Closing Costs in Costa Rica

What are Closing Costs?

Closing costs are additional costs incurred by both buyers and sellers and are paid at the completion of the transaction. 

 

Standard Closing Costs for a Real Estate Purchase and Sale in Costa Rica

Closing costs are always negotiable, but it is common to see the Buyer paying for all the costs and the seller paying the real estate agents commissions.

 

There are two scenarios when selling a property.

 

  1. Share Transfer Agreement: This scenario occurs when the corporation that owns the property is sold or transferred to the Buyer. The corporation, therefore, remains the owner of the property, and at the Closing, the board of directors will be modified to remove the Seller and include the Buyer. Additionally, new shares of stock will be issued that reflect the buyer’s interest in the property. Since the owner does not change, you avoid significant fees associated with recording a new owner with the Costa Rican National Registry.

 

Typical Closing Costs for a Share Transfer Agreement:

  • Legal Fees                           1.25% + 13% tax on legal fees
  • Transfer Tax                       1.5%
  • Escrow Service                  $678 includes IVA and assumes a transaction under $500,000
  • Recording Costs                $200

 

Example on a Purchase/Sale of $200,000

  • Legal Fees + tax                 $2,825
  • Transfer Tax                       $3,000
  • Escrow Service                      $678
  • Recording Costs                   $200
    TOTAL                                $6,703

 

  1. Property Transfer: This scenario occurs when the property is sold, and a new owner is registered with the Costa Rican National Registry. For example, if a property is owned in a corporation but is sold and put into another corporation or into the personal name of the Buyer then you have a property transfer. The attorney will draft a Transfer Deed, and the new owner will be recorded in the Costa Rican National Registry.

    Typical Closing Costs for a Property Transfer:
  • Legal Fees                           1.25% + 13% tax on legal fees
  • Transfer Tax                       1.5%
  • Escrow Service                  $678 includes IVA and assumes a transaction under $500,000
  • Recording Costs                0.85% approximately as they may vary depending on the value of the transfer and type of property

 

Example on a Purchase/Sale of $200,000

  • Legal Fees + tax                 $2,825
  • Transfer Tax                       $3,000
  • Escrow Service                     $678
  • Recording Costs                $1,700
    TOTAL                               $8,203

 

Notes:

The difference in cost between the Share Transfer Agreement and the Property Transfer is due to the higher cost to record a new owner.

 

Often times the buyer will be responsible for paying the entire amount of the Escrow Service. 

 

If you own your property in a corporation and you are not able to be present at the closing, then you can easily grant a special power of attorney to anyone you choose normally at a cost of $200.

 

In the past, the Share Transfer Agreement was very common because the transfer tax was avoided by transferring the corporation. However, recent changes in the law now require the transfer tax to be paid whenever a property is sold. Therefore, it is more common today for an attorney to recommend a property transfer over the share transfer due to the possibility of inheriting any unforeseen liabilities attached to the corporation that owns the property.

 

Capital Gains Tax

As of July 1, 2019, Costa Rica initiated a capital gains tax that applies to any property that is not your personal residence. If you can show that you lived in the property for a minimum of 183 days per year, then this tax does not apply. The tax is 15% on the gain from the sales price less documented improvements from what you reported with the National Registry that you paid for the property. If you purchased the property before July 1, 2019, then you have the one-time option to sell the property and pay a 2.25% tax on the total sales price instead of 15% on the gain or whichever amount is lower.

 

Tax for Non-Domiciled Sellers  

This tax only applies if you own your property in your personal name with a foreign passport and is 2.5% of the sales price. If you own your property via a Costa Rican corporation or with a Costa Rican ID (cedula), then this tax does not apply. Furthermore, this tax does not apply if you occupy the property for 183 days or more per year. This tax is to ensure that a foreign seller will pay the capital gains tax, so the 2.5% tax must be withheld in lieu of the capital gains tax in order for the property title to be transferred. 

 

Real Estate Commission and Sales Tax

The Seller is responsible for paying the customary 6% real estate commission and 13% sales tax (described below) that totals 6.78%. The real estate commission is typically shared 50/50 between the listing agent and the buyer’s agent. 

 

Sales Tax

Costa Rica Law (Ley de Impuesto General sobre las Ventas: 6826 Articles: 1.n – 2.d – 3.c)  states that:

 

 “The real estate broker is responsible for collecting the sales tax by law and must charge the owner 13% on the commission for the sale of the property.”

 

Most people in Costa Rica are only aware of this tax on other goods, and not usually on services. As an example, let’s say you go into a Costa Rican restaurant and order a $10 pizza. You will be charged an additional 13% bringing the cost of the pizza to $11.30. (There is also a 10% service fee or mandatory “tip,” but that is outside the scope of this conversation, and not applicable to real estate commissions). The client pays for the pizza; the client pays the tax, the seller collects the tax and then pays it to the government every month. As with the purchase of anything in Costa Rica, there is a 13% tax, and when you hire a realtor to sell your property, the same rule applies.

 

Costa Rican law clearly stipulates that 13% must be charged in accordance with any realtor commission. If a property is sold for 100k with an agreed realtor commission of 6% commission, the commission is 6k, and the tax is $780. Both the commission and the tax being paid are the responsibility of the Seller. The responsibility of the broker/vendor is to collect the tax and pay it to the government every month. Despite the Costa Rican landscape, unfortunately, being rife with realtors who are happy to incorporate this tax into their commission (which in some cases never goes to the government) this practice, although part of some murky legal terrain is essentially against the law. The law clearly states that the commission and the 13% tax must be separate. Despite a Seller’s commission being negotiable, any realtor who tells a client that this tax will be subtracted from the commission is operating outside the law. In fairness, this policy is common practice among otherwise ethical realtors, so why is it that these agencies who often genuinely wish to operate within the confines of the law end up paying the tax themselves?

 

Imagine the following scenario:

A homeowner wishes to sell their property and goes about listing it with a variety of realtors. During a visit to realtor A the price is set, the listing agreement signed, and the Seller agrees to the established realtor commission. The Seller then visits realtor B. while reading the listing agreement; the Seller notices a clause that requires them to pay a 13% commission. Realtor A did not mention this clause, and the Seller senses something is afoot and retracts their listing with realtor B. The problem is that the Sellers listing is essential to the prosperity of the business of both realtors. However, realtor B has decided that instead of taking the chance of losing the listing they will either absorb the losses incurred by paying the 13% from their own commission, or, (and this may, unfortunately, be the case in the overwhelming majority of these situations) not pay the tax to the government at all. One often-used loop-hole has been for people to represent themselves as mere “ex-pat” advisors and thereby try to circumvent a job title that would force them to adhere to the rules that apply to that profession since the tax specifically applies to “services rendered for acting as real estate broker.” However, in the eyes of the law, receiving money to execute any real estate transaction incurs the same 13% sales tax.

 

RE/MAX Tres Amigos strives to operate according to the law and within ethical guidelines. We also feel that in an area as complex as the buying and selling of real estate we do our best to keep it simple and we can’t state it more simply than this: None of our agreed commissions include the 13% sales tax that all realtors, agents, intermediaries and brokers are legally required to pay to the government. We place ourselves in a situation where we risk losing listings and thereby making less money because it is the law.

 

To get a better understanding of the closing costs, you can use the closing calculator 

 

 

 

 

Copyright © Lisa Farrell ~ Costa Rica Licensed Realtor

Email: lisa@papagayorealestate.com 

Cell: 506-8398-8129 | Office: 2672-4100 | USA & Canada: 561-372-8370