Paradise Management now offers a separate Rental Accounting Service to the public. You don't have to be a PM client to take advantage of this!. If you hava a rental home or business and need tax help - regardless of who manages your property, we have the right solution for you or your manager so that you can be assured your property is in complete compliance - all the time.
Every homeowner in Costa Rica that has a house in the vacation rental business, has ever questioned if there is any sales or income tax that needs to be paid. There have been many and different interpretations in regards to this topic, but since December 2016, the Law states the following:
“Vacation rentals, defined as short term rentals under 30 days must collect a 13% sales tax and pay it to the tax department every month”.
Also, since July 2019, the Law of Strengthening of Public Finances number 9635 has become effective and it brought another set of tax laws that are very essential for homeowners to know. To clear all doubts, vacation rental owners should pay sales and income taxes every month.
First, it is important to know that the sales tax is now known as Value Added Tax (VAT). It is the 13% and has to be charged to every rental. It has to be applied in the following cases:
However, there are 2 exceptions:
VAT has to be applied to almost all services including property management and commissions. The homeowner has to declare the rental income at the end of every month and pay the sales taxes that was collected to the Tax Division. The declaration is known as Form D-104 and has to be presented even if there were no rentals.
There is a good side related to this tax. Since VAT is paid on most of the expenses you will incur during the month, you can deduct it from the tax due for the current month. This is to say that if you collected $150 in sales tax and spent $100 in the same sale tax of the purchases, then you have to pay over the $50 at the end of that month. However, for this to be possible, you need to ask for a “Factura Electronica” in every purchase you make and upload it to the Tax Division as an expense and also, do it within 8 days. If not done in this period of time, then the expense will not be accepted as deduction to the VAT.
It is also know as “Impuesto de Renta”. In the past, it was as simple as summing up the gross income, adding the expenses as deductions and paying the net income. However, this is now applied ONLY to those corporations that have an active employee registered in the CCSS (Social Security) and is declared at the local Tax Division office.
Currently, homeowners have to file the form D-125 at the end of every month, declaring gross income and liquidating the calculated income tax. The tax is a simplified flat one that permits limited deductions. Most people refer to this as the 15/15 rental tax.
Here is how it works: You rent your unit for $1000. You collect $1130 from the renter. The $130 is the sales tax that will be declared and paid – as detailed above. The $1000 is the rental amount and is your gross income. The law allows you to deduct only 15%, or $150 from the $1000. There remains $850 and you are taxed 15% on that amount, for an amount of $127.50. This is the Income tax you owe at the end of the month. No other deductions! Another way to look at it is a 12.75% flat tax on your gross income.
To summarize: for that one rental of $1,000, you collected $1,130. You have to fill out form D-104 for the sales tax declaration and form D-125 for income tax declaration. You owe $130.00 in sales tax and $127.50 in Income Tax. You keep $822.50 and have no more tax declarations or liabilities to Hacienda.
How do I collect the sales tax from my renters?
Factura Electronica digital signed by the tax department
As of November 2018, for every tenant that stays in your property, the property owner is obligated to create and provide (even if not requested) an electronic invoice (factura electronica or tiquete electronico) to the tenant or online booking engine. The invoice must be approved by the department of tax revenue (Hacienda) and digitally signed. The invoice will include the 13% sales tax which is then collected by the property owner / manager.
Numerous property owners manage their vacation rental remotely from outside of Costa Rica and receive payments in an account located outside of Costa Rica. This implies that the income bypasses the Costa Rican banking system. While this arrangement may be acceptable, it is important to note that according to the law, the vacation rental is situated in Costa Rica. As a result, sales tax must be collected and remitted. You have the freedom to handle your finances from any location, but this does not exempt you from fulfilling your responsibility to collect and remit the sales tax.
Many vacation rentals benefit from professional management services, which can streamline the process of handling guests and taxes. It is crucial to ensure that your manager collects the required tax for each reservation and submits the tax payment monthly. The responsibility for this task lies with both the property owner and the manager. We advise that your property manager furnishes you with copies of the invoices issued to your guests, demonstrating the proper charging, declaration, and payment of the 13% tax to the tax authorities each month. Failure to comply could result in consequences for both parties involved. Additionally, you are still obligated to pay a 13% tax on the net earnings received from your property manager and must report monthly sales tax and income. Your property manager should be able to assist you with these obligations.
While unregistered vacation homes are still prevalent, the tax department (Ministerio de Hacienda) has become more vigilant in identifying and penalizing non-compliant properties. To avoid potential fines, it is advisable to take proactive steps. One convenient option is to engage a reputable property management service that can handle invoicing and tax obligations for all your clients. A competent manager can also take care of filing the monthly Sales and Income Tax declarations on your behalf and making the necessary payments. Alternatively, you may choose to hire an accountant to assist you with these tasks. Although this may entail additional expenses and effort, it is essential for compliance with the law. Keep in mind that many accountants are currently overwhelmed with the increased workload resulting from these new requirements, leading to potentially higher fees for their services.
Please contact us for more assistance.