Buyers Handbook For Purchases in Costa Rica

Foreign investors can own titled property with the same rights as a Costa Rican Citizen. You can also own your own corporation to manage your property. We recommend this as it will allow you to open bank accounts, apply for insurance, and reduce personal liability. If you are looking to use your property or home as a vacation rental you can run it with the same or less income tax that in the United States. If you decide to keep the funds in the country, you will only pay the lower Costa Rica income tax. If you decide to bring the funds back to the United States, you will only be taxed on the balance.

Purchasing Process

The purchasing process can be daunting if you do not understand the process.

All real estate transactions are made in US Dollars.

This is a big investment and extremely important to understand the process and general timeline. The payment schedules vary depending on the buyer’s needs and the structure of the property transaction. If you are purchasing a built home or land the following is the general starting point of the purchase process:

1. Reservation to hold the Property (Only if purchasing from a developer)

2. Letter of Intent - with what you are willing to pay for the land/home (basically its the same as an offer in the US) -

3. Negotiation if Needed

4. Seller Acceptance of Offer

5. Buyer Signs Sales and Purchase Agreement (Referred to as the SPA) - drafted by attorney

6. Buyer will open a Costa Rican Corporation and Escrow Account

7. Buyer deposits 10% of Total Purchase Price

8. Due Diligence Period Begins (Due Diligence in normally 30 days.) If the property is raw land more time may be required to complete the proper studies depending on size and variables; More difficult properties may have 45 or 60 day Due Diligence periods.

9. When Buyer is satisfied Due Diligence is Completed

10. Attorneys produce the Closing Statement (Outline of payments for buyer and seller)

11. Closing Date is Set

12. Buyer sends the 90% remaining funds to Escrow.

13. Closing, Buyer Signs Deed to Buyer and Buyer Signs Escrow Funds Release Document

a. Property is Registered in the National Registry Several Weeks Later (Taxes, utilities, and insurance will be transferred after property is registered)

14. Transition Complete

a. If this purchase is not with a developer you will be on your own from this point with the support of your attorney or realtor. b. If you have purchased with a developer you will be assisted in furnishing the home, construction is applicable, and management of the property moving forward. Suggestions to prepare for purchasing your first property or home:

Corporation We recommend opening a corporation to hold your property. We do not recommend purchasing shares of the previous owner’s corporation. This can have unforeseen problems such as previous employees or caretakers grievances. You do not want to take on the seller’s problems.

To open a corporation, you will pay under $1,000 and the process takes 24 hours. Having a corporation will provide separation from you personally to mitigate liability and also will allow you to quickly open bank accounts, acquire insurance and other necessary business activities. Purchases can be done in your personal name, but we do not recommend this.

Escrow We also recommend opening an escrow account at the time of signing the Sale and Purchase Agreement. This allows the banking transactions to happen easily and alleviates the stress of learning the banking process. The escrow can be opened on the same day and will be an asset you can use well beyond the purchasing process. Escrows in Costa Rica act similar to personal bankers, so you can have them pay your bills and make other payments needed in everyday life. Warning, the escrow will need to collect documents from you to satisfy the central banks of Costa Rica and SUGREF the international banking commission. Costa Rica is proudly the only Central American country not on the Black list in SUGREF. This comes at a price and compliance requires more documents from the buyer’s side to make high dollar transactions. Buyers are required to provide 3 months of bank statements, origin of funds, tax returns (in some cases) and copies of their personal identification. The escrow agent will take care of the entire process; you just need to provide the agent with the information and they handle the compliance. The process is quick and painless, but some feel it is invasive because they are not accustomed to this in North America. This is normal protocol and probably the most unenjoyable part of the transactions process.

Due Diligence Breakdown, what you need to look for: Water - the only thing that matters This is the first thing that you should review even before making an offer on a property. Water in Costa Rica is administered by the government and has many restrictions of use. It is important to have an attorney look at the water situation before pursuing any property. There are 3 categories of water a property can utilize:

• Internal or Artesian Well or Deep Well - To use this source the property must have a concession of use. It is very important to understand the quantity and quality to understand the potential of the water source. If you are trying to subdivide or make a commercial or tourist business you will need to know if this will support your needs. This is paramount and should not be an afterthought.

• ASADA – This is a locally administered water system in Costa Rica governed by AYA national level water department. With this you can feel more confident in the property’s potential. Even if you have an internal source this will provide the developer or you with a straightforward permitting process. The water availability will still need to be verified for your specific property. • AYA – This is the national level water department. This is not as available in many coastal and rural areas. Again, this will need to be analyzed to make sure you property has the proper documents and that the system can accommodate your desires. If you find that there is no water access or the water on the property does not have access to the amount needed you should strongly consider your timeline and use of the property. To obtain a water concession on an existing internal source will take 1 to 3 years. To drill a new well and concession the well will take 2 to 4 years. If there is an ASADA or AYA system that does not have enough water for you then you will need to negotiate with the authorities to donate sources or system upgrades, which will take time and a large sum of money. To avoid these pitfalls we recommend purchasing in a community from a trusted developer. Even with a developer you should make sure your attorney verifies their water documentation.

