Costa Rica Real‑Estate Taxes: Essential U.S. Tax Tips for Property Investors

Costa Rica’s beaches, jungles and relaxed lifestyle make its property market alluring to foreign buyers. Many U.S. investors are drawn to the idea of buying a vacation home or rental property in paradise, but few realise the complex tax and legal implications of investing abroad. The United States taxes its citizens and residents on worldwide income, and the Internal Revenue Service (IRS) imposes strict reporting and compliance obligations on those who own foreign real estate through local companies. Meanwhile, Costa Rica’s civil‑law system, lack of a formal MLS and different legal requirements mean that due diligence and professional guidance are essential.
This article summarises the most important U.S. tax considerations for investing in Costa Rican property, drawing on guidance from McGowin Tax’s international tax specialists. Whether you are purchasing a beach condo, renting out a vacation home or planning a larger development, understanding these rules can save thousands of dollars and prevent painful penalties down the road.

U.S. reporting requirements: don’t ignore the paperwork

Holding Costa Rican property through a local company—such as an SRL, SA or Limitada—may make sense for liability or local legal reasons, but it triggers extensive U.S. reporting obligations. Key forms include:

Reporting requirement	When it applies	Why it matters
Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations)	Required when a U.S. person owns, directly or indirectly, more than 50 % of the voting power or value of a foreign corporation. Even simple holding companies used to own rental property can meet this threshold.	Failure to file can result in automatic penalties of $10,000 per year per form. Ownership in a Controlled Foreign Corporation (CFC) may also trigger Subpart F income and GILTI rules.
FBAR (Foreign Bank Account Report) and Form 8938 (Statement of Specified Foreign Financial Assets)	Required when foreign bank accounts or certain assets exceed specified thresholds. Opening a Costa Rican bank account for your rental property typically triggers these filings.	The reports are informational, but penalties for non‑filing can be $10,000 or more per year.
Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities)	Required when a foreign company is treated as a disregarded entity for U.S. tax purposes. A missed filing can prevent retroactive entity classification elections.	Ensures the IRS recognises flow‑through treatment and allows losses to pass through to the owner.

The key takeaway: discuss filing requirements with a qualified tax professional at the planning stage. Missing these forms can lead to penalties even when no additional tax is owed.

Choosing the right ownership structure

Foreign entity classification vs. U.S. LLC treatment

In the U.S., limited liability companies (LLCs) are generally flow‑through entities, meaning income or losses pass directly to the owner’s tax return. However, the IRS automatically classifies Costa Rican entities such as SRLs and SAs as foreign corporations. This classification change has serious consequences:

• Double taxation: The foreign corporation pays tax locally and the U.S. shareholder pays tax when profits are distributed.
• Loss limitations: Rental losses do not flow through to your U.S. return, meaning you cannot offset wages or business income.
• Higher rates on sale: Gains from selling the property are taxed as ordinary income rather than at favourable capital‑gains rates.
• Complex reporting: You must file Form 5471 and may face GILTI taxes.

Check‑the‑box elections

To avoid the default corporate treatment, investors can elect flow-through status by filing Form 8832 with the IRS—commonly called a “check‑the‑box” election. This election must generally be made within 75 days of forming the entity. Filing after this deadline is still possible but more complicated; the IRS allows retroactive elections for up to three years if you can demonstrate reasonable cause and have not filed returns inconsistent with the desired treatment.

Failing to make the election leaves the entity classified as a corporation, locking in higher tax rates and preventing rental losses from flowing through. Therefore, consult with U.S. and Costa Rican advisors before forming your company or purchasing property. Retrospective fixes are possible but often require careful documentation.

Passive vs. active rental income

Passive‑activity loss rules

The IRS treats rental income as passive income, which means that losses from the property cannot generally offset your active income (wages or business profits). These losses are “trapped” until you generate passive income or sell the property. A small exception allows up to $25,000 of rental losses to offset ordinary income if your modified adjusted gross income (MAGI) is under $100,000 and you actively participate in the rental; however, this benefit phases out between $100,000 and $150,000.

