International Investment Trends During US Election Cycles
Richard: Good morning. It’s not morning. Let me stop. No worries. Good afternoon, Alex. How you doing?
Alex: Hey, Richard. Doing good. How are you?
Richard: Yeah, good, good. Man, I’m getting confused with it’s morning day. It’s. Yeah, it’s. I’m not too sure I’m losing the marbles here or the jet lag is catching up with me.
Alex: It’ll do that. It’s light outside either way.
Richard: True, very true. It’s raining hard here in Costa Rica. I mean, as we start to transition from kind of the, the rainy season to the dry season here. So I’m looking forward to the dry season.
Alex: Yeah.
Richard: Well, Alex, the first question I always love to ask is just get an idea of kind of what’s going on in your work. I mean, I know there’s been quite a bit of volatility. I mean, you guys are being bombarded with election stuff up there, you know, which we don’t hear anything about down here, which is kind of nice. But I mean, with regards to the volume of inquiries that you’re getting and the work that you’re getting from expats, you know, specifically, let’s say for Costa Rica, how is the. Is it still increasing? Is it pretty steady? Has it been decreasing?
Alex: Yeah, I mean, I think it always increases a little bit around big election times. And this one is. They seem to get bigger and more politically intense every time. But. But yeah, it picks up. And, and Costa Rica in particular is a very desirable place for a lot of Americans. I mean, I do hear some of the, you know, if, if so. And so wins, I’m moving the country, announcing my citizenship. I hear that. And, and I have some people that, that do it. It’s pretty rare that somebody actually goes through with, with that process. But, but I would say in general, like, I am getting. It’s. It’s more so now I’m getting people that are kind of moving or investing outside of the us Costa Rica in particular, with a kind of an anxious impulse, you know, as opposed to specifically, you know, I just love Costa Rica or I love. Want to move abroad. There is, there is a little bit of anxiety that I’m feeling from people with their investments and moves and, and that’s pretty natural around election. But like I said, this one seems a little bit more intense maybe.
Richard: Yeah, I mean, I agree. Look, I mean, you know, we see a lot of people looking to diversify outside of their home country just because, you know, they just want to diversify, which I think is smart. And I mean, it’s kind of cool to invest in Costa Rica as well because a lot of the time when you’re investing, you get to use it and enjoy it, etc. You know, with most, most things down here. So I always say it’s a lifestyle investment. You know, it beats putting money in the stock market because, well, depending on what you do, you know, you can kind of enjoy it down here as well.
Alex: Yeah, yeah, for sure.
Richard: Yeah.
Alex: I mean there’s two different, two different. I mean, I encourage investments outside the US for diversion, diversification purposes. You know, the people moving is a different story because there’s a, there’s more of an additional move, you know, but, but yeah, I mean, and one of the things, what’s interesting about this election is I think because it’s so tight, I mean, because I do about half of what I do is actually US citizens living outside the US and they in particular kind of get a raw deal in some cases. I mean, of course we can, there’s ways we can plan and make things tax efficient, but at the end of the day, you know, certain investments and things like that, when you’re outside the U.S. i mean, just the reporting requirements in general, if nothing else. It’s annoying, right, that you’re still having to report things in the US but, but Trump actually came out and said that he is going to do away with citizenship based taxation in the US for expats. He said that as part of his campaign. And that’s never really been talked about. It’s never really been on the table before because I mean, at the end of the day, the expats, there’s not enough of them. They’re not loud enough. It’s not politically. But I think, I mean, I think the estimates around 9 million Americans live outside the US and you know, that’s 9 million people that could swing a vote, you know, in one way or the other. So I don’t really believe it. So I don’t think people need to take that to the bank necessarily. I definitely would not. But, but it’s interesting that it’s being talked about and it, to me it just shows that the number and the noise is growing to where, you know, as races get closer and you have more people outside the U.S. i mean.
