Standing in a cow pasture overlooking the Pacific Ocean, you know you’ve found the perfect piece of property. The price is right, the location good, and you’re ready to sign on the dotted line. But wait. The property slopes. Can you safely build what you want to build there? Will environmental regulators let you build on that slope? Does the property have water and electricity hook ups? Has the municipality zoned it in any particular way? Does the seller have authority to sell it? Have all the taxes been paid over the years? What kinds of legal encumbrances does the property have on it? Is the government planning a highway that will go right through the middle of it?

To answer these and many more questions, you will have to perform due diligence. What is due diligence? Basically, it is the process of carrying out background research to confirm that the property you want to buy is, indeed, as the seller represents it. Due diligence also looks into the future, to confirm, as far as possible, that there will be no significant legal or other restrictions that would block you from doing what you like with your new property (building a home, developing a gated community, converting a house to a bed and breakfast, etc.). Due diligence confirms the present and future value of your property.

The amount of due diligence a retiree or anyone else need to do will vary greatly depending on the property and on what you plan to do with it. Purchasing a condominium from a well-known developer will take very little due diligence. Purchasing several hectares of farmland from a Tico family in order to build a high-density development will take a lot.

A word of caution for retirees and others

Whatever the case, it’s difficult to overstate the importance of thorough due diligence when buying property in the Costa Rican real estate market. Costa Rica can be an odd place, and among its many charms is its ability to lull foreign real estate buyers into carelessness. Call it the “Pura Vida Affect” – otherwise-sharp businesspeople land in Costa Rica, and because the people are so nice, or perhaps because it’s their first international adventure, they cut corners, trust too much, and get into a mess. Keep in mind that no matter how lovely the culture, large amounts of money attract all manner of scammers. Foreign buyers, especially people of retirement age, need to be extra careful, and that includes carrying out due diligence before buying.

The other reason due diligence is so important in Costa Rica is less prosaic: Namely, it’s much easier to do things right the first time in Costa Rica than to go through a lawsuit later. A problem with a contract or illegal actions by an unscrupulous seller can take years to sort out through the painfully slow and fairly ineffective Costa Rican legal system. That labyrinth of paperwork and linoleum-hallwayed public buildings is best avoided in any circumstance, and especially if you’re buying a property in the country so you can get away from it all. Even worse is trying to pursue a court case from outside Costa Rica if you don’t plan to live here full time.

The process of purchasing a condominium is basically the same as that of buying a house which I have discussed in previous blogs. There are, however, a few key differences that you need to be aware of when buying a condo for retirement:

- Condo properties are registered under a different legal regimen that leaves the administration of the property as a whole up to the condo association, of which you, as owner of a condo, will be a member. That means condos come with a set of rules that dictate everything from the makeup of the administration to the use of common spaces to whether or not you can have pets. As an additional piece of preliminary due diligence, review the rules closely for deal breakers before you put down your deposit. The rules can be changed, but only if everyone in the condo committee agrees to change them, which doesn’t happen often.

- Condos can offer a greater level of services, including use of common areas and recreational facilities; 24-hour security; and agents who will take charge of renting out your condo when you’re not using it. All of this, of course, comes for a fee, and that fee is not optional. The size of the monthly fee depends on the number of condo owners in the development and the level of service. Inquire into this before agreeing to anything, as an extra $150 a month can be a significant expense if you are a retiree living on a fixed income.

- Condo developments often have their own sales offices. If you’ve found the development you like, you can skip the step of finding a broker and go straight to the source. Be careful, though: Baby Boomer retirees and other home buyers should have a lawyer look over the sales contract template they hand you, as many of them are poorly drafted, disadvantageous, or just plain sloppy.

When retirees purchase property in Costa Rica they should be aware of the legal fee and taxes which they will have to pay.

Fees are somewhat negotiable as far as who pays them, although they follow certain guidelines. Notary services range between 1% and 1.25% of the value of the property. The minimum fees are set by law through the local Bar Association or Colegio de Abogados y Notarios, so while you might get quoted a fee lower than 1%, the lawyer/notary would be breaking the law. That fee does not include other legal services you might request of your lawyer – for example, the due diligence process, contract revision, translations, etc.

