piece of property that has incredible appreciation potential with such low holding costs.
   
   
   Corporate Tax: The Sociedad Anonima (S.A.)
   These forms of corporate structures allow owners of property to keep their names away from the corporations they own (literally translates as “anonymous society”). Ninety percent of all property in Costa Rica is purchased through these S.A.’s. When a property owner purchases property through these S.A.’s they use a shareholder’s loan to fund the purchase. Rental income generated is taken out of the corporation as dividend income and deducted against the initial investment and thus no taxes are paid.
   
   Income Tax: Only income generated in Costa Rica is subject to income tax
   Costa Rica offers large amounts of income to be deductible and free from any tax
   
   **all tax information should be verified by independent tax professional. The Carvajal Group, LLC would be more than happy to get you in contact with a tax professional in Costa Rica to assist you with your due diligence.
   
   
4. Proximity to Major U.S. Cities:
   
   When investigating vacation destinations and environments for second homes or investment property, it is important to factor travel times to the destination. Costa Rica’s proximity to major US Cities gives even more reason why investors are buying property in Costa Rica. Great tourist destinations need to be close and easily accessible.
   
   Major US Carriers offer direct flights to and from Costa Rica from the following international airports (3-5 hour flight times)
   -Miami
   -Houston
   -Atlanta
   -Dallas
   -Chicago
   -New York
   -Los Angeles
   -Toronto
   
   
5. Healthy Local Economy:
   
   For baby boomers and entrepreneurs, spiraling costs of living abroad, oppressive taxes and government regulation in the US have placed Costa Rica high atop the list of places to retire without sacrificing standard of living. This is what savvy investors are looking for!
   
   
6. No Ownership Restrictions:
   
   Foreign Ownership is promoted in the country of Costa Rica. In many foreign countries fee simple title is only available to locals and without titled ownership your investments can be at great risk. All foreigners enjoy the same rights as Costa Ricans when it comes to real estate ownership. Titled, fee simple properties are all registered in the National Registry of Costa Rica properly protecting your ownership rights.
   
   
7. Excellent Lending market:
   
   Prior to 2006, there was no market for lending in Costa Rica and investors bought and sold property on a cash basis. With the recent surge by worldwide and US lenders as well as the strengthening of the Costa Rican market, financing at reasonable rates is now an available option. This addition to the real estate industry has made it possible for many more investors to buy property in Costa Rica and will only increase the demand over time.
   
   As you can see there are many great reasons to invest in Costa Rica. Many people believe that it is too late to make any money. This is not the case! The time is now to invest in this beautiful country and incredible vacation spot.

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There’s a Silver Lining in Costa Rica’s Gold Coast

AT the heart of the real estate wave in Guanacaste province in Costa Rica in 2006, some 20 residential projects had either broken ground, been announced or been approved. About 350,000 visitors landed that year at the regional airport in Liberia, quadrupling the figure from 2003, its first year of international flights.

In 2006, $131.4 million was spent on personal property sales in Guanacaste, according to the Central Bank of Costa Rica, and Alexander Porras, an economist for the bank, estimated that most of that was in second homes.

But now the tide has turned. A number of highly publicized residential developments aimed at second-home owners and anchored by brand-name hotels and golf courses have been delayed on Guanacaste’s so-called Gold Coast, a 60-mile stretch on the Pacific Ocean from the Papagayo Peninsula in the north to Tamarindo in the south.

Vacation-home sales have been reduced to a ripple. Individuals who built or bought with an eye toward selling have lowered or postponed their quick-flip expectations, trying instead to earn money by renting out their properties in a region that remains a popular tourist destination.

These days, there are still visitors who come to Costa Rica on real estate buying sprees, but they will see less than was projected three years ago.

That’s not all bad news. For the serious or even the spontaneous buyer “this means deals can be had in some niche price ranges,” said Christopher Howard, an American author in Costa Rica who has written a book on the topic that will be self-published in July.

The best deals are in the $300,000-and-under market, “but properties at the high end haven’t been hit too badly,” Mr. Howard said. “In a way, this turn-down benefits the Guanacaste market. Things were developing too fast; prices were getting too high.”

The best-known Guanacaste project to be delayed is Cacique, a venture backed by Stephen M. Case, co-founder and former chairman of AOL. He announced plans in August 2007 for an $800 million development that included two luxury hotels, an array of high-end homesites and 300 private residential units on 650 acres. A year later Mr. Case halted development. Jorge Cornick, corporate relations officer for Cacique, said it would be delayed until the economic outlook improved.

Not far from Cacique, in Panama Beach, work had begun on La Punta Papagayo, a projected $300 million development, but it’s now been put off, too, said the Minneapolis-based developer, Blaine Kirchert. The Costa Blanca Hotel, which was on the property when he bought it, is open, but no progress has been made on another hotel, the 150-room Viceroy, nor on the planned 86 condos and 34 estate lots.