Finding Qualified International Tax Advisors
Richard: Yeah, also investments are going to get more global. I mean, you know, wind the clock back 50 years. Nobody was really investing internationally. Now, I mean, a lot of people are investing internationally because again, for various reasons, diversification, you know, and that could be diversification of the asset product, can be diversification out of currency because you also have to deal with the currency fluctuations. I mean the advantage that we have here in Costa Rica, of course the majority of stuff is US dollars like Panama, you know, but there are some countries where you can’t buy in US dollars and you have to use local currency. But look, a lot of people, you know, I had a conversation with someone the other day, was like, you know, I was like, I think, you know, you should take a look at, there was a structure for doing business. He was like, okay, I’ll talk to my Costa Rican account. And I’m like, dude, your Costa Rica accountant knows nothing about probably international tax, if that makes sense. Like you need to be speaking to someone probably in the US that understands Costa Rica taxation. If you’re going to, they were going to set up a pass through entity inside the US for basically money to kind of flow down to Costa Rica to another corporation. And he was like, well, I’ll speak to my accountant. I was like, no, you need to do that the other way around. You need to speak to a U.S. you know, account and not your Costa Rica account and to kind of figure that out. But I mean, what questions do you think people should be asking when looking for an accountant that understands, you know, international tax to make sure he or she is really no, like knows what they’re, what they’re doing?
Alex: Yeah, yeah. I mean honestly, I started my business with the sole or my main, my main client was small to mid size US CPA firms that have a handful or one or two clients that are international because at the end of the day those firms, it’s not worth it for them to learn a whole new set of rules and train their staff on it for the one or two international people. And that’s what I see a lot with people, especially with the foreign investment people. Because I mean you could be working with your CPA for 40 years in the US and you have a great relationship, they do great work, but as soon as you do something internationally, they just don’t do that type of work. So I mean, I think it comes down to, you know, if you’re working with your, your personal CPA you’ve been working with for a while and you’re changing your strategy to start doing something internationally, it’s having an honest conversation with them to see. I mean, I think the point blank question is what is your experience with, with international tax work in the US and getting that answer, I would be a little nervous with somebody if you’re kind of their guinea pig, of course, you know, and then, and then see what they’re open to. I mean, I don’t encourage people to necessarily drop their accountant for the sake of, of, you know, one real estate investment in Costa Rica when the other 99 of what you have going on is still in the US and you have a good relationship with your accountant. So maybe it’s just plugging somebody in that can help with that piece. Yeah, but like you mentioned, it’s a coordination at the end of the day. So usually the, the US Is the more complicated of the coordination, but it’s a coordination between the local jurisdiction and the U.S. and also within your advisors in the U.S. so yeah, just seeing what kind of experience they have and if you can get any specifics on that and then, and then seeing what they’re open to with working with somebody that has that specific international experience, I think is the way to go.
Optimal Tax Structures for Costa Rica Real Estate Investments
Richard: Alex, what are some of the common questions you get asked by, you know, current clients and potential clients?
Alex: You know, on the investment side, it’s almost always structuring, you know, is how do I need to. So with a, you know, with a real estate investment structure, say outside the US or in Costa Rica, it’s usually how do I structure this? And, and what’s your advice? Yeah, and I’ve kind of changed my tune a little bit over the last year. I mean what happens is, is in the U. S and when you set up, usually what I see is you set up, the person needs to set up a foreign company or a company in the local jurisdiction. So in, in Costa Rica I’m seeing that about. Not. It’s a kind of inconsistent the way I see that in Costa Rica. Maybe you can explain a little bit more about why I think it’s probably.
Richard: Inconsistent of whether it’s in their personal name or whether it’s in a company name based on advice they get. But also as if they want to get residency here in Costa Rica, they have to do it in their personal name. They can do it in a corporation. It’s just changing a little bit and become a little bit difficult. Whereas if you do it in your personal name now it’s, it is easier.
Alex: Yeah. Okay. Yeah. I mean if you do it through a company, which I see about half the time, like a Costa Rican company, I generally tell people to make the election to treat that as a flow through. Yeah. That it’s a corporation for US Tax purposes. Two main reasons, especially if it’s going to be A rental property, if it’s a personal residence, and you know it’s not, you’re not really planning. This isn’t like a business business venture, then it’s a little different. I think it’s okay to keep it in the corporate form, but if you keep it in a foreign corporation, that’s not a flow through, you know, without getting too deep in the technical nuance, really. I mean, you lose the ability to carry forward losses, which is a problem. Yeah, rental side. And then also if you sell it in the future, you’re missing out on capital gain. Taxation rates versus ordinary income rates. It’s kind of a complicated way of where you get there, but that’s where it ends up in a lot of cases. So I usually say make what’s called a check the box election. So it flows through. And then it’s also easier on your cpa. You know, that’s where I can kind of step in to make sure that election gets made properly. And then your CPA at that point, the tax side of it is just very similar to how you would do it for a US Rental property just goes on your personal tax return. I mean, the, the other option is to structure in the U.S. as well, you know, to have companies in the U.S. and that kind of just depends on. To me, that’s more of a maybe not estate planning, but just a future planning alternative. You know, I mean, sometimes it’s easier to pass ownership and things like real estate if you have it held in a trust structure or a company structure in the US So that’s maybe less of a tax rate question and more of just a personal. What’s your plan on. What’s your plan with this property?
