www.CostaRicaTicas.com

If an American buys a home in Costa Rica for both capital appreciation AND rental income does anyone know if there's a way to shelter any of that income from U.S. taxes. Does the American investor wind up paying both U.S. and Costa Rican income taxes? Thx.

This one I think I know since I am a CPA, an American citizen must pay taxes on worldwide income. So to answer your question, you would have to pay taxes on the rental income each year on your US tax return and if you sold the property for a gain you would also pay a capital gain on your US return. This is additional to what you would pay to Costa Rica, However on taxes paid to Costa Rica, you may be able to take a foreign tax credit on your US return.

I do think I am overdue for another trip to Costa Rica soon.

I'm also a CPA and a private citizen. As a private citizen, I might offer another option that I can't recommend as a CPA. I'm sure there are many US citizens in CR, who fail to report or at least under-report their foreign income. Its not like anyone else in CR is required to report your income to the IRS on a 1099 or anything. I'm also pretty sure that it was as much pressure from the US and Canadian tax authorities as it was pressure from the DEA or local gov't that finally brought down the Brother's Fund. Many if not most of the investors were US and Canadian citizens and many if not most of them weren't reporting the interest income they were getting. The IRS was probably just drooling to get their hands on the funds financial records and their client list. I don't know if they ever did, but a lot of gringos were sweating bullets for a while there and not just because of the money they lost. Of course, that story also highlights the risk one runs by cheating on their taxes. One never knows when it might catch up with you and if it ever does watch out.

Speaking again as a CPA I can tell you that Taxman is absolutely right about being liable in both countries but also being able to deduct the taxes paid to CR from your US return.

To be a little more specific there are basically 2 ways to go about it. The simplest thing to do is to include it with your itemized deductions (line 8 of Schedule A). The major drawback here is that you'll only save to the extent of which tax bracket you're in. The second way may enable you to save 100% of what you paid in foreign income taxes (for any property tax you can only take the deduction). If the taxes you paid were less than $300 ($600 for married couples) all you have to do is report the amount on line 44 of your return. If it is more than that you'll need to fill out and file a 1116 Form. Although that form is only 2 pages long, let me warn you, again speaking as a CPA, it can be a real bear to figure out.

Here is the link to the relevant tax info http://www.irs.gov/pub/irs-pdf/p514.pdf. Do the rest of you guys find this topic as fascinating as I do? Have fun.

I should have been more explicit. I understand the responses above as they apply to a U.S. citizen, but what if 2 or 3 "partners" (all from the U.S.) buy a rental property. This would I assume be done by establishing a partnership or corporation. Does the same still apply...is there a way to dodge taxes in that scenario or does the same still apply just as it would towards an individual citizen?

By partnership or corporation, I'm assuming you mean a CR one. To the extent you distribute any income or gains from the partnership, it would qualify as foreign income and would thus might be taxable. OTOH, there are certainly less direct ways around that. For example, you could live rent-free on the partnership property and whose to say what reportable value that represents. You can also draw a salary for your efforts on behalf of the partnership (which also reduces its passive income) and IF you qualify as a foreign resident (under the 330 day rule) and IF it is earned income you might be able to exclude up to $80K/yr in foreign earned income. http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html

You might also want to check out this link as well http://www.irs.gov/businesses/small/article/0,,id=106562,00.html

U.S. persons are taxed in the U.S. on their worldwide income. Foreign persons, (nonresident aliens and foreign corporations), are only taxed by the U.S. on income originating in the U.S. .... As a result, some U.S. persons may attempt to structure their income earning activities through foreign entities, hoping to take advantage of the differences in the way we tax U.S. persons as compared to foreign persons.

Congress has adopted several complex sets of rules to keep U.S. persons from using foreign entities to defer or avoid U.S. taxes in ways Congress deemed improper. Those sets of rules include special tax consequences for U.S. persons who transfer property to or own the following:

Foreign personal holding companies ( IRC §§ 551-558),
Controlled foreign corporations ( IRC §§ 951-964),
Foreign investment companies ( IRC §§ 1246-1247),
Passive foreign investment companies ( IRC §§1291-1298),
Controlled foreign partnerships ( § 6038 & § 6038B)
Foreign grantor trusts ( IRC §§ 671-679)

Basically, they don't make it easy. What you really need to do is consult accountants and attorneys familiar with the laws in both countries and exactly what it is you want to do, rather than seek help on a board like this based on sketchy information.