Ground was broken in January 2008 in Brazilito for the Azulera Resort Village, a 557-acre community with a $300 million Hyatt Regency and 1,000 condominiums, town houses and single-family houses. Then construction stopped last fall. Anil Kothari, chief executive of the New Jersey-based Global Financial Group, the developer, said that work would resume in June, with completion in two years.

Despite the slowdown, opportunities have risen. A small number of individual homeowners are finding a market among vacationers seduced by the enduring appeal of the country, where annual municipal property taxes are 0.25 percent of the construction value of the home, where no rain falls from December to May, where 25 percent of the country’s rich biodiversity is protected parkland and where a stable democracy has existed since 1899.

In February, Louise Chandler and Ken David, a couple in their early 50s from near Butte, Mont., walked into the Tamarindo Beach office of Bella Collina Realty and walked out with a “fire sale” deal: on April 1 they closed on a two-bedroom 1,100-square-foot town house. It was originally priced at $142,000; they paid $99,000. Lock Cooper, the sales director at Bella Collina, said the owners had sold because they wanted to trade up to a larger unit closer to the beach.

The new owners say they plan to spend two to three months a year there and rent it out the rest of the time. “It was purely an impulse buy. We were on vacation, fell in love with the country and didn’t want to leave,” Ms. Chandler said. “We just happened to pop into this agency. It was an unheard of deal — plus a pool and gated security.”

Chris Simmons, an owner of ReMax Ocean Surf Realty in Tamarindo, said there were a few individual owners in every property he currently represents who were willing to shave 20 to 30 percent off listing prices. Developers are also posting special deals, he said, including at Crystal Sands in Langosta Beach, south of Tamarindo. Five beachfront condos there, originally priced from $800,000 to $2.3 million, are being offered at 20 percent discounts.

But because “there are virtually no new projects breaking ground now,” Mr. Simmons said, “I’m going to swim against the tide of conventional wisdom here and predict that the real problem we’ll face is next year when we’ll have no inventory to sell.”

For now, though, homes remain available at the three major developments on the Gold Coast. They are Peninsula Papagayo in the northern region (a 30-minute drive from Liberia), a 2,300-acre luxury development anchored by a Four Seasons Hotel with its own collection of homes and lots for sale, the destination club Exclusive Resorts and a 180-slip marina that opened in December; Reserva Conchal in the middle (near Conchal and Flamingo Beaches), a 2,200-acre development with homes, lots and condos, with a Paradisus Playa Hotel; and Hacienda Pinilla (just south of Tamarindo Beach), a 4,500-acre project, with a JW Marriott resort that opened in early February.

Sales representatives from all three reported that since last September most of the signed contracts had been for condos, while lots and villas had moved very slowly.

Those who buy lots in such gated developments and have their houses built “definitely minimize their risk compared to starting from scratch on their own in this country,” said Bryant Martin, 49, of Denver, who is Hacienda Pinilla’s largest individual property owner. Along with buying a 12-room bed-and-breakfast on the grounds and turning it into a family vacation home, he also bought 13 beachfront acres (24 lots) to develop as La Dulce Vida. On another lot, he built a 4,000-square-foot four-bedroom house, which he put on the market on March 1 for $1.5 million and rents out for $7,500 a month.

“These development owners spend many millions on infrastructure — water, roads, electricity, permits — which in a third-world country like this can be a time- and money-consuming process,” said Mr. Martin, who owns a company that sells high-end bathroom fixtures, windows and doors and has built homes in Colorado, Arizona and Mexico.

The Gaunacaste real estate ebb may turn out to be an inadvertent saving grace for a country known for its ecological treasures.

Jim Preskitt underscored that idea, pointing to a hillside across Culebra Bay from the executive offices of Peninsula Papagayo, where he is senior vice president. The forested hill dropped into the white-sand beaches of villages named Panama, Hermosa and Coco.

“That hill would have been dotted with a Rosewood, a Miraval and a One & Only hotel. But all those projects are stalled,” he said. “Though we welcome the competition and the regional buzz, this slowdown may be nature’s way of saying, ‘Protect what you have.’ ”

Michael McNulty and his wife, Denise, were vacationing at the Four Seasons when they saw real estate opportunities in the development. He and his friend and business partner, Frank Rizzo III, bought four Papagayo lots in that frenzy three years ago and have since built two homes. Mr. McNulty said he hoped delayed development protected not only the environment but also their investment, which he calculated at about $9 million.

“When we saw the economy sliding, we worried about our long-term investment, but now we find ourselves in an enviable position as pioneers here,” said Mr. McNulty, 47, of Philadelphia, a founder of the early Internet business-to-business portal VerticalNet.com. The McNulty-Rizzo houses are the first of six built so far at Peninsula Papagayo and the only two currently available for rent. When not vacationing with family and friends, Mr. McNulty and Mr. Rizzo market the houses as vacation rentals at $2,200 to $4,500 a day, depending on the season.

Meanwhile, Mr. McNulty still harbors fantasies of flipping the properties.