Purchasing Process
For many foreigners, the scariest part of buying property in Costa Rica is taking on an unknown process. How will the contracts work? What are standard due diligence periods? What are the closing costs? Attorney’s fees? Property taxes? Should I use a Costa Rica corporation to carry out the transaction? Below, we have given you a brief introduction and hopefully, the answers to these questions to familiarize you with the process of buying property in Costa Rica.
Ensuring Clear Title
All documents relating to an interest and/or title to real property must be registered in the property section of the Public Registry. Each property has a registration number referred to as the folio real, and the records database can be searched with this number. The Public Registry report (informe registral) provides detailed information on the property, including the name of the title holder, boundary lines, tax appraisal, liens, mortgages, recorded easements, and other recorded instruments that would affect title.
Use of Corporations
Real Estate transactions can be carried out in the name of an individual or, in the name of a company. Generally, it is advised to purchase property through a Costa Rican corporation as this allows a higher level of flexibility in a variety of fields such as the eventual sale of the property, tax benefits, and representation of the property.
When purchasing property through a Costa Rican corporation, there are two ways for this transaction to take place. A common practice is to simply transfer the shares of the existing corporation that owns the property in negotiation, thus creating a more efficient closing. In previous years, this was a more cost effective closing for all parties as the transfer tax was avoided. However, recent changes in that law null the tax savings therefore most attorneys will likely recommend not purchasing the corporation, but rather a simple deed transfer. There is currently a loophole provided by Costa Rican legislation for a short period allowing for a one time transfer out of non active corporations which allows for some corporations/sellers the opportunity to save on these closing costs.
The second method is to transfer the property to a third party (individual or corporation) by means of a notarized deed, and register the transfer at the Public Registry. This is the safest route to take, although certainly carries higher costs and at times, can be more time consuming. The attorney that you select to handle the transaction can make specific recommendations based on the circumstances of the specific transaction in order for you to make the decision.
Transfer of Title
In Costa Rica, property is transferred from seller to buyer by means of a transfer deed commonly known as an “escritura before a Notary Public. In Costa Rica, a Notary Public is not limited as in the US and actually must also be an attorney, in order to draft contracts, as well as the standard role of a Notary Public as it is known in the US.
At closing, the notary/attorney selected will draft the “escritura” and register the sale in the Public Registry. All deeds executed in the provinces of Costa Rica must be filed in the Public Registry. The local custom is that the buyer may select his or her Notary/Attorney to draft the property transfer deed if the buyer is paying cash for the property. If the a portion of the purchase price is financed by the seller, generally, the seller will have the option to choose the attorney and any costs involved with the drafting of a mortgage, or trust, will be incurred solely by the buyer.
Registration of the Transfer Deed
Once all the fees have been paid, it is the obligation of the Notary Public that drafted the transfer deed to ensure that the deed is presented (anotado) and registered (inscrito) in the Property Section of the Public Registry. The Public Registry will not register a transfer deed unless all taxes and registration fees are included; a certified copy from the Municipality where the property is located is provided certifying that the seller's property tax (bienes inmuebles) and municipal assessments (impuestos municipales) have been paid through the date of closing. Likewise, any prior instruments that encumber the property (i.e., mortgages, liens, judgments, etc.) must be lifted before your transfer deed will be registered.
Once a transfer deed is accepted for registration, the Public Registry will return the original document with all the documentary stamps affixed to it and properly sealed. Assuming no defects in the transfer deed, it should be registered by the Public Registry with 45 to 60 days after presentation.
Closing Costs
An important element of any real estate transaction here in Costa Rica is an understanding of the closing costs and transfer taxes which relate to the transaction. The total closing costs in Costa Rica actually include a conglomeration of multiple government taxes, stamps and duties. Also included in the closing cost totals are the required notary fees for the registration fo the deed in Costa Ricas National Registry.
Closing Costs in Costa Rica are typically higher than what a comparable sale/purchase in the United States or Canada would be so it Is important to have all the information and estimates in hand when making your decision to purchase or to sell a property. Having an experienced agent and legal team to help answer any questions and understand all of the costs is essential to making informed decisions and insuring you have clarity as to all of the economic elements of a potential transaction.
Closing costs in Costa Rica are calculated here in a total of four general subcategories which include:
The closing costs contain the following components: Government transfer taxes and registration fees, Notary Legal fee, and mortgage costs, if any.
- Transfer Taxes
- National Registry Stamps and Documentary Stamps
- Legal or Notary Fees
- VAT/ IVA taxes
Here is a more detailed breakdown of each of the categories.
1. Transfer Taxes (1.5% of purchase price)
These transfer taxes are the 1.5% of the properties registered fiscal value or the current sales price, whichever of the two is the higher value.
