Any time property that you own appreciates, it is considered a gain. This could be a piece of real estate, bond, stock, or something else that experiences an increase in value, meaning it is now worth more than what you paid. The amount that you initially paid is your “basis.”
Gains can be realized or unrealized. Typically, for taxpayers in the United States, realized capital gains on assets you have owned for more than one year are taxed at 15 percent. These are referred to as long-term gains. The asset that you own remains unrealized until such time that you sell it. At that point, it becomes realized.
The controversial aspect of capital gains is the income normally used to purchase an asset already taxed. Many people feel that the United States government is taxing earned income and then turning around and taxing the gains from activity specific to saving a portion of that income.
To avoid paying tax on capital gains, there are some loopholes to consider. Some of these include like kind, resident home exclusion, exchanges, 1031, and selling assets within a 401(k) or IRA. Pertaining to property that you own in Costa Rica, you would realize a gain after selling if it is taxable. If you are a citizen of the United States, that gain must be reported. Keep in mind that the U.S. taxes on worldwide income, regardless of where it is generated.
However, there is no capital gains tax in Costa Rica, as long as the gains did not come from operating a real estate business, like selling lots from your inventory or working as a developer. Ultimately, the U.S. would tax you when you sell your property in Costa Rica, whereas in Costa Rica, there is no tax for this scenario.
There are ways for you to avoid paying this tax in the U.S. For example, if the real estate that you own were held in a Costa Rican corporation as opposed to your name, the gain would be for the corporation, not you. Because there are no capital gains tax in this country, the corporation would not be taxed on the gain.
However, if you withdrew the gain from the corporation, you would need to pay taxes in Costa Rica. In addition, you might also be taxed in the United States. One way to avoid this is with the Foreign Earned Income Exclusion. After qualifying, you would not be subject to U.S. tax on that income. To qualify, you must first apply, after which time the income is drawn from earnings, like salary or a dividend.
A prime example is purchasing, selling, or reinvesting in a corporation located in Costa Rica and then building wealth over a period without being taxed in that country or the United States. In this situation, your Costa Rican corporation would have a tax-free engine associated with wealth creation similar to a 401(k) or the IRA without heavy regulations or forced requirements for taxable withdrawal applied after reaching retirement, an age defined by the U.S. government.
Another reason that Costa Rica has become so popular is Foreign Direct Investment. As you can see, taxation rules in this country can be complex. To learn more and get your questions answered, it is always best to sit down with a reputable tax expert.