Buying Property in Costa Rica as a U.S. Citizen - A practical guide to the key considerations before you buy

U.S. Tax Considerations for Americans Buying Property in Costa Rica

Buying property in Costa Rica can be an excellent investment or lifestyle decision. For U.S. citizens and certain U.S. tax residents, however, owning property or financial assets outside the United States may create U.S. tax and reporting considerations.

The important point is that living in Costa Rica does not generally eliminate U.S. tax obligations for U.S. citizens and resident aliens. The IRS generally requires U.S. citizens and resident aliens to report worldwide income, while certain foreign accounts, assets, and ownership structures may create additional reporting requirements.

The rules can vary significantly depending on how you use and own the property.

Before purchasing, consider these questions

1. Will the property be for personal use, rental income, or both?

The U.S. tax treatment can differ depending on whether a property is your residence, a rental property, or a combination of the two.

2. Who will own the property?

You may purchase property personally or through a Costa Rican legal entity. The U.S. tax treatment of a foreign entity can be different from its treatment under Costa Rican law, so ownership structure should be considered with professional advice before the purchase.

3. Will the property generate rental income?

Rental income from Costa Rica can have U.S. reporting and tax implications for a U.S. taxpayer. Expenses, depreciation, foreign taxes and the way the property is used can also become relevant.

4. Will you maintain Costa Rican bank or investment accounts?

Foreign financial accounts can create separate U.S. reporting obligations. For example, the FBAR requirement can apply when the aggregate value of qualifying foreign financial accounts exceeds $10,000 at any time during the year.

5. Could additional foreign-asset reporting apply?

Some U.S. taxpayers may also have Form 8938 obligations. Importantly, Form 8938 and FBAR are separate requirements and one does not necessarily replace the other.

6. Will you pay taxes in Costa Rica?

U.S. taxpayers may, depending on the circumstances, be able to use mechanisms such as the foreign tax credit or the foreign earned income exclusion. These provisions have different rules and limitations and should be evaluated by a qualified tax professional.