TAX AND FINANCE

Tax and Finance

Costa Rica - Buying Property in a Retirement Account from the United States

Section 408 of the U.S. Internal Revenue Code allows much broader investment options for retirement plan funds than many people realize. The code only prohibits certain investments. If not specifically prohibited, all other investments are legally permissible, including investments in real estate within IRS-described guidelines. With funds held in many common forms of retirement accounts, including 401(k)s, traditional IRAs, Roth IRAs and Simplified Employee Pension plans (SEP-IRAs), individuals may purchase real estate interests, including land, commercial property, condominiums, residential property, mortgages, trust deeds, real estate contracts and, via private placements, shares in limited liability companies conducting real estate activities.

The majority of U.S. Retirement Account custodians allow their clients to hold real estate in individual retirement accounts and will allow purchase of raw land, residential properties and commercial buildings. In addition, many custodians are equipped to manage self-directed investments in foreign property and leveraged property. Because buying a property may require more liquid funds than you currently have available in your IRA, your IRA custodian will also permit purchase of an interest in the property in conjunction with other individuals, such as a spouse, business associate or friend. Keep in mind that if the property is leveraged the debt must be a non-recourse promissory note. Further, Internal Revenue Service regulations will not let you use the real estate owned by your IRA as your residence or vacation home. Nor can your business lease space in your IRA-held property. The underlying premise for any real estate investment purchased with IRA funds is that you cannot have any personal use or non-investment benefit of the property. To do so may cost you in taxes and penalties. There are a few other IRS limitations as well. You cannot place a real estate property that you already own into your IRA. Your spouse, your parents or your children also cannot have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the U.S. Internal Revenue Code (section 4975) specifies that only "lineal descendants" be disqualified. Once you have chosen a specific property or a real estate investment vehicle, your U.S. IRA custodian - not you personally - must actually purchase it. The title will reflect the name of your IRA custodian for your benefit (such as XYZ Corporation, Custodian FBO John Doe IRA). In addition, if you put up earnest money with your personal funds, you will need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.

Because all property expenses, including taxes, insurance and repairs, must be paid from funds in your IRA, you will need cash available in your account. Of course, all income generated from the property will be deposited in your IRA account so you can use those funds to cover your costs. Also, you can continue to make annual contributions to your fund within federal guidelines. Of course, it is possible to sell properties while they are held by your IRA, as long as the purchaser is not a family member. Once a sale closes, your IRA account now holds the cash proceeds ready for you to make your next investment. One alternative is to sell an IRA-held property with seller financing so that all payments made by the buyers are paid to the IRA.

If you are interested in purchasing real estate with your IRA, contact your representative at Coldwell Banker Peninsula Trading Company Costa Rica Real Estate and they can assist with any questions you may have.

Costa Rica - Finance

Time is of the essence in any real estate transaction, whether in Costa Rica or another country. The simplest way to finance property in Costa Rica is to finance the purchase directly with the owner. However, many sellers do not want to carry your debt (paper) and are not willing to allow the buyer significant time to secure financing. By being pre-approved on a loan you can negotiate a better deal on your lot, home or condo. Until recently, financing real estate in Costa Rica has not been easy and the terms have not been very favorable. Costa Rican banks are finally lowering mortgage interest rates and offering longer terms in addition to a more streamlined loan process. Mortgage interest rates tend to be a little higher when financing real estate in Costa Rica as compared to North American mortgage lenders, but with the usually higher value through appreciation rates and/or high rental income of properties in Costa Rica, financing your real estate can still bring positive cash value to your investments. If you are interested in financing your purchase in Costa Rica please, contact your representative at Coldwell Banker Peninsula Trading Company Costa Rica Real Estate.

Costa Rica - Taxes

General Costa Rican Tax Provisions Under the Costa Rica Tax System

Residents and corporations are taxed only on income earned in Costa Rica. The tax year begins on October 1 and ends September 30, for both individuals and corporations. Companies may request returns filed on a different (fiscal) tax year, subject to the approval of the Ministry of Finance. Unless proof to the contrary exists, for certain professionals as well as corporations, presumptive net income is established by the Ministry of Finance, and constitutes a minimum taxable base.

Costa Rica Tax & Tax Adjustment Laws

In September 1995, major reforms to the prevailing tax structure were issued in Costa Rica. These reforms include the Tax Law (Ley de Justicia Tributaria) and Tax Adjustment Law (Ley de Ajuste Tributario). Both these Laws impose severe administrative fines, penalties and criminal prosecution for failure to comply with the income reporting requirements established by law.

Costa Rican Income Tax applied to individuals as well as legal entities, i.e., corporations for income originated from a Costa Rican source. Costa Rican Laws do not tax income derived from a foreign source.

According to the law all of the following are subject to income taxation:

    * Legal entities, the de facto corporation, professional companies and state enterprises which operate in the country
    * Branch offices, subsidiaries or agencies of any non-resident which operates in the country
    * Trusts
    * Inheritances (as long as they remain indivisible)
    * Individuals residing in Costa Rica regardless of nationality
    * Individuals hired in a professional occupation
    * Physical and legal entities not specifically mentioned and engaged in profit making activities in Costa Rica

Costa Rican Entities Exempt from Income Taxation

The following are tax exempt:

* Government, local governments and autonomous and semi-autonomous organizations excluded by specific laws
    * Religious institutions regardless of creed
    * Associations, foundations, chambers, unions, political parties and other non-profit organizations
    * Employer-Sponsored Workers Associations (Asociaciones Solidaristas)
    * Worker's Cooperatives
    * Companies under Free Zone status

Taxable Incomes

Taxable income is based upon net income; thus, it becomes necessary to establish the corresponding gross income of the tax paying entity. Costa Rican Laws defines gross income as the total revenues and profits earned in the country during the taxable year. This includes earnings from real property, investment of capital and other business activities. It also contemplates any increase in net worth during the taxable year, which cannot be justified by declared or registered income.