By: Carlos Taboada
The purchase and sale of real estate is a common and regular transaction in most countries that recognize private property rights. In this transaction, the seller may generate a capital gain or loss, depending on the difference between the selling price and the acquisition cost. The Tax Concertation Law (“LCT”), in its Article 3, establishes the Income Tax (“IT”) that taxes Nicaraguan source income of resident and non-resident taxpayers, including both gains and losses from capital as well as those arising from economic activities. The majority of real estate transactions will be subject to IT on gains and losses from capital, except for those carried out by companies whose main business or activity is the sale of real estate, in which case they will be subject to IT on economic activities. In this installment, we will discuss the first case, and in the following one, the regime applicable to real estate companies.
Article 15 of the LCT defines gains and losses from capital as “variations in the value of the taxpayer’s assets resulting from the sale of property or the transfer of rights.” Therefore, since the purchase and sale is an act of sale, it could generate a capital gain or loss. Chapter IV of the LCT regulates the application of IT to gains and losses from capital, establishing certain important rules to consider for the case of purchase and sale transactions:
a) Article 74 of the LCT establishes that the tax applies to gains and losses from capital made;
b) Article 75, numeral 2, of the LCT establishes that the moment of realization of the gain occurs at the time of the sale of the property;
c) To determine the taxable base on which the tax will be applied, we observe Articles 82 and 83 of the LCT:
i) The first determines that in onerous transfers (such as purchase and sale transactions), the taxable base is the difference between the transmission value and the acquisition cost;
ii) The second specifies the calculation method for the acquisition cost and transmission value. The acquisition cost includes the total amount paid for the acquisition, the cost of improvements, and expenses inherent to the acquisition, excluding interest and deducting amortizations and depreciations. On the other hand, the transmission value for tax purposes will be the higher of the value stipulated in the public deed or the value of the cadastral appraisal.
iii) When the taxpayer is unable to document their costs and expenses, they may apply the withholding tax rate established in Article 87, which is equivalent to sixty percent (60%) of the amount received.
d) Article 87 establishes the tax rates to be paid on gains and losses from capital, stating that in the transfer of assets subject to registration with a public office, the following definitive withholding tax rates of IT shall apply:
Equivalent in cordobas of the value of the good in US $
The correct interpretation of this article is that the applicable percentage will depend on the value of the property, which, in the case of real estate transactions, as we have seen, will be the higher of the value stipulated in the public deed or the value of the cadastral appraisal.
e) Article 88 of the LCT establishes that the IT to be paid on gains and losses from capital is the amount resulting from applying the tax rates to the taxable base. Therefore, the resulting tax rate should be applied to the taxable base calculated in accordance with the previous articles.
In Nicaragua, the purchase and sale of real estate is carried out before a Public Notary, and as a result, the seller transfers their property rights over the real estate to the acquiring buyer. After obtaining the corresponding cadastral certificate, the fiscal appraisal of the property is requested, after which the tax is settled. Subsequently, after paying the tax, the property is registered with the Public Registry of the Department in which the property is located.
In practice, however, during the tax settlement, authorities mistakenly determine the IT to be paid by applying the tax rate to the value instead of the taxable base, which should be the calculated gain or loss according to the rules of Articles 82 and 83 of the LCT.
There are two scenarios regulated by the LCT for the correct determination of the IT to be paid in real estate transactions. When the taxpayer can document their costs and expenses, which we consider to be the case when the purchase amount and the cost of improvements are recorded in the deed of sale based on registrations with the Public Registry of Property, the taxable base should be the difference between the transmission value (Article 83, No. 2 of the LCT) and the acquisition cost (Article 83, No. 1 of the LCT). When these values are not documented, Article 83, No. 3 should be applied.
Next, we illustrate the difference between the current method of determining the tax and the one that should be according to the law for both scenarios, for a purchase and sale transaction of US $400,000.00, which, based on recorded information, the seller had acquired for US $250,000.00.
Form of application of Current Taxable Income
Correct Application of the Taxable Base Documented Costs (art. 83 n.1 and 2 LCT)
Correct Application of Taxable Basis Non Documented Costs (art. 83 n.3 LCT)
Transfer Value (art. 83 n.2 LCT)
Sale Price as stated in the Deed
No se considera
Se toma el valor de transmisión
Valor de transmisión – Costo de Adquisición (art. 83 n1 y n2 LCT)
60% del monto percibido (art. 83 n3 LCT)
IR to pay
In this way, we can observe how the current method of applying the taxable base is not only contrary to what is established in the LCT but also results in a higher tax payment. Correcting this situation would require making the corresponding adjustments in the forms of the Tax Administration that allow for the recognition of acquisition costs or the application of Article 83, numeral 3), so that the taxable base is 60% of the amount received.
In our next article, we will analyze the situation regarding companies whose business and activity is the purchase and sale of real estate.