Archives for June 2016

Let’s say you’ve run the U.S. rat-race for the past few decades and have a nice nest-egg to show for it. You’ve not reached “retirement age” quite yet, but that delightful day isn’t too far off. Your nest-egg is tied up in your 401K account and you don’t dare want to touch it, knowing that if you do, the tax man cometh and cometh hard.

You’ve heard that Costa Rica’s a nice place to invest, but apart from all that dough trapped in your 401K, you really don’t have any other way to access the funds to buy your little piece of Costa Rican paradise.

You’d like to make the investment asap and let it appreciate, while generating some income, over the next few years. Once you reach the ripe old age of 60, you’ll say sayonara to the boss and co-workers and head south to live out the rest of your days on that Costa Rican beach you’ve been reading about.

Well, you could roll over the funds in your 401K to a Self-Directed IRA, making sure to pick a custodian who allows investments in foreign real estate. Then you would direct your IRA custodian to make the investment in income producing Costa Rica real estate, either directly in the name of the IRA, or, even better, into the shares of a Costa Rican company, who will then receive the cash to fund the real estate purchase.

Then you sit back and watch your IRA-owned Costa Rica corporation rake in the income from your Costa Rica investment, without any U.S. tax implications. Once you finally reach retirement age you can then proceed to live out your years in your Costa Rica home.

Can you really do this? Is purchasing Costa Rica real estate with an IRA actually allowed? Sure, but with a few caveats.

First, any form of self-dealing is considering a prohibited transaction and will blow up the tax deferral benefit the IRA provides. That means you have to make sure the property the IRA purchases is not owned by a disqualified person, such as one of your relatives, brothers and sisters (and their spouses) excepted. You can’t rent the home to a disqualified person either.

You also can’t dare live or vacation in the home until you reach the ripe old age of 59.5. At that age you can receive a distribution of the home without triggering a penalty. The distribution would be taxable at ordinary income rates if your IRA is a traditional one. But if it’s a Roth IRA, then even the distribution of the home would not be taxable!

What kind of Costa Rica property can you purchase?

Well, the example above presumes a property that will produce a good rental income, such as a condo or home at a beach popular with the tourists. But you certainly aren’t limited to that. It could also be raw land, or a commercial building.

There really are no restrictions regarding the types of Costa Rica real estate your IRA can invest in.

Can your IRA borrow the money to buy the Costa Rica property? Yes, but it must be a “non-recourse” loan. That means a loan where the only thing the lender can go against in the event of default is the property itself. There are specialty lenders for these type loans. Obviously loan to value ratios are likely to be lower than with conventional mortgages.

As always, the many nuances of Self-Directed IRA purchases of foreign real estate are well beyond the purview of this short blog post. You should seek the advice of a qualified tax professional for your particular situation.

What is a capital gains tax and why is it often viewed as being controversial?

A gain is when an appreciating property you own, like a piece of real estate, a share of stock, or a bond, increases in value above what you paid for it. What you paid for it is called your “basis.” The gain can either be unrealized or realized. It’s unrealized until you sell it and once you do, it becomes realized. For most U.S. taxpayers, realized capital gains on assets that you’ve held for more than a year (so called, long-term capital gains) are taxed at a rate of 15%.

What’s controversial is that the income you would normally use to purchase such assets has already been taxed. So, it doesn’t seem fair for the government to tax your earned income and then tax you again on gains from the prudent activity of saving part of that income, rather than just spending all of it!

Now there are loopholes you can use to avoid paying tax on capital gains, such as 1031, or like-kind, exchanges, the resident home exclusion, selling assets within an IRA or 401K, and so forth.

How about real estate you own in Costa Rica? If you sell it and realize a gain, is it taxable?

Well, yes, if you are a U.S. citizen you would have to report this gain just like any other. Remember, the U.S. taxes you on your worldwide income, no matter where it is generated.

However, there is no Costa Rica capital gains tax. That is, as long as the gains were not derived from the operation of a real estate business, like being a developer and selling lots from your inventory.

So, you would be taxed in the U.S. on the sale of your Costa Rica property, but not in Costa Rica.

Is there a way to avoid the U.S. tax? Why certainly! If you hold the real estate in a Costa Rican corporation, rather than in your own name, then the gain would belong to the corporation and not to you. Since Costa Rica has no capital gains tax, the corporation would not be taxed on this gain!

Now, if you withdraw the gain from the corporation in a taxable form, then you would be subject to tax in Costa Rica and potentially subject to tax in the U.S. as well. However, the Foreign Earned Income Exclusion could come to your rescue, if you qualify, and allow you to escape any U.S. taxation on that income. Note, however, for this exclusion to apply, the income would have to be drawn out as earnings, such as a salary, and not in a passive way, like a dividend.

For instance, you could buy, sell, and reinvest within a Costa Rican corporation, thereby gradually building wealth over time, without ever having it taxed in either the U.S or Costa Rica! That would make your Costa Rican corporation a nice tax-free engine of wealth creation, sort of along the lines of an IRA or 401K, but without the morass of regulations, nor the forced taxable withdrawal requirements applicable once you reach what Uncle Sam considers your “retirement age.”

As always, the complexity of all these taxation rules is well beyond the purview of this short blog post. You should seek the advice of a qualified tax professional for your particular situation.