Stamps and taxes for registering your property will run between 0.75% and 0.8% of the value of the property. Finally, the property transfer tax will cost 1.5% of the value of the transaction. If you’re purchasing the shares of a corporation rather than the property itself, this tax will not apply. Otherwise, expect fees and taxes to add about 3.3% in transaction costs, meaning a $1 million transaction will cost about $34,000 in fees and taxes. To recap:

Stamps: 0.75% – 0.8%
Transfer Tax: 1.5%
Notary fees: 1% – 1.25%

Total fees and expenses: 3.25% – 3.55%

Retirees should be aware that often fees and taxes are split down the middle between buyer and seller, but that depends on the size and variety of transaction. Who pays the fees can be a bargaining chip during the negotiation process.

Costa Rica Residence and Liability for Taxation
In Costa Rica the taxation of individuals is based on the principle of territoriality, meaning that all personal income which has a foreign source is tax exempt PENSIONS included. Only that proportion of revenue earned by an individual within Costa Rica is subject to an assessment by the tax authorities. The principle of territoriality is perhaps the most significant aspect of the country’s fiscal regime. Costa Rica does not discriminate between the taxes payable by residents and non residents The main taxes affecting an individual are income tax, employee social insurance, withholding taxes, capital transfer tax and selective consumption tax. There are relatively minor municipal taxes, and there is a tax on vehicles. Income tax is levied on both employment source income and non-employment source income.

While residents and non-residents pay the same income tax on employment source income there is a slight distinction between how a resident and a non-resident are assessed on their non-employment source income but the distinction is driven by pragmatic considerations and is not discriminatory. The selective consumption tax, equivalent to a VAT, and levied at 13% has a major impact on the standard of living.

Tax system; taxes payable by Free Zone companies would also be increased over a period of time, and it’s possible that the territorial basis of personal taxation would be abandoned in favor of world-wide income taxation. There is no capital gains tax in Costa Rica. Whilst gains made by businesses on the sale of capital assets may be subject to business income tax, capital gains made by a resident or non-resident individual on the sale of a capital asset are exempt from any form of income tax. No credits are granted in

Costa Rica Income Tax
Income tax payable by individuals is set out in the Income Tax Law; the rates are in article 15. The fiscal year runs from 1st October to the following 30th September. Employment income includes the gross value of a salary, wage, pension, commissions, bonuses, expense allowances and any benefits in kind. No expenses can be deducted in assessing employment income. However in respect of non-employment source income (e.g. dividends on shareholdings, rental from a property letting, etc) there is a difference in how residents and non-residents are taxed. Thus there are 3 distinct manners of assessing income tax payable by residents and non residents namely: Personal Income Taxes: This group includes two categories:

(1) Persons whose income consist of a fixed salary or other remuneration and

(2) persons with profit generating activities

a. – Persons whose income consists of a fixed salary Any individual employed in Costa Rica pays a monthly withholding tax rate based on his salary. From October 1, 2008, employment income (on a monthly basis) of individuals is subject to a progressive tax of 15% as follows:

Income up to 586,000 colons, exempt.

In excess of 586,000 up to 879,000 colons, 10%.

In excess of 879,000 colons, 15%.

There is a monthly tax credit applicable to each dependent meeting the following criteria:

A minor (under 18 years)

Handicapped (physically or mentally), and therefore unable to make his own living.

A high school or college student, not older than 25 years.

A monthly tax credit applicable to the spouse only if there is no legal separation between them. In case that both spouses are tax payers, the tax credit can only be deducted by one of them. The amount of the monthly tax credit is 1,110 colons, and 1,640 colons for the spouse. b. – Individuals with profit generating activities The following rates are applied to taxable annual profits for the tax year:

• Profits up to 2,599,000 colons exempt

* In excess of 2,599,000 up to 3,880,000 colons 10%
• In excess of 3,880,000 up to 6,473,000 colons 15%
• In excess of 6,473,000 up to 12,972,000 colons 20%
• In excess of 12,972,000 colons 25%

An annual tax credit per dependent can be applied by taxpayers, once income tax has been calculated. Conditions to apply to this tax credit are the same as stated previously. In case that both spouses are tax payers, the tax credit can only be deducted by one of them. The tax credit is 13,320 colons oer child and 19,680 colons for the spouse.

Income tax payable by residents on non-employment source income:

• Non-employment source income includes payments related to bonuses, profit share schemes, dividends on shares, interest on loan deposits, and rental income.

• A number of non-employment sources of income are exempt from tax. They include Christmas bonuses (mandatory after 12 months service with the same employer), gains achieved on the sale of capital assets (e.g. the sale of a house at a profit), gifts, inheritances and income from securities designated either as tax exempt or subject to a withholding tax in place of income tax.

