Purchasing property in a foreign country can be both an exciting and complex endeavor. In the case of Costa Rica, a nation known for its stunning landscapes, rich biodiversity, and welcoming culture, the process of acquiring real estate comes with its own set of considerations. Beyond the allure of owning a piece of paradise, potential property buyers must familiarize themselves with the various financial aspects involved in the transaction. From taxes and legal fees to closing expenses, understanding the financial intricacies is essential to making a well-informed decision and ensuring a smooth property acquisition process.
Costa Rica's real estate market has seen increased interest from both international investors and those seeking a second home. However, the country's legal and financial landscape differs from that of other nations. In this article, we will delve into the common taxes, legal fees, and closing expenses associated with purchasing property in Costa Rica. By gaining a deeper understanding of these financial aspects, prospective buyers can approach the property market with confidence and clarity, minimizing the risk of unexpected financial burdens.
Closing Costs are fees that every property acquisition must pay. These are all subject to negotiation, and there are different approaches. Also, and very importantly, this is only a guide to give you a reasonable expectation of what is to come:
1. 2% of the closing price for legal/notary fees, transfer taxes, and stamps: The total of these costs for a typical real estate transaction is around 4% of the total price, and it's customary for buyers and sellers to split these costs 50/50 when both are from North America. However, Europeans and Latin Americans, as a custom, expect the buyer to pay them. In today's market, with capital gains taxes almost every transaction happens where the buyer pays all of the closing costs.
2. 0.125% of the closing price for half of the escrow fee, with a $325.00 minimum on your side (plus incidentals of normally another $150 each plus 13% tax): The total fee for the service is 0.25% of the closing price with a floor of $650.00, so you have to pay 50% of either 0.25% or $650.00. Often times the total comes to a minimum of just under $900. For that reason, we urge you to use a U.S. Escrow company that just charges a flat rate of $1000.00. Their escrow requirements are much easier than those of Costa Rica and you pay more upfront but with the time saved, you actually save money. This fee is also variable and changes once we go over U.S. $2mm.
3. ~$1,000 to establish your new corporation and register it for taxes: A service that the legal firm will provide in one fell swoop. The total, with the inscription to the tax authorities and shareholders registration, usually comes to around $1650.00 plus the 13% tax depending on how your lawyer charges.
4. ~$1,000 miscellaneous legal costs: Just to set a realistic expectation, there are always a few little costs that come up (you may need to do a power of attorney or have the lawyer create an additional legal document for your side of the transaction), paralegal fees, copies.
5. .40% due diligence fee of the sale price
6. Registration fees: $200.00 for D-140 of the corp. $150.00 to update the ownership info in the municipality, Resident agent and bookkeeping of $300.00 plus tax for a total of $735.00.
7. .40% due diligence fee of the sale price.
8. Registration fees: $200.00 for D-140 of the corp. $150.00 to update the ownership info in the municipality, Resident agent and bookkeeping of $300.00 plus tax for a total of $735.00.
9. Luxury Tax (Impuesto de Lujo): Luxury tax, known as "Impuesto de Lujo” in Costa Rica, is an annual property tax levied on real estate properties. It's assessed by the local municipalities and is designed to fund local services and infrastructure. Depending on the value of the property and municipality, this tax adds up to 0.3% to the municipal taxes. It is levied to construction valued at over ₡138 million (~$275,000.00). It is paid to the Ministry of Finance (Ministerio de Hacienda) and is used to fund homes for the less fortunate in the area.
10. Corporation Tax (Impuesto a las Personas Jurídicas): The corporation tax, known as "Impuesto a las Personas Jurídicas," is a tax imposed in 2012 on legal entities or corporations registered in Costa Rica. This tax was introduced to increase transparency and to combat the misuse of corporate entities for illegal activities. It applies to both domestic and foreign legal entities registered in Costa Rica. Corporations are required to pay an annual tax based on the company's category and the assessed value of its registered assets. This new tax has a fixed fee of $135.00 USD for inactive corporations. Failure to pay the corporation tax can lead to penalties and potential dissolution of the legal entity. It's important to note that the corporation tax is distinct from other property-related taxes and is aimed at legal entities rather than individual property owners. However, some property transactions may involve the transfer of shares in a corporation that owns the property, which can have implications for the corporation tax.
11. Property Taxes: This tax is paid annually at 0.25% of the registered property value to the local municipality. They can be paid every three months or in full. Although it sounds ridiculous, here in Costa Rica you are required to voluntarily update your property value with the local municipality every five years. If you haven't done so within the last five years you should do it now to avoid tax penalties (albeit small) and especially if you are thinking about selling as it is a very important item for due diligence.
Understanding these taxes is crucial for anyone considering property ownership or transactions in Costa Rica. Consulting with legal and financial experts familiar with Costa Rican tax laws is recommended to ensure compliance to make informed financial decisions and avoid sanctions.