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Unusual Property Tax System Hurts Newcomer

by Garland M Baker on April 26, 2004

First there was arithmetic, and then came new math, and now Costa Rica has introduced tax math.

Aristotle, the Greece philosopher, was the first ever to theorize this kind of geometric mathematics in his book The Physics. So no one should be surprised Tributacion Directa, the Costa Rican tax authority, much like the IRS in the United States, and Hacienda, the Costa Rican treasury, has decided to use it in calculating tax values on property.

Here is how it works. Let’s say your property has a value of $50,000 and the property is transferred, mortgaged, or sold, for $100,000. The new value is added to the original value at the Registro Nacional, the Costa Rican public records office. Please note, the new value does not replace the old value but is added to it. The tax value now is $150,000.

This is especially true if the property is mortgaged because the lender is required by law to report the appraised value immediately by computer to the records office. When the property is transferred again, for whatever reason, the new amount is added again to the existing base.

On a $100,000 property, the tax value base could easily be $400,000 in a few short years after a couple of sales.

Property taxes are levied at 2,500 colons for every 1 million colons of value. Using the current exchange rate of 430 colons to one U.S. dollar, the tax on the original value in the above case would be 53,700 colons. Once the property is transferred and the new value is added to the original, the new tax would increase to 161,500 colons. After another transfer the tax goes to 322,500 colons and so on. Someone with many properties who borrows against them often can be driven into the poor house with balooning valuations.

Collecting property taxes was passed to the municipalities in 1995, and local officials do not believe you should question the venerable judgment of the tax authority if you should go to complain. You will meet surprised faces if you take updated appraisals to the municipality office.

In other words, they will not accept your paperwork, even though they are required to by law, to bring your property value back into line. If you try to explain to the tax collectors that Aristotle was talking about geometric progression as it applies to biology and not taxes you only get blank looks.

With this kind of computerized tax assessment, you could have a tax value on your property 10 times that of your neighbors because you recently purchased it and your neighbor has lived on their property without any kind of transfer for years.

There is a way to fight back if you find your property value in outer space. You need to have an attorney prepare an acta notarial, a legal notary document, attesting to the fact you tried to deliver new property valuations to the municipality. Then you need to have the attorney send the documents via Costa Rica’s not-too-well-known EMS service, the country’s version of FedEx, to the property tax department where municipal officials blindly sign for the envelope unaware of what is inside. This acceptance will start an administrative review of the case.

Usually, officials will immediately contact you and set up a meeting to review the matter. If your valuation documents are in order, a more correct value will be assigned to the property and your taxes will immediately decrease.

The law that moved the collection of territorial property taxes to the municipalities requires individual property owners to provide new property values every five years to the tax authority. Non-compliance could mean having a tax assessor on your doorstep using a version of tax math to update the tax records.

Virtually no one complies with the five-year rule or even knows the tax value of their property in the National Registry. Actually, most foreign investors don’t even know where to pay their property taxes or if the taxes have been paid.

Fines and interest on any past due taxes in Costa Rica are outrageous, and unpaid amounts can have your property embargoed and sold at auction.

It is best to check to see if you are up-to-date with the powers-that-be and pay your municipal and territorial taxes promptly. You may have to have someone investigate whether your property is correctly registered to you and has a plano catastro, or plat plan, in your name. Most properties sold or otherwise transferred before 1998 are not registered correctly and the registration needs to be fixed before taxes can be paid or disputed.

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