That's exactly my intent. I just decided to start here as a launching pad.

YO Piroca:

There are ways around paying taxes in the US. Of course old Circus would not know about anything illegal to our tax laws but you might get with an attorney in CR (recommended of course) and look into a shelf corporation. I even had a dream the other night about a couple of others along with myself in a corporation like that. Gee, is that not a coincidence. I would like to commend our resident CPAs for giving you correct and legal tax advice.

Now if you fellows have any dinero left over.....there is the "Send Circus to CR Fund."

_________________
Damn if I'm going to repeat this shit again. I need a drink.
I've been drinking vodka every day for 45 years and I have certainly never found it to be habit forming.

Piroca,
All a "Shelf Corporation" is one that is already incorporated, but never operated and ready for delivery to a purchaser. It's particularly common in tax havens and countries where incorporation time is lengthy. The main reason it is used more heavily in tax havens is because the investor may need to show the company has been in existence for a period of time and has not just been set up to dodge taxes. Those advantages come with a cost since there are usually extra fees involved with them, such as annual fees for each year its been in existence. I don't know how long it takes to incorporate in CR, but it is not on the usual lists of tax haven countries like Bermuda, the Bahamas or the Caymans and so a shelf corp. will probably not be necessary. Of course, the fact that CR has not yet been added to that blacklist could also be considered one of its advantages. Tax considerations aside, as you probably know, there are also other advantages for forming a CR corporation in lieu of full residency in order to more easily puchase property. TMan could probably tell you more about that. As for the issues of offshore tax havens you could also check
http://www.escapeartist.com/taxhavens/taxhavens.htm
http://www.lowtax.net/lowtax/html/jcrhom.html
http://www.taxhavenco.com/osm/sc_amer-costa_rica.html
I don't vouch for the services offered at any of those links but you might learn somethings by reading their ad copy. Just be sure you don't end up like this guy or just as bad a victim of someone like himhttp://www.amcostarica.com/021302.htm. There's a fine line between minimizing your taxes "legally", skirting the law and being just plain stupid.

Hey Tax Dude's,

Would this not be a qualified charitable deduction.
Lord knows o'l Circus need's all the help he can get.

The Nuck's good for a buck.

_________________
Throughout the history of mankind there has never been one shred of evidence that supports that life is serious..........
Don't believe everything you think ............

Just to add a little qualifier here. Be very careful of accepting the current tax situation in CR. There maybe major changes in a year or two.

The current administration is pushing very hard for a major overhaul of the tax codes. They have enlisted the help of the IRS to train Costa Rican tax agents in enforcement of tax laws and in collection of tax revenue.

_________________
Pura Vida
Only Irish coffee provides in a single glass all four
essential food groups:
alcohol, caffeine, sugar and fat.
Alex Levine

both taxman and prolijo are technically correct.
i, too, am a tax pro and would look it pratical terms:

1. the rental property would practically have a loss each year because of the business expense of travel and such to check up on it.
it's really tough to manage one of those property without being truly hands on and there alot.
also, some tenants are just unreliable and they dont pay the rent like they are supposed to. it's amazing how the bank deposits just dont happen like you planned.

2. the capital gains issue would need to be looked at, assuming of course that the property shows a profit when you sell it.
there are many ways to postpone any gains.
for example, you could refinance before you sell it and take the cash tax free- then you sell it on an installment sale and spread the taxes out over many years, alternatively you could swap the property for shares in business interest in the DR, SL, BB, etc and qualify for a tax free exchange.

but my advice is to do a deal based on the money you'd make, not on the tax you may or may not have to pay on it

Ding Dong wrote

Costa Rica is phucked. The IRS (any US gov't agency for that matter) is the model of ineffiency.

_________________
Eu gosto de brasileiras...

Yes I do agree with Roco, I was giving a general answer. In reality there are many ways to legally lower any potential tax liability. Everybody's individual situation is different, and tax advice could vary depending on their individual situation. That is why I do not wish to get into and deep discussion regarding a complicated issue without knowing all the facts.

My best advice is hire a professional, dealing with these issues on your own is not worth it and could be expensive.

