Building a House in Costa Rica?

So you’re thinking about building a house in Costa Rica. You want your own piece of paradise, and there are so many things to think about: location, design, construction method, cost, and timetable to name a few. An important consideration is: What are the builder’s responsibilities? Here’s what you need to know about the law.

building a house in costa rica

Many entities will be involved in your construction project. First of all, there will be your realtor. Hopefully you decided to work with someone that has years of experience, and is vested in the country, not a fly by night type, that can help you find the right property for building a house in Costa Rica.   Then there there’s the architect who designs your home according to your wishes and the conditions of the building site. Then there’s the general contractor, called “maestro de obras” in Costa Rica, who follows the blueprints and directs the construction workers. Additionally, a civil engineer may be involved depending on the nature and scope of the project

According to Costa Rican building regulations, each individual or company is responsible for the integrity of their work. If their negligence or poor workmanship causes a partial or total loss of the project, they would be held responsible. That holds true whether the cause is a defect in the construction process or a defect in the underlying soil (Costa Rica civil code, section 1185). Section 1186 of the same code stipulates that, when more than one professional is involved, each one is responsible for their participation in the project.

How do you know which person performed each task of the building process? An official construction logbook, known as the “bitacora” in Costa Rica, is kept for the entire project. The person that is ultimately in charge of the construction, typically the architect or engineer, makes regular inspections of the construction site and updates the logbook. Thus, it can easily be determined who performs any given task and when.

The liability associated with building a house in Costa Rica is mandated in the law, not just in the contract, so there is a basis for a lawsuit if necessary. What are admissible grounds for suing the professional responsible for the construction, or in the case of a condominium, the administrator? The owner may bring a lawsuit if he discovers defects in the construction process or the materials used. Negligence, recklessness, and lack of supervision of the project are also grounds for legal action. However, damage resulting from an event or circumstance deemed to be an “act of God” or force majeure is not.
Costa Rica’s civil code establishes a statute of limitations of five years for this kind of lawsuit. The period begins when the project is completed and the owner officially takes possession of it. On the other hand, a 10-year statute of limitations applies to lawsuits for breach of contract (Costa Rica Civil Code, Sections 868 and 1045). An example of breach of contract is failure to complete a project. If a building collapse results in serious injury or death, there could be criminal liability. In that case, other laws and statutes of limitations apply.

During the construction process, reputable builders will have insurance for their workers. In fact, the construction professional must present proof of insurance for his workers in order to obtain a building permit. It is called “seguro riesgos del trabajo” by Costa Rica’s government owned insurance company (INS), and it is similar to workman’s compensation insurance. It covers injuries that are common to a construction project. After the construction is completed, the homeowner can obtain a traditional insurance policy for fire and/or civil liability. Such insurance is readily available in Costa Rica.

Clearly, there are many factors to consider before building a house in Costa Rica. But it helps to know that builders have responsibilities as defined by law and that those who contract them have legal recourse when needed. While it could be very tempting to accept a low bid by a builder making appealing promises, it is VERY important to get everything in writing from a reputable contractor, or you may find yourself with no legal recourse.

building in Costa Rica

 

Of course the best way to find a reputable builder is ask around and to ask the builder to give references–don’t just take his word for it. And don’t just take the word of your realtor. Ask for references!!

If you are thinking of finding that perfect spot in the Papagayo Area of Costa Rica, just shoot me a note and I may be able to help you find that right spot and will introduce you to 3 different builders to interview.

1031 Exchange and U.S. Taxes. Do they Apply in Costa Rica?

What is a 1031 exchange? I will try to make this simple. It is a provision made by the United States Internal Revenue Service that allows an American citizen or permanent resident investor to sell a property that is used for business or held as an investment and then reinvest the proceeds in a new property without immediately paying capital gain taxes.

Costa Rica 1031 exchange

The taxes are deferred or avoided altogether. The rules are outlined in section 1031 of the IRS code, hence the name “1031 exchange”. For those interested in buying property in Costa Rica, it’s noteworthy that 1031 exchanges are not limited to U.S. property. However, according to subsection H of the IRS 1031 code, very strict rules and regulations must be followed in order to obtain the benefits of the 1031 exchange in a foreign country. What are the rules, and how can you make them work for you in Costa Rica?

First of all, the arrangement applies only to exchanges of real property and not to exchanges of personal or intangible property. The exclusion of the latter went into effect on January 1, 2018. Thus, exchanges of vehicles, equipment, collectibles, intellectual property, and intangible business assets generally do not qualify under section 1031. Any gains on the sale of such personal or intangible property must be reported and taxes may apply.

playa Hermosa property taxes

Another requirement of the IRS rules is that the properties that are exchanged—that is, one is sold and another purchased—must be of “like-kind”. What does that mean? The IRS explains, “Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality”. For example, the “like-kind” of an apartment building would be another apartment building. A rental property for another rental property and so on.

“So how does this all apply to buying property in Costa Rica”? You may ask and “why are you writing about this”? You must be thinking this about now, but hold on continue reading.

According to the IRS definition, real property in the United States is not like-kind to real property outside the United States. So, the 1031 exchange provision could not be applied to selling a U.S. property and using the proceeds to invest in a property in Costa Rica.

However, you can exchange one foreign property for another foreign property and still obtain the 1031 tax benefits. That’s how it can work for you in Costa Rica. You can sell one Costa Rica business or investment property and reinvest in another Costa Rican property. When handled properly, a 1031 exchange can allow your investments to grow while deferring the tax burden into the future when you’ll likely be in a lower tax bracket. I.E. Retirement.

Let’s try to explain this a little more simply. Let’s say for this example that you purchased a small 2 bedroom 2 bath condo 5 years ago and have been renting it out and also visiting it one or twice a year. But now that you love Costa Rica so much you want a bigger property to invest in like a home. You will still rent it out as an investment, but also use it as well. You can defer the capital gains tax on the sale of the condo and buy the larger home.

Keep in mind that if the value of the property you sell is greater than the value of the property you exchange it for, the difference is taxable. That holds true whether you buy and sell for cash or you hold a mortgage on the exchanged properties. For example, if you had a $200,000 mortgage on the property you sold, and the property you buy has a $150,000 mortgage, the difference of $50,000 is considered income.


This matter is related to the tax treaties that the United States has with many foreign countries. Unfortunately according to the U.S. Embassy in Costa Rica there is no tax treaty between the two countries https://cr.usembassy.gov/u-s-citizen-services/internal-revenue-service-u-s-taxes/faqs-paying-taxes-abroad/
Unfortunately, U.S. citizens are taxed on their income regardless of what country it is earned in. In most cases, even if you live in a foreign country, and even if you are a legal permanent resident of that country, you are still responsible to pay taxes to the IRS on all your income. Just like I have been doing for eleven years now.

I know that sounds really bad, especially since I also pay taxes in Costa Rica! I do get a bit of a break from the IRS.  It is called the Foreign Earned Income Exclusion. It means exactly what it says. For 2018 under section 911 of the U.S. tax code, the Foreign Earned Income Exclusion is $104,100. Basically, the first $104,100 I earn in Costa Rica, I pay no U.S. income tax.

Making this kind of income in Costa Rica, you can certainly live very nicely, that’s for sure. If you have an interest or just want to look around visit  https://www.costarican-american-connection.com/

playa del coco property taxes

It is always important to consult a tax adviser on such complicated issues as this, but the 1031 exchange does work if you know how to do it right.