2. National Registry and Documentary Stamps
Part of nearly every government process in Costa Rica involves some kind of oficial stamps or seals for documentation to be registered. These are moving into a more digital realm but the fees are still part of each real estate closing and registration of the corresponding deed or ''escritura'' en Spanish. The stamps for property sales are broken into the following sub categories, the majority of which have their own percentage fee as follows:
- National Registry Stamps (0.5%)
- Agrarian Fees: (0.15%)
- Fiscal Stamps: these are less than $2 and are a set fee, not a percentage based calculation like the others.
- National Archive Fee: These are less than $1 and are a set fee, not a percentage based calculation like the others.
- Costa Rica Bar Association Fees: Less than $15 per transaction regardless of the amount
- Municipal Fee: (0.2%)
3. Legal or Notary Fees
Unlike the USA, only attorneys can become Notaries in Costa Rica and you are required to have a notary to formally registered the deed for your purchase or sale. In Costa Rica, the Notary Public is an advanced legal position which requires not only that you have been practicing law for a minimum of two years, but that the attorney take an advanced degree in notary and registry law. The selection of a notary for the sale can vary depending on the deal structure and and important element to discuss with your agent when finalizing the transaction.
The notary fees, which are part of total closing costs are calculated on a sliding scale with different percentages charges for each scaled portion of the total contracts price. The calculation chart here does the work for you, but in the event you want to further understand how these notary fees are calculated, this is the breakdown of the sliding scale of fees.
- Up to 10,000,000 colones of value is billed at 2%
- From 10,000,001 colones - 15,000,000 colones is billed at 1.5%
- From 15,000,001 colones - 30,000,000 colones is billed at 1.25%
- 30,000,0001 colones and up is billed at 1%
It is IMPORTANT to note that all of the values in the closing costs calculations are based on the equivalent colon total of the sales price so using the corresponding exchange rate for the closing date is important to a proper understanding of the exact amount. Given fluctuations in the exchange rate, at the time of contract signing, a good estimate of costs can be provided, but a final statement with the exchange rate in the days prior to closing will be calculated to insure accuracy.
4. VAT/IVA. 13% Value Added Tax
The VALUE ADDED TAX or IMPUESTO DE VALOR AGREGADO in Costa Rica is a required tax that is part of any final closing costs. It is IMPORTANT TO CLARIFY that this tax is NOT calculated or charged on the total purchase price or as a calculation of that price. The VAT/IVA is only charged on the legal fees a escrow services (if applicable). These are not addition fees for your attorneys but are just the required taxes they must charge on their professional services, as is the case with escrow and real estate professionals. These taxes are calculated only on the fees for these services and the corresponding professional simply collects these VAT taxes and pays them to the government during the corresponding monthly fiscal cycle.
EXPENSES NOT INCLUDED IN THESE CLOSING COSTS CALCULATIONS:
The expenses outlined above do not encompass any and all costs related to a potential real estate sale or purchase here in Costa Rica. The cost outlined in the chart above are the legal closing costs required for the transfer of the ownership, but do not include any of the following elements which might be part of your transaction.
- Due Diligence expenses including topographic reviews, home inspections, and any legal due diligence hours which your attorney is not including if participating as the or one of the notaries for the sale. (Important to note that if your attorney is acting as the notary on the sale, they will often include some amount of due diligence as part of the notary fees they will earn at the closing. This can vary depending on the firm and when engaging with legal consul, a clear understanding of their billing structure, hourly rates, and what might be included if they are the notary for the sale is important to clarify)
- Escrow fees. While not all sales are using escrow, it is very common to use an escrow service and the escrow fees and VAT associated with these services is not included in the closing costs calculation chart above.
- Costs to incorporate a new corporation for your property or to close down an existing property if you are selling. While foreign buyers can purchase and own real estate in their own personal names (with the exception of maritime zone properties), it is very common for purchasers to use a Costa Rican Corporation to hold the title. You can learn more about the varios forms of corporate ownership on our FAQ section of the site, but it is important to note that the costs of incorporation are not included as part of the tabulations on this page.
How Are Closing Costs Split
There is no legal definition or requirement as to which party pays what in regards to the closing cost and transfer taxes. It is typical for the Buyers and Sellers to split the closing costs, 50/50 on a sale, but the contract will determine this and there are cases where the closing costs and payment of such are points of negotiation and should be duly noted in the contract. Most contracts will indicate clearly that each party is responsible for their own expenses related to entering the contract and that each party will bear their own expenses related to due diligence or any preparations, powers of attorney, etc. related to a closing.
It is important to note that if there is any financing or seller financing involved, any and all costs related to the creation of the mortgage, trust or instrument used to secure the financed balance along with the legal fees associated are typically paid by the party who is seeking the financing.
Your agent should be your guide and advisor on all of the costs related to a transaction here and feel free to contact any of our team members at 2 Costa Rica Real Estate to get a better understanding of the expenses related to buying or selling a property here in Costa Rica.