When making the decision to own and invest in Costa Rica real estate, there are many things to consider. Below are a few FAQs that answer some of the most important questions on living and owning real estate in Costa Rica. As compiled and answered by a Costa Rican attorney these questions and answers are some that you may find very helpful in your search for a vacation or retirement home. For more information on owning real estate or investing in Costa Rica, contact us at Palms International.
Can foreigners legally own property in Costa Rica?
In Costa Rica, foreigners may purchase fee simple title to property. The only exception to the rule is regarding the so-called Maritime Zone Regime, in which a Costa Rican citizen must always have a percentage ownership.
What is a “Holding” Corporation?
A “Holding” Corporation provides several advantages to ownership, such as the “anonymous” condition of the owners. This provides a shield and protection to your assets and separates your real estate investment from any other liability, along with facilitating the transfer of ownership and effectiveness of implementation of succession rights, to mention a few.
In this regard, U.S. citizens should always opt for using Costa Rican Limited Liability Corporations –instead of a Sociedad Anónima-, which are recognized by the IRS as “pass-through” entities, for U.S. tax purposes, and hence any tax payment made in Costa Rica may be credited in the United States.
Normally, companies holding title to real estate hold the contracts with service providers, employees and other contractors. All of these are hence acquired –without the liabilities, which will be included and determined in the Due Diligence- when the holding company is acquired as part of the purchase.
What taxes apply to property ownership?
Property taxes are astoundingly low, as they are applied to the value of the property as recorded by the local municipality, which often values properties below true market value. The property tax is a mere 0.25 % of the recorded value of the property, on an annual basis.
However, all properties that are registered with a value higher than an approximate two hundred thousand dollars (US$200,000), are also subject to a yearly “luxury tax”, which is paid to the Central Government, in an amount equal to 0.25% of the recorded value of the property.
For the time being, there is no capital gains tax in Costa Rica. When you sell your home, you receive both the original cost of the house plus the appreciated value, tax-free.
Income taxes –like those derived from rentals- are taxed at a fixed rate of thirty percent (30%) for corporations.
In addition, sales tax in Costa Rica is thirteen percent (13%).
How does the property Registry work?
All titled properties in Costa Rica are titled under a single, legal, government-managed system, known as the Costa Rican Public Registry. Property titles are registered in the Registry, whose records serve as ultimate proof of ownership. In addition to recording title, the Registry also indicates whether a given property has any liens, encumbrances or easements associated with it. Registry records are public and are accessible via the Internet.
Are there Escrow accounts in Costa Rica?
Escrow is a process that allows a potential buyer to place an amount of money (either a down payment or the entire purchase price) in the secure hands of a disinterested third party for a set amount of time. In so doing, the buyer demonstrates to the seller the intent—and capacity—to make payment for acquisition of the property. The Escrow Agreement provides the conditions (free and clear title, for example) for transfers of the money, and it is only when those conditions have been met that the Escrow Agent is obligated to hand over the money to the seller; thus buyer and seller are both protected.
What is a Due Diligence period?
Due diligence is the process of researching the physical and legal status of the property you are about to buy before you buy it. It will also be conducted in the holding corporation, if applicable. During this process, you should confirm that the property is what the seller says it is; that it brings with it no legal complications that will make your life difficult and that you can do with it what you have planned.
In addition, Due Diligence will allow you to determine the acquisition process: by means of acquisition of the holding company or by means of direct transfer of property –to a new Costa Rican company-, as explained below.
In the event the Due Diligence shows the probable existence of liabilities, then a recommendation will be made to keep a portion of the purchase price in Escrow as a hold-back, to ensure buyer will not have to bear these liabilities.
What are the standard costs for Due Diligence?
Most attorneys will charge based on an hourly rate. However, some attorneys might be willing to include their fees for due diligence as part of their fees for the actual closing –described below.
Can you explain the buying process?