Title vs Concession Property We strongly recommend buying titled property, especially if this is your first purchase in Costa Rica. Titled property is owned by a foreigner with the same rights as a Costa Rican Citizen. Coastal Concession property is normally the area between the 50 meter high tide of the beach to the 200 meter line. The 150 meter area along the coast is called concession. This area is generally owned by the local municipality. Concessions are normally a 20 year period lease, but can be as low as 5 years and high as 99 years. These areas are subject to land use plans and have limited uses based on this. Concession cannot be owned by a foreigner. You must open a corporation and have a Costa Rican partner with 51% ownership of the corporations that hold the concession asset. If you are looking at purchasing a concession property you will need to complete a thorough analysis before making an offer. Again, we highly recommend staying away from concession property as there can be serious unforeseen consequences because you are leasing the land and have limited rights. Registry A registry study should be performed in all due diligence reports. This will notify the attorney if there are any issues on the property and they can proceed accordingly.

Easements Easements also called “servidumbres” in Costa Rica are important to look for in a development or property. Most common easements can be for rites of passage, environment purpose, or water systems. These are normally 6 to 8 meters wide and can cross anywhere in the property. It is important to check if the property has any easements and if so what they are. These can affect critical areas of the property compromising building areas and can allow others to access the property.

Embargos These can be seen in the registry study. There may be liens or other things compromising the property, which need serious consideration before purchasing a property. Condo by laws If you are purchasing from a developer or in a community it will be important to review the Codes Covenants and Restrictions (CCRs). In most cases these are very standard and are in place to insure the value of your property continues to grow and the tranquility of the community is maintained. Utilities Your attorney will need to check the utilities and make sure they are paid and working. If this is raw land you will need to see what utilities you have access to. It is recommended to buy within a community to make sure you have the utilities you need for everyday life. The Internet is widely available in Costa Rica. It is important to have hardline direct access to the internet and not have systems of wirelessly transmitted internet. You will have trouble with any system not directly connected to the home. Optimally you will find a community with access to fiber optics, which will allow you to have unlimited bandwidth and speed.

Taxes Always check to make sure the taxes are paid to date on the property. The taxes will be prorated at closing and you will normally have to pay the prorated amount as taxes are paid annually.

Insurance Always check to make sure the insurance if applicable is paid to date on the property. The insurance will be prorated at closing and you will normally have to pay the prorated based on the term of payments. Patrimony Patrimonio Nacional del Estado (PNE) can affect certain properties and this should be studied. This is a protected forest area. IF part of the property is affected you will not be able to use that area, only for trails as it is an environmentally protected area. This can be removed, but it is very difficult, time consuming and, in some cases, not possible.

Property Survey We recommend a property be done, which is normally paid for by the Buyer. This depends on the current survey. If the current survey was performed and registered within 5 years it may be ok. If this is a property in a rural area we always recommend a new survey to check boundaries and make sure there is no overlap with other properties in the national registry.

Soil Study Depending on what you are building and the topography of the property a soil study is always a good idea. This is normally done by the buyer. Perforations are made to test filtration (information needed for septic systems) and cores are taken to the lab to check the soil density, viscosity, and compression strength to determine the suitability for construction. If there are currently structures on the property it will insure they will not settle or worst fall in mountainous properties.

Title Search One of the most critical aspects of due diligence is conducting a thorough title search to verify the property's ownership. This search should confirm that the seller has legal title to the land and that there are no outstanding liens or encumbrances. You should also check for any claims or disputes related to the property. RECOMMENDED ATTORNEYS REAL ESTATE ATTORNEYS Uvita Law Firm - Kristi Penland Email: kristi@uvitalawfirm.com T: +506-2743-8619 T: +506-2743-8416

ESCROW ATTORNEY E&T Escrow and Trust Solutions – Jeimy Quesada Email: jquesada@escrowtrustsolutions.com T: +1-860-417-0800 Secure Title Latin America – Lizzette Blanco Email: lblanco@stla.net T: +506-2505-3005

IRS Reporting for Foreign Investment/Assets There are IRS reporting requirements for U.S. citizens when they buy land or build a house in Costa Rica. The primary reporting requirement is related to foreign financial accounts, specifically the Foreign Bank and Financial Accounts (FBAR) reporting and the Foreign Account Tax Compliance Act (FATCA). Here's a brief overview of these reporting requirements:

FBAR (FinCEN Form 114)

● If you have financial accounts, including bank accounts, investment accounts, or other financial assets, in Costa Rica with a combined total value exceeding $10,000 at any time during the calendar year, you are required to file an FBAR. This requirement applies to U.S. citizens and residents who have a financial interest in or signature authority over these foreign accounts.

● This requirement does not depend on whether you purchase land or build a house in Costa Rica but on the value of your financial accounts in the country. FATCA (Form 8938)

● The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers to report specified foreign financial assets if their total value exceeds certain thresholds. These assets can include foreign bank accounts, investment accounts, and interests in foreign entities. The reporting threshold varies depending on your tax filing status and location, but it generally starts at $50,000 for single filers living in the United States.

● The purchase of land or the construction of a house may involve financial transactions or holdings that fall under the FATCA reporting requirements.

It's essential to consult with a qualified tax professional or accountant who is knowledgeable about U.S. tax laws and international taxation, particularly if you have significant financial interests or investments in Costa Rica. They can provide guidance on how to comply with FBAR and FATCA reporting requirements, as well as ensure that you are fulfilling all of your U.S. tax obligations related to foreign property ownership and financial accounts. Failure to meet these reporting requirements can result in penalties, so it's crucial to stay in compliance with U.S. tax laws.