I received a question in the forum at Dominical.biz by a gentleman who wondered if he should continue in his endeavor to retire to Costa Rica. His concern was based on a recent article on the front page of the Tico Times that described some rather frightening tax scenarios for owners of Maritime Zone properties up north in the Guanacaste Province. There was the example of a couple whose beachside property’s taxes were increased from $70 annually to $15,000.
I have had a number of clients wonder if maybe the days of Costa Rica being a good investment, and a place to retire are over. It would seem from the various questions that I get that the article gives the idea that there is a new tax law in Costa Rica. So, being the ever vigilant real estate agent that I am, I called my lawyer to ask about the “new tax laws”. The answer surprised me. “Don Benjamin, there is no new tax law”, nor was the existing tax law changed. What the Costa Rican government is doing is re-assessing properties, primarily in the Maritime Zone. The extreme increase in taxes resulted from two likely causes.
- Enormous appreciation of the property since it was last assessed
- Likely the “declared value” of the property when it was bought by the current owners was considerably less than what they actually paid for it. This is a common practice here in Costa Rica.
To understand the amount of appreciation that has occurred here in Costa Rica over the last 15 years, we have to understand some about the culture. Land was essentially “value-less”, it didn’t really factor into a family’s budget concerns, not that they really had any budget concerns. The point being, land was a given. Someone in the family had a property large enough, usually much larger than necessary, to house everyone in the family, and their friends too. Well that may be a bit of an exaggeration, but you get the point. The Tico (Costa Rican) culture was, and still is to a lesser degree now, mulit-generational. To this day, a number of my friends in San Isidro de Perez Zeledon, live on a now smaller piece of land with a cluster of Tico style houses where you will find grandparents and great grandparents, as well as adult sisters and brothers with their families living. Family compounds are what I guess we’d call them in our culture.
So up until our start date of say, 1993 for understanding the valuating of Costa Rica land, many Tico families lived on property that was multi manzanas in size. (A manzana, as you may know means “apple” in Spanish. However, in Costa Rica it also means a piece of land that measures 1.7 acres. “Manzana” is not unique to Costa Rica, but it is one of very few countries that uses that measurement.) It seems that a 60 manzana parcel was a common size for a homestead stake. Land was so value-less at that time that the government was looking for men that would simply take responsibility for a particular piece of land, so they granted them ownership rights to the land simply by the Tico land owner being willing to own the property. From that point on, anyone in the family, due to the cultural structure, could live on that piece with their extended family in close proximity.
Then came the foreigners. Upon discovering the beautiful beaches of Costa Rica, as well as its expansive valley and mountain views, and postcard overlooks of quilted patchwork coffee fields, adventurous foreigners would approach one of these land owners about purchasing their property. Money, to the Tico at that time, was hard to come by. When I arrived in Costa Rica in 1999, the going wage for most labor services was around .80 – $1.00 per hour. The Tico didn’t have a mortgage nor rent in mind for what he needed to earn. Housing was essentially free. They would get the wood they needed to build their house from the trees that were in abundance on the family farm. Family and friends would help with the construction. Houses were not built in a permanent way and they would need to rebuild the house after some years. The exceptions to this were when there were certain types of woods available that essentially have the same durability as cement. Manú is one and there is another called Ajo, or “garlic wood”. Houses built with these woods are still around. These little Tico houses that endure to the present have the most beautiful wooden floors in them, burnished by years of foot traffic and daily sweepings and waxings.
The concept of say, $10,000, was nearly inconceivable to the people that lived at that time in that cultural structure. This really wasn’t that long ago. Comparative values in the States and Europe made the land here seem free. Twenty acres of ocean view property for $10,000? Imagine! Add to this the custom of under-declaring the value of the transaction so that the title transfer taxes would be almost nil all add up to the situation that we have now with this re-assessment situation. The properties of Costa Rica are registered as having a value of $3,000 lets say. In more recent times the figure of $20,000 is a common declared value. By the way, this practice of under-declaring is not illegal and is universal in its practice.
There is currently no capital gains tax in Costa Rica. There is no reason for there not to be, so we are expecting a capital gains tax at some point. When this happens, there will no doubt be a period of time during which land owners will be able to reassess their properties. For those that don’t reassess, there will be some huge hits, such as those cited in the Tico Times article, to those who are sitting on a property with a declared value of $3,000 and the property then sells for $500,000.
The properties discussed in the Tico Times articles were all in the Maritime Zone (Google: “Maritime Zone” or “Zona Maritima”, “plan regulador”). Most of our land deals here in the Dominical, Uvita, Ojochal area are on land that is titled and is classified “Agrícola” or agricultural. Agricultural zoning serves the needs of single family lots just fine. You can build on 15% of the land size, and the minimum lot size is generally 5,000 square meters (1.25 acres). I can’t imagine that the tax laws for these types of properties will be changing any time soon. Nor do I see a push to re-assess such properties in the foreseeable future. Costa Rica is still made up of the farming, family compound-like life style. To enact such a change in law, or require that the Tico farmer pay annual taxes on the modern value given to his land, would severely hurt a large percentage of Costa Rica’s people. Conversely it makes sense to focus such taxation concerns on the zones where large hotels and lucrative tourism enterprises reside.
Please keep in mind that this viewpoint is derived from my personal observations of this land and the time that I have of living here and being fascinated by the new and different culture among which I live. In other words, I reserve the right to be wrong and to have the Costa Rican government surprise me. But I suspect that you can understand the logic.
If you are looking to invest in Costa Rica real estate, you must learn all you can and develop your own crystal ball. What do you think is going to happen? As a land owner and real estate broker here, I feel sufficiently secure and optimistic about what is going on with regards to ownership rights and taxation to continue building and working my portfolio of properties, and helping others to do the same.