Here are the basic steps in more or less chronological order: find a real estate broker and find a property; check it out by doing some preliminary due diligence; have your broker begin the negotiation, offer and counter-offer; sign the sales agreement and put down a deposit; complete the due diligence process and inspection; make any contract adjustments according to findings of due diligence; execute Purchase Agreement –in any of its possible ways-; pay transfer and stamp taxes, notary fees, broker fees, and administrative fees.
Depending on the result of the Due Diligence, your attorney will recommend the acquisition process: (a) by means of a direct transfer of property from the Seller to a newly incorporated Costa Rican corporation; or (b) by means of acquisition of the shares of the Holding Company.
Provided the result of the Due Diligence conducted on the Holding Company is positive, the acquisition of such company’s shares shall have the following benefits: (a) no stamp taxes will have to be paid (equal to 0.9% of the purchase price); (b) all services (i.e., water, cable, electric, and, in some cases, already existing bank accounts) will most likely remain in the Holding Company’s name and be transferred to the Buyer. Benefits regarding transfer taxes are no longer available, since September, 2012.
What are the standard closing costs for a Real Estate transaction?
When a property is sold, a tax equal to 1.5% of the value of the transaction is levied on the transfer of the property. As of September, 2012, such tax also applies to transfer of shares of the holding corporation. In addition, stamp taxes, equal to 0.9% of the value of the transaction, applies when the vehicle used is a direct transfer of property. Legal and notary fees are equal to 1.25% of the value of the transaction. Total: 3.65%.
Therefore, by acquiring an already existing corporation that holds a property, payment of 0.9% for the stamp taxes may be waived.
What is a Trust?
A Trust is created in order for a third party –Trustee- to hold, keep and maintain the Trust Assets (i.e., share certificates, real estate, vehicles), as a way to safeguard them from any potential liabilities, to guarantee the fulfillment of the terms and obligations set forth by the parties –in a Guarantee Trust Agreement- and to create a vehicle for their direct inheritance to the Trustor’s beneficiaries, according to the instructions set forth in the Trust –in a Living Trust Agreement. The Trust Assets remain under the Trustee’s custody, as fiduciary property, during the term of the Trust. Upon occurrence of any of the events described in the Trust (i.e., death of the Trustor, fulfillment of the obligations by the parties), the Trustee shall act pursuant to the instructions and transfer the Trust Assets to the beneficiary of the Trust.
What are the costs associated with setting up a Trust?
Standard, mandatory fees for setting up a Guarantee or a Living Trust are around one percent (1%) of the loan amount –for a Guarantee Trust- or theTrust Asset’s value –for a Living Trust. In addition, an annual trustee fee shall be paid. Most Trustee’s charge between five hundred dollars (US$500) to one thousand dollars (US$1,000), on an annual basis.
What is a tourist Visa?
North Americans and Europeans visiting Costa Rica are granted a three-month tourist visa on entering the country. After the three months have lapsed, tourists who want to extend their stay another three months can do so by hopping over the border to Nicaragua or Panama and remaining there for at least seventy-two (72) hours. On reentering, they will be issued a new three-month visa. If you plan on staying in Costa Rica for longer periods of time, then you should consider applying for a temporary residency.
How can I obtain my temporary residency?
There are several ways to may apply for and obtain a temporary residency. The most common are by claiming “pensioner”, “rentista” or “investor” status. Individuals who apply for these types of residency permits must prove that they receive at least US$600 per month from U.S. Social Security (or some other State Plan) or from a private pension program, in the first case, and US$1,000 on a monthly basis, in the latter. A third way to establish legal residency is to invest in the country. To become eligible for investor (inversionista) status, you must either invest US$50,000 in a tourism business (or other high priority business), US$100,000 in a reforestation project, or US$200,000 in any other kind of business venture.
Is it possible to have a Costa Rican Bank Account?
Yes. After you have acquired real estate in Costa Rica –or obtained a temporary residency-, it is possible to open a bank account in Costa Rica. Most banks will require proof of ownership –which may be provided by your attorney, after the closing-, along with letters of recommendation from your banks. All other documentation will be provided by your attorney in Costa Rica. Most attorneys will assist you in the process and charge your for their services on an hourly rate.