Excellent points raised here by Rico1040, Taxman and DD.

As I said earlier here, without knowing more details we can only speak in general terms. Anyone seriously interested in these issues obviously needs to talk to professionals that know the particular environment and subject area better AND that know exactly what Piroca hopes to do. That is why I added that caveat to my first post. I'm sure now that Piroca understands that.

Also, as Rico astutely pointed out tax implications are just one of the many factors that should go into any investment decision and is not even the most important consideration. One has to show a profit first and even then there are ways to defer it or dissolve it altogether. Rico seems to know more about the unique pitfalls of operating rental properties in CR, but we both alluded to how easy it would be to eat up any profit with salaries to Piroca and his partners. Incidentally, while those salaries would effectively reduce any corporate tax by reducing the corporate profit, they might also make Piroca and his partners subject to CR personal income tax (currently 18% for upper brackets). All that might really acheive is to convert passive rental income and capital gains into earned income that would not be subject to US tax.

DD raised the issue of future changes to the tax code in CR. Thats true for both the US and CR. As I said in an earlier post, the US is increasingly cracking down on tax haven countries and loopholes in the US tax code that enables US citizens to go offshore to avoid taxation. I said CR is not on the list of tax haven countries YET. But that could change. CR is facing multiple pressures. On the one hand it wants to maintain a laissez faire atmosphere that encourages investment. That includes corporate privacy laws that are hallmarks of traditional tax havens. On the other hand, they undoubtedly are facing pressure from the US, IRS, WorldBank etc. to tighten up their financial practices. CR is also facing a fraying social safety net just as many other countries do. Even without the expense of a standing army, universal health coverage, public education, public infrastructure (roads) and public safety (increased crime and drug trafficking=need for increased spending for police and courts), not to mention public corruption and waste all conspire to create a battered public budget. Does anyone really believe they're going to raise taxes and enforcement on the voting public before they crackdown on tax avoidance by the rapidly growing population of wealthy foreigners? Most of you probably don't even remember it, but long gone are the days when foreigners were allowed to bring in luxury goods duty free. Nowadays, we see CR immigration coming down increasingly hard on so-called "perpetual tourists". As more and more of us flock to CR bringing US pricing and inflation with us, locals are bound to begin feeling they need us less and less and feeling more and more resentful.

This is why I'm not as gung-ho on CR as a retirement destination as I once was. I realize its anathema to many guys around here to say anything negative about CR and that CR really does have a lot going for it today. But when it comes to retirement, I have to think in terms of the future, and I don't like all the trends. Forget about changes to tax and immigration laws for the minute. Property prices are going up rapidly. That's great if I can afford to buy now. It may be not so great by the time I'm ready to make the jump and even then it would probably be another year after I move to CR that I'd be sure enough about my choice to make a more permanent investment. As drugs flow to the US they often stop in CR. There is a growing problem of drug addiction and a rise in crime that goes with it. Just a few years ago, at worst one would face a "strong arm" mugging or home break-in. Today, armed robberies with hand guns and even home invasions are more common. Some gringos really enjoy the uniqueness of CR culture, but many others bring the worst aspects of our american culture with them. For example, one is seeing more and more of the US fast food chains and corporate excess that the rest of us go to CR to escape. And the attitudes of the CR people seem to be changing too. I think many ticos are growing more resentful of the gringo wealth around them (and far too often arrogance that goes along with it). We're rapidly bidding up local prices on everything from beachfront real estate to women. At the same time, many ticos are becoming somewhat americanized themselves. Granted some of these same trends also exist in the US and are sometimes far worse, but I can't help but think that in 10-15 years time, when I'm either starting my retirement or well into it, some other location will be better offering the things that we enjoy most about CR today.

YO Tax Tigers:

Prolijo: Your last paragraph reflects the view I arrived at two years ago and also is the reason I will not live in CR. The break ins by armed banditos has hapened to several families that I know. And yes, there are come changes going on in the tax and legal system that are not good. As for the shelf corporations......best I not say anthing else about that. We might have picked up an IRS rep or two in this group.....I have reason to think so.

Reminder: Fellows, always remember there are a lot of eyes and ears out there.

_________________
Damn if I'm going to repeat this shit again. I need a drink.
I've been drinking vodka every day for 45 years and I have certainly never found it to be habit forming.