Is there a chance that vacation rental accommodations will have to start paying taxes soon?
Many vacation rental owners are probably wondering what’s going on with that topic. Paying or not paying taxes makes a huge difference to your ROI if you have a vacation rental investment.
It’s a fact that if you have income from a business, such as vacation rental accommodations, you have to pay income tax. Even in Costa Rica!
Often, homeowners rent out their home or condo in Costa Rica when they don’t use it. Others have a guesthouse that is rented out when not needed by visiting family. Most don’t even think it’s necessary to pay income tax on this rental income. What kind of tax needs to be paid?
All these questions are starting to arise since Airbnb is so much in the news. Hotel owners are starting to complain about unfair competition.
Although Costa Rica tax legislation does not include capital gain tax, we do have an income tax. If you have any income in Costa Rica, as a salaried person or as a business, you have to pay income tax. Find out more about what taxes are paid here.
Costa Rica also has a 13% sales tax on most services and goods. There is a 13% sales tax on hotel rooms. Last year, Airbnb agreed to collect sales tax from hosts in Costa Rica too. Nonetheless, Airbnb is a company registered in another country and cannot function as a tax collector like local businesses do. Besides, Airbnb is not willing to share names and contact information of their hosts with the Costa Rican tax office.
Home Away, VRBO and other vacation rental websites are not bothering with the issue. So for now, almost nobody charges their guests the mandatory sales tax, except the hotels. In fact, nobody is showing any income either. A big loss for the Costa Rican tax authorities and a profit for investors.
How it functions
To be able to charge sales tax, the business person (personal or corporative) needs to register in the sales tax office first.
The home/condo owner needs to bill the tenant or vacation rental guest for the rental + 13% sales tax. This way, the homeowner acts as a tax collector for the Costa Rican tax office.
Sales tax paid by the home/condo owner on invoices for maintenance, replacement of inventory, marketing and other overhead needed to run the business, are deductible from what sales tax is collected at the end of the month.
It’s important to know if the home is registered in your personal name or in the name of a corporation.
If you have vacation rental accommodations registered in your personal name, your banker might ask one day where all this income is coming from. They might even ask if you are laundering money. By not telling them where this income comes from, you run the risk of having your account shut down.
Usually, corporations that are constituted as a holding company for real estate are inactive. If you have a corporation registered as a business, it is active. Check if your corporation is registered with the tax authorities as active or inactive here.
If your corporation is active, you have an obligation to fill out the income tax form, with or without income.
When you have an inactive corporation, you are not supposed to use it for business. Creating an income with an inactive corporation will make it active. So if you used it for vacation rental accommodations with income, you need to present the income tax form D-101 Declaración Jurada del Impuesto sobre la Renta. For details in Spanish, click here or contact an accountant.
If that is the case, you will also have to charge 13% sales tax and become a tax collector for the government. First, your corporation has to be registered in the Sales Tax department. Then, every month that you have written an invoice, you fill out form D 104.
If you have vacation rental accommodations, how do you manage the deposits made by your tenants and guests?
Often, this income goes into your property manager’s bank account and you collect once a year when you arrive in cash. There are hardly any controls <yet> on these bank accounts by the tax authorities.
If you receive this kind of income, and you’re a US citizen, read Randy’s article about FBAR.
If you have used your retirement funds such as an IRA or a 401(k) to invest in vacation rental accommodations, it is important you do the correct thing: declare your income to the Costa Rican tax authorities.
Food for thought?
Should you get your vacation rental accommodations better organized? What will the future look like? Will income that is generated online soon be controlled and taxed? Hotels and tourism organizations are pushing hard for regulation and formalization of the vacation rental business. If you are in doubt about your personal situation, contact an accountant.
As a good Dutchman, I hate paying taxes and if I can get away with paying less… I will certainly do so. Big brother is indeed watching us and it is harder to hide income from tax authorities than ever before.
Can you get away with not declaring income to the Costa Rican government? And what about your own government (U.S. citizens)? I guess you can, for as long as it takes for the government to start checking on websites that are willing to divulge data of the owners of vacation rental accommodations.
My recommendation is that if you have vacation rental accommodations and you don’t want to get caught, sit down with a good accountant and get organized. Take care of income tax, sales tax and how you will manage income and bank account.
When you’re in the market for a vacation home as an investment, or you know someone who is, contact us. We know what we’re doing.
The grammar of the Spanish version of this blog was checked and corrected by Wagner Freer of Spanish School for Residents and Expats. We strongly recommend this language school as your best choice to learn Spanish, click here to contact them.
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I DO want to remind our readers that we appreciate any referrals you can send us. Also, please remember the GoDutch Realty agents when you talk about your home in Costa Rica, we appreciate it.