In recent weeks many clients and friends have been asking me for orientation regarding the Solidarity Tax, a new tax recently approved by the Congress and commonly referred to as the Tax on Luxury Residences.
Since the topic is complex and many questions and concerns have been voiced, we prepared this summary so that the thousands of Utopia readers can become well informed and can achieve a broader understanding of this subject that may be affecting several of you shortly.
What is the Solidarity Tax?
In very simple terms, it is a tax that will be accessed each year to the owners of luxury homes (some 12,000 taxpayers). The extra revenue generated as a result of this tax will then be fully applied to help fund the Social Assistance Housing Program, that is, to build houses for people that live in extreme poverty conditions.
So far it seems quite straightforward, however, it gets more complicated as we try to understand the method by which this tax will actually be implemented.
To that end, I will address 6 of the most common questions I have received since the new bill was passed.
Who does this tax apply to?
First let’s clarify that all property owners must declare for this tax, regardless of whether they will be required to pay it or not.
The qualification parameters are:
1.- The Solidarity Tax applies only to residential property with construction valued at more than ¢100 million (this is the value of the construction alone, not inclusive of the value of the land). However, those who do meet this first criterion will then be required to add the land value when actually calculating the tax. For example, a property with construction valued at ¢150 million (apply to tax) on land that is valued at ¢50 million, will be eligible for this new tax and the amount they are accountable for will be calculated based on a full ¢200 million property value. By contrast, a house whose construction is valued at ¢90 million located in a lot valued at ¢110 million will be exempt (as the value of the actual construction is under ¢100 million)regardless of the fact that the total value is also ¢200 million like the former example.
2.- As well, the property must be designated for residential use, whether permanent, temporary or recreational, including boarding services. Any construction exceeding ¢100 million that is used for agriculture, commerce, industry or any other non-residential use, is exempt. Condominium owners must also determine their % of possession of the common areas (called Percentage of Measure), with the common areas that have commercial use being exempt.
3.- In the event that a property qualifies for this tax (building of residential use whose construction is assessed at over ¢100 million), the final amount payable will be calculated at a progressive rate depending on the total valuation of the property (the construction + the land). The minimum rate assessed will be a rate of 0.25% for the first ¢250 million with an increase of 0.05% for each additional ¢250 million, with a maximum rate of 0.55% applied to the portion of the property valued over 1,500 million colones ( about 2.6 million dollar).
Did all of those numbers confuse you?
Don’t worry, the following chart presents things more clearly.
For Example: A house valued at ¢375 million pays a 0.25% for the first ¢250 M (¢625.000) and a 0.30% for the remaining ¢125 million, to pay a total of ¢1 million.
When does this new tax take effect?
Even though the law was approved in November 2008, the tax only went into effect on October 1st, 2009. In turn, this year only the prorated portion from October 2009 to December 2009 needs to be paid. However, this does not mean you are off the hook this year as the tax will be collected in advance. In other words, immediately after paying the 2009 tax, you will have to pay the 2010 corresponding tax (with a deadline of January 15, 2010).
How is the declaration filed?
The calculations will be made directly by the property owner or his advisor based on the parameters established in the law and in the “Manual de Tipologías Constructivas” and the “Matrices de Zonas Homogéneas”. A major headache for those not familiar with this!
The good part is that the entire process, from the registration to the declaration and payment is done via Internet at www.hacienda.go.cr (click on Tributación Digital).
To complete the declaration, the taxpayers must have information on the land, the municipality, the district, the legal address, the number of the Plano Catastrado, the area dedicated to residential use and the value of the Mt2, among other information on hand.
Even though it might be tempting, it isn’t recommended to manipulate the appraisal because the penalties will be very stiff and one could end up paying up to 10 times more in fines than the amount that was owed. The oversight promises to be very strict, backed by the new alliances among Tributación (Tax Collecting Agency), the Public Registry and the Municipalities. They will all share information pertaining to appraisals, updates, sales or new mortgages and cross-reference them against one another to prevent fraud. In the end they will be able to derive an estimated actualization of the property value for both the Solidarity Tax and for the Real Estate tax.
The declaration must be updated every 3 years. If the property owner does not submit said update, Tributación will go ahead and do it on their behalf, charging the tax according to their own appraisal. In the event of the sale of real estate for a price above the one previously registered, the appraisal on file will automatically be updated.
Is the Solidarity tax deductible from income tax?
Sadly enough, not only is it not deductible but the due dates of the two taxes are almost simultaneous. (End of December and beginning of January).
What is the relationship between the Solidarity tax and the Real Estate Tax?
There is no relationship between the two. The real estate tax is collected by the Municipalities and used within each municipality. The Solidarity tax on the other hand, is a national tax collected by Hacienda and flowing into the National Government Account, where it is then distributed by the Housing Mortgage Bank directly to the Housing Assistance Program.
Is there a manual for the declaration?
Despite the system’s attempt to be user friendly, there is yet to exist anything such as a “Manual for the Beginner Taxpayer”. Because this tax is new and quite complex, it is advisable to seek quality guidance, at least for your “first time” filing this declaration. A well-informed consultant will provide assistance in the various details that surround your specific situation and help to ensure that you are aware of any future appraisal changes. Additionally, good guidance will help facilitate the process of making the declaration, and will free you from making errors and possibly incurring future penalties as a result. Finally, seeking proper guidance will help you feel secure that even if you don’t know the law, you will not end up overpaying.