by Simone Ferreira, Own Costa Rica Property
Costa Rica has a safe and well developed mechanism for title registration and transfer. Regardless, it is important to work with a broker who knows the area you are interested in as well as a trust-worthy lawyer who can guide you through the steps.
How Can I Ensure That I Have Clear Title to the Property? Costa Rican law requires that all documents relating to an interest and/or title be registered in the property section of the Public Registry. Most properties have a titled registration number (folio real), and the records database can be searched with this number or by name index. Actual ownership is not proven by a deed, but by verification of the properties folio real (registration) number. The Public Registry report (informe registral) provides detailed information on the property, including the name of the title holder, boundary lines, tax appraisal, liens, mortgages and recorded easements, or instruments that would affect title. Only after the procedures have been done properly and the title has been cleared of any liens or encumbrances and the chain of title has been traced to the actual seller, can the buyer can be assured of Good Title.
How is Title Transferred? Property is transferred by executing a transfer deed (escritura) before a Notary Public. In order to close on the property, the buyer and seller must select a notary/attorney who will draft the transfer deed and register the sale in the Public Registry (Registro Nacional).
How About Closing Costs? Closing costs involve three things: government taxes and fees, notary fee, and mortgage costs, if any.
Sales Price:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
A) Transfer Tax (1.5%):Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $Â Â Â Â 1,500.00
B)Â Documentary Stamps:
Municipal Stamp                              $       30.00
Hospital Stamp                                  $       30.00
Bar Association Stamp                    $         3.75
Fiscal Stamp                                       $         3.12
National Archive Stamp                $            .10
Subtotal Taxes and Fees                $      1,566.97
C) Notary Fee
1.5% of the First Million                     $      1,500.00
Total Closing Costs (normally Shared 50-50)Â Â Â Â Â Â $Â Â Â Â Â Â Â Â 3,066.97
A) Real Estate Transfer Tax - The government collects a 1.5% property transfer tax called (Impuesto de Traspaso) The Public Registry will not record a transfer deed unless the transfer taxes and documentary stamps have been paid.
B) Documentary Stamps - The government also requires that documentary stamps be affixed to the deed. These stamps include the following: Municipal Stamp: (Timbre Municipal); Legal Bar Association Stamp (Timbre del Colegio de Abogados); Agricultural Stamp (Timbre Agrario); National Archives Stamp (Timbre del Archivo Nacional); Fiscal Stamp:(Especie Fiscal). The Public Registry also imposes its own tax of .05% on documents presented to the Public Registry. (Derechos de Registro)
C) Notary Fees- The Notary that drafted the contract for sale and conducted the closing is entitled by law to a fee of 1.5% of the first one million Colones of the actual sales price and 1.25% on the balance.
How to Ensure Registration of the Transfer Deed? Once all the fees have been paid, it is the obligation of the notary to ensure that the deed is presented (anotado) and registered (inscrito) in the Property Section of the Public Registry. I have stressed the words presented and registered to highlight the importance of following up with the notary to ensure registration. Although presentation guarantees your priority (i.e., first in time, first in right), it does not automatically guarantee registration. The Public Registry will not register a transfer deed unless all taxes and registration fees are included; a certified copy from the Municipality where the property is located is provided certifying that the seller's property tax (bienes inmuebles) and municipal assessments (impuestos municipales) have been paid through the date of closing. Likewise, any prior instruments that encumber the property (i.e., mortgages, liens, judgments, etc.) must be lifted before your transfer deed will be registered. Â Once a transfer deed is accepted for registration, the Public Registry will return the original document with all the documentary stamps affixed to it and properly sealed within 60 days after presentation.
When to Pay Property Taxes? Once a property has been bought the owner should take care to meet their tax obligations to avoid foreclosure procedures. New property owners erroneously assume that they will receive a notice from the tax authorities. In reality it is the owner’s responsibility to visit their respective municipality’s office and pay the taxes. The law also requires the property to be appraised every five years, with a sworn statement made by the owner. After the declaration is made, the value of the property is calculated and determined by the municipality according to several variables, such as street frontage, location and total area. If this mandatory sworn statement for property appraisal is not filed when due, the owner is subject to often arbitrary appraisals. Negations of what is fair are often more likely if this requirement is met voluntarily. A good rule of thumb is, if when you purchased your property you were able to take advantage of the two tier system, then when making your subsequent sworn statement show a reasonable increase. The system is not very well regulated and the best way to fly under the radar is to play and pay fairly.
How To Avoid Problems With Squatters? According to Costa Rican law, a person can acquire rights to a property if the property owner allows that person to use or maintain possession of the property for more than a year. Once the property has been acquired it can't be taken away, except for reasons such as eminent domain, and then only with proper compensation. If a person has held possession of a property for at least ten years, they can claim full ownership and re-register the property at the Public Registry. Landlords should take action to evict squatters during the first three months of their invasion. If a year passes the squatter has a right to demand compensation for any improvements they made to the land. If you have squatters you need to start an Interdicto a civil procedure, or level criminal charges, called Usurpacion as soon as possible. Delay may cost you dearly in red tape and legal procedures. For large rural tract, it is advisable to “contract a caretaker to guard against encroachments. It is important to have a written contract with the caretaker in order to prevent them from ever asserting squatters rights. One other encumbrance, which can only be detected by a visual inspection of the property, is the case of unregistered leases. Leases can be registered but most are not, especially in the case of residential ones. Make sure your lawyer guards against unwanted tenants with an appropriate clause in the agreement of sale.
What Forms of Ownership Exist? The legal system allows for a number of different types of incorporating. The two most commonly forms are the Sociedad Anonima, generally abbreviated S.A., and a less elaborate form of the first, called Sociedad de Responsabilidad Limitada, known as S.R.L. or Ltda. The two may be used to conduct the same type of activities but there are slight differences between them, and you should select the one that best suits your needs. If the property is owned by a corporate entity in addition to a title search, it is necessary to perform a corporate search at the commercial section of the Public Registry. This search can verify the transferring entity is in good standing and that the proposed signatory of the transfer deed is empowered to authorize the transfer.
Why use a Corporation to Purchase Property in Costa Rica? It is advisable to purchase property through a corporation for a variety of reasons beyond limited liability. The corporate structure allows for more flexibility and predictability in areas ranging from estate planning, tax planning and representation. A somewhat common practice is to transfer shares of the company that owns the land instead of transferring the land through the Public Registry to a third party. The share transfer system may sound appealing at first, as it saves time and money on notary fees and transfer taxes. However, this course is not advisable, because when you acquire the shares of a corporation in Costa Rica - you not only acquire the assets (in this case the property) you also acquire the liabilities. No mechanism exists to satisfactorily list them or rule out their existence.
Condominiums Purchases in Costa Rica
Condominiums are a very practical solution for those who plan to be an absentee owner of income producing properties. Condominium law in Costa Rica grants this type of property special status. A special Horizontal Property Section of the Public Registry exists for registering condos. As in the case of any property, condominiums must be title searched for any liens or encumbrances. The buyer should also become thoroughly familiar with the condominium regulations, which are in the deed. These regulations set forth the rules of condominium management and procedures for handling relations between the unit owners. They also set forth any restrictions to which the units, thus the owners, are subject to. For example, they may restrict pets or business activities or the number of occupants. There will also be a maintenance fee, usually monthly, as well as a procedure for increasing the fee. Since unpaid fees are collateralized by the unit itself, a buyer must be sure that all such fees are paid prior to purchase.
