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 and more cost effective closing for all parties (by closing in this manner, the costly transfer tax is avoided). The risk involved in carrying out a transaction in this manner, is that not only do you assume the assets of the corporation, but also any liabilities. Although the risk is low, an existing corporation could have liabilities that are not able to be found in an initial search, or that could appear in the future.
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.
It is customary that all sales contracts stipulate that the closing costs are shared in equal parts by the seller and the buyer. There are certainly exceptions to this, either due to specific demands from a buyer or seller that are negotiated by the involved parties, or, for example, in contracts involving mortgages or trusts, when the costs involved in drafting such documents or forming these entities, are incurred solely by the buyer. Closing costs can be reduced dramatically when transactions take place via a purchase of the stock of an existing corporation as the transfer tax is then avoided.
The closing costs contain the following components: Government transfer taxes and registration fees, Notary Legal fee, and mortgage costs, if any.
- overnment Transfer Tax and Registration Fees
- Real Estate Transfer Tax. - The government collects a property transfer tax (Impuesto de Traspaso ) which is equal to 1.5% of the registered value of the property.
- Documentary Stamps - The government also requires that documentary stamps be attached to the deed. These stamps include the following: Municipal Stamp: (Timbre Municipal) ;Legal Bar Association Stamp (Timbre del Colegio de Abogados); Agricultural Stamp (Timbre Agrario); National Archives Stamp (Timbre del Archivo Nacional); Fiscal Stamp:(Especie Fiscal). The Public Registry also imposes its own tax of .05% on documents presented for recordation to the Public Registry. (Derechos de Registro)
- Notary Fees- The Notary that drafted the contract for sale, carries out the real estate closing and records the property title transfer is entitled by law to a fee which is based upon a percentage of the value of the transaction. The original law established a fee which was equal to 1.5% of the first one million colones of the actual sales price and 1.25% on the balance. This has since been modified to the following:
Mortgage costs. It is customary that any fees involved in the drafting of a mortgage including stamps and attorney’s fees, will be solely incurred by the buyer.
- Up to 10 million Colones 2% of the value of the transaction
- On the Excess of 10 million Colones to 15 million Colones 1.5%
- On the Excess of 15 million Colones to 30 million Colones 1.25%
- On the Excess of 30 million Colones 1%