Real Estate FAQs

Real Estate FAQs

buying real estate in costa rica

FAQs: Answers to Your Questions about Buying Real Estate in Costa Rica

When making the decision buy property in Costa Rica, there are many things to consider. Below is helpful information on frequently asked questions that will help you navigate the ins-and-outs of owning real estate in Costa Rica and living here. Compiled and answered by a Costa Rican attorney these questions and answers are accurate, detailed and provide facts that you will find very helpful in your search for the perfect property here.

The questions below contain detailed information on the buying process, the closing process, taxes, corporations, trusts, residency, utilities, and more.  If you have further questions or are ready to start your search for real estate 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 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.

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 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.

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.

Purchase and Sales Agreement

Once you’ve found the property you would like to purchase, your real estate agent / or your Costa Rican Attorney will prepare an Offer to Purchase. The offer will require you to make a International wire deposit into an Escrow or Money Management bank account in Costa Rica.  (Checks are not acceptable as it takes up to 45 days for them to clear.) The offer will allow you and your legal representative a Due Diligence period to research the title of the property, the corporation that it may be held in, Home Owners Association dues and rules and regulations, taxes and any other relevant details. Should the Due diligence uncover issues the buyer finds unacceptable, the deposit monies are returned and the Offer to Purchase becomes void.

Should the Due diligence reflect that all pertinent details of the property are in good standing or can be rectified easily, the deposit monies shall become non refundable and the purchase process continues.
The attorney will then prepare the Transfer documents called an Escritura, transferring the property from the Seller to the Buyer in the National Registry, called el Registro Nacional, which will be signed by both parties at the time of closing

The balance of the money for the purchase need to be wired to the Escrow account or Money Management account 3 days in advance of the closing.   Allow 3 days for the funds to arrive from North America to Costa Rica.

Costs Associated with Purchasing

The closing costs in Costa Rica are government governed but a quick rule of thumb is 3.5% of the purchase price OR the registered value of the property in the National Registry-whichever one is higher.
Example:          $100,000 purchase price
Closing costs:    $3,500

Very often, the closing costs are split 50/50 between seller and buyer.  The Buyer’s attorney generally is responsible for drafting the Transfer document and will send to the Seller’s attorney for review.  The costs for the Seller’s attorney to review the Escritura, is at the seller’s sole expense and not included in the 3.5%.

Closing on a Purchase:

The day of the scheduled closing, according to the Purchase Agreement, the buyer and seller meet with the Buyers attorney and possibly Seller’s attorney and both parties sign the Escritura or Transfer deed, which is written in Spanish and recorded in the Notaries book.  (For non Spanish speakers, the attorney will read the document in English, explaining all of the details.)

Once all documents have been signed by both parties and notarized by attending notary, the Escrow Agent will disburse the monies to the various parties, such as attorneys, realtors and the seller.  Bank account information is provided in advance so that it’s a simple press of a button and the funds are transferred.

Once the Transfer deed has been signed, the Buyer’s attorney will register the paper work at the Registro Nacional, which takes approx. 2 weeks to receive a copy of the transfer, showing it is complete.  Ensure your attorney provides you with a copy after the closing.

Closing on a Purchase, When NOT in Costa Rica:

If you are unable to be present for the Closing of your property purchase, your attorney can draft a Power of Attorney, assigning the rights for a 3rd party to sign the closing documents on your behalf.  This is a ‘limited’ power of attorney, which specifically outlines the ‘powers’ this 3rd party has been temporarily given.

An additional fee is associated with your attorney drafting the Power of Attorney, which you will need to sign and return in advance of the closing.  Please discuss the costs directly with your attorney.

In some cases, the Power of Attorney must be taken to the closest Costa Rican consulate in your country and signed in front of the Consular, this is called having the document authenticated.  Ask your attorney if this is necessary, in your case.

Setting Up Utilities:

In many cases, the electricity, cable, Internet, water and telephone are registered with the various providers under the name of the Seller’s Corporation.  In this case, nothing needs to be switched over.  The seller provides the account numbers for the utilities and the Purchaser begins paying them, without any changes necessary.

If the utilities are not in the Corporations name already or if you are purchasing via  a new Corporation, your attorney or Property Manager via a limited Power of Attorney, can assist you in changing the utilities from the old corporation into your new corporation for a minimal fee.

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 the Trust 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.

Corporations in Costa Rica:  Most properties are held in a Costa Rican corporation commonly referred to as an S.A. Sociedad Anonyma or S.R.L   When purchasing a property, often the Buyer will simply have the shares of the Corporation transferred into their names.  There are legal books that are associated with corporations that physically change hands and in which the transfer of the shares are noted.

Your attorney may advise against assuming the shares of the S.A. if there are any tax liabilities that you as the shareholder could be responsible for in the future.

Attorneys can easily and quickly supply a new corporation, if the property you are purchasing does not already have a corporation or if you require a new one.  You can select a name for the corporation and the approximate cost is $800-$1,200 USD.

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 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.