Everyone knows that Costa Rica is the perfect “get-away.” But, is it also the perfect “hide-away.”? That is, a place where you can hide yourself, and/or your assets, from those who’d like to take a nice fat financial swipe at them…for a legal cause, of course.

To pose the question is another manner; can one become judgment proof simply by moving, lock, stock and barrel, to Costa Rica? Can you hide from creditors in Costa Rica, successfully?

The technical answer is no. However, moving everything to Costa Rica will make it a whole lot harder for any creditor to reach you.

The answer is technically no because foreign judgments actually are enforceable in Costa Rica, by means of a rather involved court process called an “exequatur.”

An exequatur is a determination by a Costa Rican court declaring that a foreign judgment, or decision of a foreign court, is legally enforceable in Costa Rica. The particular court in Costa Rica that does this is called the Sala Primera of the Corte Suprema de Justicia (Sala I), the first division of the supreme court of Costa Rica. It alone decides what foreign judgments are enforceable here and which are not.

A party holding a judgment against you can petition the Sala I to enforce said judgment against you in Costa Rica. The court in Costa Rica will not re-try the case. It only approves, or denies, the exequatur.

For a foreign judgment to be declared enforceable in Costa Rica your creditor must supply the following information to the court:

1. The judgment from the foreign court, translated and authenticated;

2. Proof that the defendant (you) was properly served with the legal action in accordance with the laws of the country from which the case originates;

3. Proof the defendant was properly served with the final judgment;

4. Evidence the legal matter is not exclusively a Costa Rican one;

5. Proof the judgment is enforceable in the country from which it originates;

6. Proof that the judgment is not contrary to Costa Rica’s laws.

Most private interest exequaturs in Costa Rica have to do with family law matters, like divorce, or approving other martial affairs. The remaining ones usually have to do with adoption, or child support.

Court settlements and arbitration judgments are also enforceable using the process of exequatur.

Unless the issue is particularly egregious, that is, unless it involves an amount that would motivate someone to spend the considerable time and money to go after you via exequatur, you and your Costa Rica assets are probably safe from foreign judgments.

Now, does that mean you should actually consider the option of trying to hide from creditors in Costa Rica?

Well, there certainly are many expats in Costa Rica who are hiding from something. Hopefully, in your case, it’s simply from the rat race up north and not from creditors, your ex, or the law.

If you’d like to consider making your escape and becoming a Costa Rica expat, please consider a customized expat tour to get started.

Investments are supposed to make money and not lose it, right? And that’s equally true with regard to investments in Costa Rica real estate.

There’s an old, and for some, not so funny, joke that goes like this: You know the best way to become a millionaire in Costa Rica?

Answer: Bring two with you!

Yes, you can lose money in Costa Rica. And that’s especially true with respect to bad real estate deals. It pays to do your homework. So, let’s do a little of that with this post.

What is the outlook for real estate appreciation in Costa Rica?

Well, of course that depends on you making a good deal to begin with. In that light it pays to have a knowledgeable and ethical real estate professional guiding you. If you have no knowledge of Costa Rica, then you need to spend some time on the ground gaining that knowledge. You might want to consider taking an expat tour from a reliable source for such tours.

But the answer to the question posed, in general, is that the outlook for real estate appreciation in Costa Rica is favorable.

Partly because Costa Rica does indeed have a stable and growing economy. In fact, Costa Rica has one of the strongest economies in Latin America. It has a long-standing democratic tradition, with peaceful presidential elections and transitions of power taking place every 4 years. Costa Rica is a vibrant social democracy. It has no military and thus is freed from that heavy drain on revenue to spend money on its people, especially in areas of infrastructure, healthcare and education. Costa Rica has made great strides in improving its infrastructure, especially its notoriously bad roads, over the past decade. For these reasons, Costa Rica is ranked annually as one of the world’s happiest countries.

But the area that’s perhaps most relevant to real estate appreciation is Costa Rica’s growth in the tourism sector. Costa Rica has become on of the world’s major tourism draws. In 2015, Costa Rica attracted a record-breaking 2.7 million tourists from around the word. That represented 9% growth over the previous year and outpaced national GDP growth of 2.8% threefold! According to figures from the Costa Rican Tourism Board (ICT), the tourism sector was responsible for more than $2.8 billion in revenue during 2015 and employs roughly 600,000 people through direct and indirect employment.

Costa Rica’s strong tourism growth comes for good reason, as the country contains some of the world’s most stunning landscapes and most intense levels of biodiversity in flora and fauna. Almost 25% of the entire land mass of Costa Rica is set aside and protected from development as either national park, or some form of reserve or wildlife refuge.

Many who visit as tourists, stay as expats. The cycle of a potential expat is almost always, first visit as a tourist, then come back as an investor, and perhaps buy and live as a long-term resident. And that has made Costa Rica one of the leaders in Latin America for foreign direct investment.

That investment has been a double-edged sword for the local people, the ticos. While it has become an important component of the economy, it has also driven up prices, both for day-to-day living and for real estate. That can obviously be bad for the locals, but good for the foreign investor, at least in terms of the outlook for real estate appreciation in Costa Rica.

And with the outlook for tourism growth looking very good, any real estate investment with strong touristic appeal should have favorable expectations for income generation as well.

Tourism is a major driver for the real estate market in Costa Rica and it appears to be driving it in the right direction.