Richard: Well, and that’s the same in Costa Rica as well. If you have it in your personal name and you die, you have to go through probate here, which is a nightmare. But if you have a corporation, you can already set up with the lawyer that transfer and it only gets executed, you know, if someone passes away. Basically.
Alex: Yeah, that’s usually so. That’s usually what I mean, I would say, I mean a trust structure in the US or an LLC that either owns the property directly in Costa Rica or through a Costa Rican company. But having it all flow through generally makes sense. It’s the simplest and, and gives you usually the best tax answer.
Tax Benefits for Costa Rica Property Owners
Richard: Okay, are there any other common questions that you get?
Alex: I mean, on the real estate side, it’s usually, I mean, I mean, one thing that people ask a lot is, you know, what is the difference? You Know, depreciation, for example, you know, that’s one of the biggest deductions. Because a lot of times when I tell people, you know, you’re, you know, my original spiel of why we should make that election for it to flow through, part of that reason is because you’re probably going to have losses on the rental that we want to pick up in the US and then they say, hold up, why, why do I have losses? I’m making money.
Richard: Yeah.
Alex: Part of that they’re not thinking about the depreciation deduction. So in the US there’s a, it’s a 27 and a half year depreciation for buildings. And then you can get, you can lower that down if you look into like specific fixed assets within the building, furniture and things like that. It’s similar when it’s outside the U.S. but if it’s a foreign property, there’s actually a 30 year life on depreciable assets and it has to be over a straight line basis. So 30 years over the life of the loan. I mean, over the life of the, of the Property. I’m sorry, 30 year life on the property. And, and so that’s your depreciation deduction. So that’s a little different. But otherwise, otherwise there’s not a lot different. You know, another thing I get is 1031 exchanges.
Richard: Yep.
Alex: Those actually you can, that works outside the U.S. you just can’t bring it.
Richard: Back to the U.S. right, right.
Alex: It’s got to be a foreign to foreign exchange. You can’t, you can’t exchange across the border, basically. Yeah, yeah.
Richard: Well, you know, a lot of the question I get actually sometimes is, you know, and I don’t have the answer for it. I’m like, I think you need to speak to an accountant on this one is, you know, if a US citizen owns a vacation rent in Costa Rica and they have to travel down there, you know, per se, to oversee the business or something, can they deduct all their travel expenses?
Alex: Yes, potentially. I mean, basically, as long as you can prove that, that more than that, the majority of the reason that you travel down there is for the purposes of that vacation rental.
Richard: Yep.
Alex: Then you can deduct the percentage associated with, with the activity on that rental. So said differently, I mean the rental, the rental property is a business. If you’re traveling overnight for business purposes and the majority of that travel is for business purposes, then you can deduct everything to the extent taking out the personal side. So for example, for a week and you’re going to Spend, you know, five days, five of the days are specifically related to the rental property. You know that you’re doing some type of work for that rental property for five of those days and two days you’re going to the beach to meet some friends or something like that. You can deduct, you know, whatever five divided by seven is.
Richard: Yep.
Alex: Of, of your stay, your travel, your meals, your, you know, all that. So generally, yeah, you just want to, I guess the short answer is you want to make sure that the majority of your time is spent on the rental. Because if you go down there for a week and you spend one day at the rental property and the rest you go to San Jose or wherever you, you go, then you really can’t deduct.
Richard: I mean, if you meet with your accountant one day, you know, you meet the next day with your lawyer the next day you meet with your, your property management company the next day, I don’t know, you end up meeting with.
Alex: Some other work on your books. You know, I mean, it doesn’t have to be, I mean the, the important thing, the important thing is that you have contemporaneous records. So it is good to like make some type of note contemporaneously that day of what you did with the late to the rental properties. But yeah, interesting.
Self-Directed IRAs for Costa Rica Property Investments
Richard: I mean a lot of the stuff what’s coming up at the moment, and I mean we were actually dealing with it, you know, is self directed IRAs, you know, because they can be basically invested in to foreign assets, if I’m correct. So, you know, we spoke to a guy the other day that. Because we were asking, and I actually asked you about it, you know. But US citizens can invest basically their self directed IRAs into real estate in Costa Rica.