• There are a number of allowances which can be deducted from non-employment source income by residents so as to reduce the taxable charge namely: an annual tax credit in respect of a spouse; an annual tax credit in respect of a dependant under 25 years of age;

• Under law 7293 of 1992 (the Incentives to Tourist Development Law) any individual who purchases shares in a corporation involved in hotel services, air transportation, water transportation or car rental can annually deduct up to 50% of the value of his shareholding from his income for the purposes of income tax so long as the deduction does not exceed 25% of his annual tax payment.

• A husband and wife are treated separately for the purposes of assessing income tax on the non employment source income of residents.

Income received by non-residents from a non-employment source is usually taxed at source (e.g. withholding tax on dividends) and if not taxed at source is not taxed at all.

Costa Rica Social Security Taxes
The employer pays a contribution of up to 26% of gross salary and the employee pays a contribution of up to 9% of his gross salary. Self employed persons are also required to contribute to this fund. Foreigners temporarily working in Costa Rica are not exempted from the requirement to pay this tax even though it is evident they can never benefit from it . Employers are required to insure their employees against accidents at work and depending on the monthly salary and the nature of the risk, premiums can vary from 0.5% to 22% of the employees salary.

Costa Rica Capital Transfer Tax
A capital transfer tax of between 1% and 2% (dependent on value) is payable by the purchaser on the value of real estate purchased, plus about 1% stamp duty. For the purposes of capital transfer tax “value” means the higher of either the purchase price recorded by the parties or the value ascribed to the transaction by the relevant Government department using a prescribed formula. The law on capital transfer taxes payable is set out in the Income Tax Law.

Costa Rica Sales Tax
Sales Tax stands at 13% and is levied both at the point of importation and at the point of sale (unless the sale is by way of export). It is levied on all goods with the exception of foodstuffs, real estate, medicinal products and certain other items. A 10% rate applies to the sale of wood and a 5% rate to the consumption electric energy for residential purposes. Sales tax is not generally levied on services. Sales tax is charged after the imposition of selective consumption tax. The selective consumption tax varies from 0% to 60% and is levied either at the point of importation or for domestic production at the point of sale. In assessing the value of the goods for the purposes of selective consumption tax domestic goods are valued at the price that the manufacturer sells the same to the distributor whereas imported goods are assessed on CIF. The Government raises about half of its revenue from these two taxes. BACK TO TOP

Costa Rica Property Tax Houses with a value greater than USD18,600 are charged a levy of 0.25% annually. Under legislation approved in August, 2008, and coming into effect from January, 2009, a scale of increased rates between 0.25% and 0.55% will apply to houses with a value of USD200,000 or more.

* Excerpts courtesy of www.lowtax.net

The Closing

This article is part of a series I have been writing to help educate retirees and other foreigners about buying a home or property in Costa Rica. In the last couple of weeks I have reviewed the buyer’s relationship with the broker and the seller, tips on due diligence and actually negotiating the deal. Below I will explain the procedure for doing a closing.

The actual sales deed is a contract drawn up by one of the lawyers in Spanish. Which lawyer draws up the contract can be negotiated, but as with many things in the purchasing process, it often depends on which party is taking the larger perceived risk. For example, if the buyer is paying cash, the buyer’s lawyer draws up the contract. If the seller is financing, the seller’s lawyer draws it up. The buyer has the right to have the contract orally translated to English at the moment of the closing, but it’s a good idea to pay your lawyer to do a written translation as well.

The closing usually takes place in the buyers’ lawyer’s office, but, as with almost everything else in the transaction, it depends on how the deal is structured: If a bank is putting up a large chunk of the money as financing, it will take place in the bank. Present at the closing will be your lawyer, you, the buyer, the seller, and a notary. Most likely the notary will also be one of the lawyers present at the closing, when you and the seller seal the deal and the notary registers the deed in his notary booklet. Later, the notary copies the deed into a separate document which he takes to the National Registry to register. After paying all the necessary stamps and fees for registration, the notary hands the document off to a registrar, who, if there are no problems with the document, may take a week or two to register the deed.

Once the deed is registered, you should be able to go to the National Registry’s Web site, type in the finca number, and bring up the property registered under your name or the name of your corporation. Sometimes, however, it takes longer than a few weeks, usually because there was a problem with the document. In that case, the registrar gives the document back to the notary and it is the notary’s responsibility to revise it and resubmit it. People who see a long delay in the registration of their new property sometimes blame the bureaucracy at the National Registry. More often it’s the fault of a notary who isn’t doing his job.