In addition, rental income is subject to a 3.8% Net Investment Income Tax (NIIT) for high‑income taxpayers. Many investors do not realise that a successful vacation rental can increase their NIIT exposure.

Real estate professional status

For serious investors who manage properties full‑time, qualifying as a “real estate professional” can convert rental activity from passive to active. To achieve this status, you must:

• Spend at least 750 hours per year on real‑estate activities.
• Devote more than 50% of your total working time to real‑estate activities.
• Materially participate in each rental property (or properly aggregate them).

On a joint return, only one spouse needs to qualify for both to benefit. Achieving real‑estate‑professional status eliminates the NIIT and allows rental losses to offset any income.

Short‑term rentals and personal‑use limits

The short‑term rental loophole

There is a notable carve‑out for short‑term rentals. If your property’s average guest stay is seven days or less, the IRS does not treat it as a rental activity at all. Instead, it becomes a business activity, and you can deduct losses against any income as long as you meet the material‑participation requirement (often around 500 hours of work per year). You also avoid the 3.8 % NIIT and the passive‑loss limitation.

Section 280A personal‑use rules

Even when you meet the short‑term rental or real‑estate‑professional criteria, personal use of the property can undermine your deductions. Under Section 280A, if you personally use the property for more than 14 days or more than 10 % of the rental days (whichever is greater), the IRS treats it as a personal residence. In that case, you can deduct expenses only up to the amount of rental income; any excess losses are suspended.

Key planning tips include:

• Track every day of rental vs. personal use; even family members staying for free counts as personal use.
• Repairs don’t count as personal use—document maintenance days separately.
• Plan visits carefully to avoid breaching the 10 % threshold.

Success strategies and real‑world examples

Converting a passive Costa Rica rental into a tax shield

In one consultation, a U.S. couple bought a $700,000 vacation rental in Costa Rica and self‑managed the property. They kept the average stay under seven days, logged 600 hours of involvement and limited personal use to 10 days. Because they met the short‑term rental and material‑participation tests, they were able to deduct rental losses against their W‑2 income—even though the property was abroad.

A cautionary scenario

Another couple rented their property for 80 days but personally used it for 12 days. This exceeded 10% of rental days, causing the property to be classified as a personal residence. As a result, deductions were limited to rental income and any excess loss was disallowed. The only way to benefit from those losses would be to carry them forward and deduct them in a year when rental income or a sale occurs.

Real‑world success story

A McGowin Tax client purchased a beachfront property in Costa Rica through a local SRL. By filing a timely check‑the‑box election, limiting personal use to nine days and structuring their other income to keep their MAGI below $100 k, they were able to deduct $18,000 of rental losses that would otherwise have been trapped.

Coordinating with Costa Rica’s legal system and professionals

Costa Rica’s legal environment differs significantly from U.S. and Canadian systems. The country follows civil law rather than common law, and notaries—who must be lawyers—play a central role in transferring property titles. There is also no formal MLS, so reliable market data can be hard to find. The best practices include:

• Due diligence: Investigate title records, zoning restrictions and property taxes thoroughly, because regulatory oversight is minimal.
• Local professionals: Hire a Costa Rican lawyer/notary, realtor and accountant to ensure documents are properly drafted and stamped.
• Ownership structure: Decide whether to hold property personally or through a company based on long‑term goals. Owning through an entity may be advantageous for liability reasons, but U.S. tax classification must be addressed as explained above.

Costa Rica Real Estate Taxes: Plan early, document everything and seek expert guidance

Investing in Costa Rican real estate can be rewarding financially and personally, but failing to plan your tax and legal strategy can quickly erode returns. U.S. investors must meet rigorous reporting requirements for foreign corporations and bank accounts, make timely entity classification elections and understand when rental losses can offset other income. The IRS offers powerful opportunities for those who meet the real‑estate‑professional or short‑term rental criteria, but strict rules on personal use and participation apply.

Ultimately, the difference between tax optimization and tax disaster often comes down to planning at the outset. Coordinate with both U.S. and Costa Rican professionals, document your time and usage meticulously, and revisit your structure regularly. With the right approach, your Costa Rican investment can provide both a tropical escape and a robust portfolio asset.