Alex: Yeah, yeah, definitely. And I’m seeing a lot more of it too. I actually talked to somebody today, an investment advisor that manages those types of funds and it does. I mean, you have to have a custodian that will deal with the foreign assets. So I mean it’s not, it’s not, it’s not a like general rule for the self directed IRA that you can invest in this, in foreign real estate. It’s specific to the custodian that you use. Yeah, I mean there’s a bunch of them that, that’s pretty easy to find. There’s ones you can even, you know. Well, yeah, there’s, there’s several that you can, I mean, but there are some specific rules related to it. I mean, one is that you can’t have any personal use of that property.
Richard: Yeah.
Alex: So you can’t, you can’t like your rental property. You can’t go down there and spend personal use days. You can’t take money out of that. Obviously, like, so the rental income or something like that, it has to stay within, within the IRA or the fund. But the hardest part with it is really the thing I’ve been. And I haven’t found all the right answers for this yet, but the hardest part is, is making the investment itself from the ira.
Richard: Yeah.
Alex: Because you can’t, you can’t buy a property and contribute it to the self directed ira. The IRA has to purchase the property.
Richard: Correct.
Alex: And you’re limited to $7,000 a year of contributions. That’s the general rule. So I mean, it take you a long time to get to a $500,000 property or something, you know, so there’s other ways of doing that though. I mean, you can roll, roll money in from another retirement account into that ira. You know, it depends on if it’s a Roth or a traditional ira. You can do both. If you roll into a Roth ira, obviously you might have some tax, some tax implications because the Roth, Roth is a better investment tool in that case. But it’s post tax money. So if you’re putting in pre tax money and rolling that in, you’re going to take a tax hit on the front end. So that’s usually the tricky part is getting it, getting it funded. Yeah, there’s ways around.
Richard: We spoke with someone the other day because, you know, we’ve got some fractional investment stuff that we’ve been working on and they review the documentation, was like, yeah, this is perfect, dude. Like, you can, you can do this very, very easily, know, because they’re investing into a corporation.
Alex: Yeah.
Richard: You know. Yeah.
Alex: And that, I think that makes it even easier when you’re buying shares in a, in a project or something as opposed to buying the property directly. Not that, I mean, you can do either one.
Richard: Yeah.
Alex: But I think paperwork wise, I think you run into some problems with titling and things like that. Yeah, you can, but you got to get the right team.
Richard: Yeah.
Alex: You familiar with that process?
Richard: Definitely. Well, I mean, look, I think it’s great that the US is kind of opening up a little bit more to foreign kind of investments, you know, I mean, again, it still kind of sucks because I know you guys have a bunch of paperwork in order to do. You know, it just as you said, that kind of sounds like it doubles the paperwork on your side.
Alex: Yeah, yeah. I mean, I mean, really, I think it gets said a lot, the complication of the US Tax rules. And it can be, but usually, I mean, if you get ahead of it on the front end, it’s not that complicated. I mean, investing in a foreign property, investing in, you know, foreign investments, it’s not really that complicated or that different than investing in the US it’s just important on the front end. You get it structured correctly, and then it flows nicely going forward. Where the complications come in and where it usually gets the bad rap is when we’re unwinding problems, and then it does definitely complicate us. So. So get on the. Get on the front end of it and yeah, it’s probably. It’s. It is more paperwork in some cases, but yeah, the goal is to simplify and save taxes. Not necessarily in that order.
Personal Investment Preferences in Costa Rica
Richard: Yeah, definitely, Definitely. Well, my last question for you is. We’ve kept you long enough. Alex, is. It’s been great. If you inherited $500,000 and you had to invest it into a business or real estate in Costa Rica, what would you invest it in and why?
Alex: Yeah, I’d probably come to you, Richard, and help me out, but. But no, I would. I mean, I would probably do something that at least has some personal that I can enjoy personally. You know, something down on the beach that I can join personally and try to find something I could also make some money on. So that’d be the goal. I like coming down to Costa Rica, so I try to make an excuse to come down there more often with that money.
Richard: Can you write it? Yeah, I mean, I suppose you. You would probably find a way to write your taxes off on it as well. So. So yeah, you could travel down and.
Alex: Yeah, yeah, no, I know how to make that move for sure.
Richard: Well, Alex, again, very much appreciate your time coming here on the podcast, anyone that wants to get in contact with you, I’ll put all your contact details in the description down below. But very much appreciate you taking the time to chat with us, sir.
Alex: All right, sounds good. Thanks, Richard. I appreciate it.
Richard: No worries. Ciao.
