Confusion Around Costa Rica’s Luxury Tax

[singlepic id=10 w=320 h=240 float=right]So, I get this great e-mail from some super in-the-know real estate guys the other day that answers a number of my questions regarding the new Luxury Tax law. After this “clarification” I post to my Facebook page and Tweet the news where I stated “I have determined that the new Luxury Tax in Costa Rica is for construction only and does not include the value of the dirt under the house.”. This is wrong.

Today I wake up to find out that I had posted incorrectly and in the process cost thousands of people their homes and livelihood – OK, well it wasn’t quite that dire, but still…

I read an article in AM Costa Rica that says:

The biggest issue appears to be if land should be included in the valuation to determine the amount on which tax is to be assessed. Some say yes and some say no.

Well, the law says yes, but that appears to be a late change by the legislative staff without the knowledge of some of the key legislative players.

Consequently the title: “Tico and expat confusion reigns on new luxury tax” In it the author explains how the law is poorly written, and the “Hacienda de Tributacion” (Costa Rica IRS) has not communicated the law well through press releases (there have been none to date) nor through their website where it is mentioned in a cryptic and hard to find form.  So, even for those well meaning, law abiding tax payers who want to comply, they aren’t really sure what to comply with.

I like this part:

As a result even some competent Costa Rica real estate brokers have been putting out incorrect information on their Web pages and via e-mails.  Or, as in the case of the esteemed Guy In The Zone Ben Vaughn, posted to their Facebook page and Tweeted to their readers.

(I added that last part in blue)

So the legal wheels of Costa Rica swirl as they try to make heads or tails out of what the new law actually says.

Frankly, I admire what it seems the Costa Rica government is trying to do with this law.  I’ve seen some expat responses to the law indicating that they feel the Costa Rica government is targeting us expats, trying to push us out of the country, or make it just too darned expensive to live here anymore.  Some say they feel the new tax law to be unfair – I don’t think so.

When one considers the current land tax here in Costa Rica, and even adding on the new luxury tax, property tax is still cheap by comparison to anywhere else in the world, except maybe Somalia.

Here is the challenge for these poor Latin American lawmakers: they are working in a system that just 5 – 10 years ago was a third world country.  Now this little country – (you can fit 3 Costa Rica’s inside of Colorado, or if you don’t want to calculate anything, it’s roughly the same size as Rhode Island), is made up of third, second and first world elements.  The fact is, the majority of Costa Rica is still Costa Rican, an agrarian society.  The farm owners inherited their land from their Dad, who inherited it from their Dad and so on back to Great Great Granddad who homesteaded 1600 acres or whatever.  On this land you’ll see a number of generations subsisting from its produce.

The old Costa Rica economic system didn’t really have a provision for “Housing”.  It was almost considered a Tico birth right that you’d have some place to live and very likely, subsist. By our (expat) reckoning, these people are well off since they own so much land, and indeed they are, just not in the way that a western mind might think.  The value of their land to them is that it supports, feeds and houses the family.  They live the genuine “Pura Vida” lifestyle there.  We expats like that saying because we come here and quiet down and enjoy the view.  “Pura Vida” predates us expats.

When I arrived here in 1999 I got to know a number of young Tico families that were in the stressed position of having to pay rent while earning a wage that presupposed that you had no housing need.  When land got valuable here, Dad sold the land that was to be passed on, so we had and have a situation where young families are struggling to provide housing for their families.  Minimum wage was barely sufficient to buy rice and beans and a little public transportation.  Certainly not enough for rent.

There are still, however, many Ticos who have not sold and that still own large parcels of land.  They are poor in the amount of money that they have, but they live The Life and are fine.  An across the board land tax increase would hurt these people and cause an economic crisis in Costa Rica.  So the government’s struggle is to find ways to tax the rich (nationality isn’t important), and leave the Tico farmers alone.  Consequently, cars have a 70% tax on them, and travel is taxed.  This tax construct has given us expats plenty to complain about for years, but it has effectively worked in a country where the “haves” in a monetary sense, live alongside the “have nots” (in a monetary sense).

The new luxury tax fits in with this kind of thinking if it is for the material construction value only, which is what we thought this law was all about.  It appears that the new law includes the land and so now I’m really confused. The article states:

Some lawmakers were concerned that if the value of land were included in the tax base that poor people with a shack on a lot of land would be hit with a big tax.

That is what is going to happen.

Article 10 of the law explains what is to be taxed and adds “the value of the land where it is located.”

So here’s my suggestion – let’s wait and see what happens.

Here’s a link to the full AM Costa Rica article.