What are Closing Costs?

Written by Michael Simons on . Posted in Buying and Selling Property in Costa Rica, FAQ's, Homes, Investing in Costa Rica, RE/MAX Tres Amigos

What are Costa Rica closing costs?

In Costa Rica, all closings are handled by a law firm, with a government authorized third party escrow, such as Secure Title Costa Rica. The fees are generally much higher than you would see in the USA or Canada, but surely nothing that will scare you away from a purchase.

The reason for this is simple. The government of Costa Rica, like any government, must collect taxes in order to survive. Most Costa Ricans live in the same house their entire lives. They are not like North Americans, who might buy and sell many properties in their lifetimes. It is very common for Costa Ricans to still live with their parents, even as adults. And many properties are given from the parents to their children for free. A farmer might subdivide his large property and give small sections to each of his children to build a house on. In the USA and Canada, there are many ways to collect taxes to keep the country moving.   Capital gains taxes in the USA are some of the highest in the world. There is also an inheritance tax and unfortunately a death tax. You have very high property taxes in most states, and also many additional taxes: School taxes, road taxes, garbage taxes, State taxes. It never seems to end.

MOST of those taxes don’t exist in Costa Rica and the property tax is incredibly low .25% (1/4 of 1%).  The only exception to this rule are beach front properties inside the Maritime zone, where the Municipality has authorization to collect up to 4%.  On larger homes, usually over $500,000 there is a Luxury tax which can bump your property tax up to .50%, still substantially less than most tropical locations.

Since many Costa Ricans are very poor, you will never see the property tax increased as this could potentially bankrupt their own people. So Costa Rica figures the only place they can get money is when a person BUYS a property for the first time by charging a transfer tax at the time of closing.

Most properties are held by Costa Rican Companies or Corporations. These are called Limitadas, which are similar to LLC’s  or Sociedades Anonimas (Anonymous Societies) which are similar to “S” Corps in North America. You can read more about that here. 

https://www.tanktopsflipflops.com/why-corporations-for-property-ownership/

If you read on the internet, you will see where many people will tell you that you can purchase the shares of the entity (Company or Corporation) and eliminate the transfer tax.   This is NOT something I would recommend to my clients in this day and age. Even though you could save the transfer tax, which might be a few thousand dollars, you also inherit any potential liabilities that the corporation might have.  If any side agreements exist, that the previous owner might have engaged in, you inherit those debts. Years from now someone could come out of the wood work claiming that this corporation owes them money for one reason or another, and you would be responsible to pay it.  Also, if any back taxes are owed, such as income tax on previous rentals, you would inherit those liabilities as well.  This procedure recently changed and since September 2012, all transfer of social capital shall also pay the transfer tax. With these modifications, the benefits of transferring social capital versus transferring the asset are very low.   The safest and cleanest way to purchase a property in Costa Rica is to transfer the property to a Brand New Entity (Company or Corporation). At closing, the attorneys will transfer the property out of the old existing corporation and into a new corporation that was set up strictly for this investment.  It will have no liabilities of any kind, as it was recently formed specifically for this transaction, and the seller can then either use the old corporation for another investment or choose to dissolve the corporation after the sale.  It will be their choice.

The fees for the property transfer, including everything, are as follows:

    • Transfer tax – 1.5% of the purchase price or the registered value at the Municipality, whichever is higher 
    • Registration stamps – .84% of the purchase price or the registered value at the Municipality, whichever is higher
    • Legal fees – 1.25% of the purchase price plus 13% VAT tax.
    • New Corporation $650 plus 13% VAT tax.
    • Escrow services $550 plus 13% VAT tax.

There will be a small fee to transfer the utilities into the name of the corporation usually less than $250 as well as an annual fee for maintaining the corporation, paid in advance, usually around $500.

Then also know that all Home Owners Association fees and property taxes are prorated to the closing date, so you will have to reimburse the seller for any fees they have paid in advance.

So what this means, is that if you are buying a property that is valued HIGHER on the current tax books than you are paying, the transfer taxes are based on that higher number. Although this seems a little unfair, you have to look at the bright side of this situation. Say you are buying a property for $200,000, but the property has a tax value of $300,000. How can this be? Well most likely, the current owner purchased the property at the peak of the market for $300,000. This means, that you are buying this property at a severely discounted price, and although you are paying a few thousand dollars more in transfer tax, you can feel good knowing you are “making” almost $100,000 in equity the first day you own it. 

So I tell everyone, just figure on paying an additional 4.5% to 5% on top of the purchase price or the registered value at the Municipality, whichever is higher .  You know up front this is going to be the case, so it won’t be a big surprise at closing.  Since we know the cost going in, it is not a big issue for most buyers.  A $200,000 house is really a $210,000 purchase and you know your tax dollars are going to good use. The rest of the way is smooth sailing, with very low carrying costs.

Many states and countries continue to raise taxes every year.  This is very upsetting, as your costs keep climbing year in year out.  Not in Costa Rica.  Your taxes will be paid UP FRONT, when you buy the property, and you can relax and enjoy the rest of your time down here in paradise, without panicking each time the tax man comes calling. You have made a very wise choice to invest in Costa Rica.  Congratulations!  You are purchasing your little piece of paradise and it might be the last property you ever buy, if you are retiring.

There is no reason whatsoever to take any risk with this investment. We all come to Costa Rica to get away from stress and risk. Start fresh, from the beginning, and you will sleep well at night, knowing nothing will ever come out of the closet to bite you.  And when your first property tax bill arrives, you will chuckle at the savings as it will be substantially less than what you were paying back home.

Pura Vida,

Michael Simons

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