Rental Properties and Sales Taxes In Costa Rica – When this tax should be collected?

Several investors who decided to buy a property in beautiful Costa Rica have also decided to, somehow, accelerate the return of their investment by renting out the property, but this decision comes with a tax liability aside for both income tax and sales tax.

Any individual or company who generates revenue out of a property in Costa Rica in the form of rent must report this income and possibly pay income tax, which is the easy part… Let’s talk about Sales Tax, which is more confusing for property owners in Costa Rica.

When Does The Sales Tax Apply?

According to the Sales Tax Law, all properties rented out such as hotels, motels, bed & breakfast and houses of transitory stay or not must collect this tax by charging 13% over the rental rate.

So, the question comes when we are talking about a house or a condo unit that is rented by the week for instance and it is not really a lodging type of business, this aspect is strictly related to how long the guest is going to stay in the house…

If the person is going to stay for only a short period of time then it becomes a guest not a tenant, therefore sales tax should be collected.

What Is A Short Period Of Time?

I remember once when somebody asked me about this and quoted what he heard at a seminar: “Short period of time is not defined by any law but it is generally accepted as less than six months”.

Truth is, that Sales Tax Law does not defines specifically short period of time as six months or less, however, the reference for the Tax Administration to define short term as “less than six months” is the Tourist Businesses and Activities Law which states that a “tourist is a person who moves to a place different than the regular address for more than twenty four hours and less than six months… without immigration purposes.”

Therefore, any individual who rents a house for less than six months and is not looking for relocating to Costa Rica is considered as a tourist, so if this person rents a house in Costa Rica it will be considered as a transitory stay, therefore sales tax should be collected.

What About The Property Lease Law?

Some would use the Property Lease Law to skip the sales tax, by signing a lease contract for the property, but keep in mind that the Tax Administration knows this law and its range of action, specifically the part where it reads that houses for touristic purposes and rented by seasons only are excluded of the Property Lease Law, not to mention the fact that by default the minimum term, according to the Property Lease Law, is three years, so there is no way that a lease contract can be used in order to avoid the sales tax.

Case Studies.

The owners of a house in Guanacaste, who live in US, rent the property on a weekly basis to families that visit the area. The weekly rate is US$1,200 per week.

In order to be fully compliance with Costa Rican Law, both Income Tax and Sales Tax, the owners of the house should be:

1. Collecting 13% sales tax on top of the standard rate, so they get a check for $1,356.00, they keep $1,200.00 and give $156 to Costa Rican Government. (1200*13%=$156)
2. Getting a check for $1,200.00 and give $138 to Costa Rican Government and keep $1062.00 for them. (1200/113*13=138)
3. Whatever the method is, a or b, the net should be reported as income and taxes should be paid after write offs such as depreciation, maintenance, condo fees, etc

Keep in mind that this tax in Costa Rica applies regardless if the funds received are being managed by a Property Manager or deposited offshore.

What Is The Risk Of Not Paying Your Taxes?

If you get caught by the Tax Administration, you will have to pay all accrued taxes based on their appraisal, whether you collected or not from the guests. Plus, not paying sales taxes to the government is considering a felony and, the worst case scenario is that they can go after your property as collateral for whatever tax liability they come up with…

Keep in mind that the Sales Tax is nothing but an Added Value Tax and it’s the person renting the property who pays the sales tax, not the property owner.

It’s the same sales tax that your guest would pay at any restaurant in Costa Rica for instance, therefore there is no reason to jeopardize your investment by not collecting this tax on top of the standard rate and paying it to the government.