Buying Property in Costa Rica: Tax Traps US Expats Must Avoid

Welcome back to Passport to Wealth.

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My name is Arielle Tucker.

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I'm an EA and CFP.

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And today I am joined with Alex McGowan, who is a CPA and an international tax expert with

deep experience advising US expats, non-residents, and Americans investing abroad.

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Alex, like me, began his career at PwC, though different offices.

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You were in Houston.

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I was in Zurich.

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And then you also did a lot of cross-border work at Grant Thornton.

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And now you have your own firm, McGowan Tax LLC, where you help clients navigate US tax

compliance, foreign investment structures, and real estate purchases throughout Central

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and South America, including countries like Costa Rica, where you're currently sitting,

and Panama as well.

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So I'm really excited to talk to you because you do a bunch of stuff that I do not do at

all, so I can't wait to learn from you today.

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And I think it's really cool to just mention that you used to actually teach.

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em

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at the University of Mobile, sorry about that.

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um so you are an educator first, and I think I always love finding those uh cross-border

professionals who are educators first.

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So we've got a lot to talk about today, a lot to learn about buying property abroad and

some of those uh common traps and pitfalls.

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So we'll just get right into it today, Alex.

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Okay, awesome.

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So tell me a little bit more.

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about your, like how did you become a specialist in international taxation and especially

highlighting your kind of experience in foreign real estate structures?

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That sounds so intimidating by the way, foreign real estate structures.

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Tell me, like what does that even mean?

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Yeah, mean, yeah, I'll give you the relatively short version.

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You know, I mean, I did a master's in tax in Alabama and I just kind of liked the

international course that I took.

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And then I got a job with PWC and they were like, you can choose what group you want to be

in.

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And was like, I have no idea what group I want to be in.

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And then I saw there was a group called the International Assignment Service, which isn't

even called that anymore, but that was like the expat group.

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I was like, this sounds pretty cool.

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I really had no...

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the specific reason for liking it.

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So I went into that group.

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So we did expat work and things like that.

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And then I just really, I really enjoyed the international stuff and stuck with it.

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And then went to Grant Thornton and did the international thing more at a corporate scale.

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But, you know, I mean, I guess what I kind of found is I always wanted to have my own

firm.

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That was really the goal from the beginning.

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And I was just kind of trying to get the experiences I needed to to feel competent enough

to do it.

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You know, but but I kind of see what I do is like the chicken salad chick of tax tax

preparing or tax work just because like it's so hard to know everything.

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Right.

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And so I just said, you know, I'm not that smart at the end of the day.

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I just figured, all right, I'm going to take this

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international tax thing and I'm just going to do that and get good at that, you know?

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And so that's what I did and really, and over time, like what I'm trying to do now is

really narrow it down even more to like geographically uh working.

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I'm working with lot of people in Latin America now like you said, but yeah and

specifically that includes the real estate side.

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So what that means just like a lot of the work that I'm doing on the real estate side is

US people moving to Latin America.

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So like you said, I'm in Costa Rica right now.

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I have a lot of clients in Guadalajara, is like the Pacific beach part of Costa Rica, but

people all over this country.

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know, they just invest in rental real estate here as a second home.

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or they move down here and purchase real estate.

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there's, what I've found is there's just a lot of gotchas and things that really aren't

that tricky.

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Like some of the gotcha pieces really aren't that tricky.

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It's just people don't know them.

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And then there's also, there's other things we can do.

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You know, the next step is trying to find ways to save taxes and do things correctly.

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yeah, that's a little bit of the background of how I got here, I guess.

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that's so, I I tell my clients this all the time.

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I always say, you know, we work with really smart people, right?

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And you're really good at what you do, and you do that all day, every day.

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And I just happen to do this one little thing all day, every day, think about it, read

about it, write about it.

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So I'm really good at this.

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And when I look for experts that we refer out to, I look for those truly specialized

experts who are specialized in, you know, a certain tax law,

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maybe certain countries within tax law.

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Because even when we're talking about just like taxes, right, we've got corporate taxes

and personal taxes, and then we talk about cross border or international taxation, right,

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that is like a tiny sliver of taxes.

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And then you layer on country specific considerations, there's a lot of ways to niche

down.

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And I think you summarize it so perfectly, like there are so many gotchas, like in the

international tax space,

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space, where when you're going out to chat GPT or you're reading forums or you're thinking

about buying real estate abroad, you don't even know the questions to ask, right?

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You could be asking really good questions and completely missing, you know, the elephant

in the room, right, so to speak.

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I mean, goal is to provide as much value as I can to my clients, right?

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And the more I can specialize in what I'm doing, the more value I can add.

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That's what I feel like.

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And right when I started, I'm in a fortunate position now to where I have been able to

narrow things down.

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just from a client perspective.

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But of course, like right when I started my firm in like 2019, I really had to take

everything that was international related.

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Because I mean, of course I have clients all over the world.

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I don't just do things in Costa Rica, because I can do US tax preparation for

international things.

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I mean, the US tax law is the same, but when I have clients in Mexico or...

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or Costa Rica or Panama, I understand those laws better.

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not that I'm not that I like do Costa Rican taxes, but I know the process and I can put

you in touch with people to get residency in these countries to, you know, talk to people

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about importing your vehicles to these countries or real estate agents and things like

that.

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So, you know, like you said, and you kind of you do the same thing in Switzerland.

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We've talked before about like the work you do.

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I you kind of try to focus on your area because you understand the processes and can put

people in touch

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with the right people, I think.

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And so it's the same thing for me here.

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Like, I feel like I can provide more value ah to clients the more I can, like, focus in on

what I'm doing, you know?

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And that's the goal at the end.

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I completely agree.

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And I think what I've realized in this space and you've also realized this is, you know,

your networks that you build are so valuable so that when the client comes to you, calls

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you and they're moving there, they've got their vehicle to import, they're looking for

certain types of properties, whatever, you have the Rolodex of people that you've already

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vetted, that you already are working with, you know are good and are going to provide a

great service even if they don't do exactly what you're doing, right?

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And so I see so much value

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because it's just like shortcuts.

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when you have, you you don't have a lot of time, shortcuts are awesome to just get to the

right people and not get scammed.

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Because unfortunately, what I'm seeing right now is all these kind of pop-up scams in the

cross-border space because they're seeing, wow, 30 % of Americans are looking to move

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abroad.

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How can we sell them a product that they don't need or a service that they don't need or

want, but they don't even know what they're asking for and we're just really...

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you in the door, but then that's where the service ends, you know, or at least an in-depth

service, you know?

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Yeah, and I mean, like I have, like, for example, I have clients in Hungary that have the

same thing, but like, I don't know anybody in Hungary.

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So like, I can do your US tax return, but that's kind of where my service ends there.

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Whereas, as I focus more on specific places and specific types of transactions, you know,

I can provide more value.

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One of those is real estate where I help people structure the real estate transactions and

comply.

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And the other one is more business.

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I mean, I'd say the two things I'm focusing on are real estate transactions with people

and US people with international businesses.

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So that's either an expat with a US business or a foreign business or somebody in the US

with foreign subsidiaries generally in Latin America as well.

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It kind of ties into the real estate because it involves foreign business structuring, oh

which is where the real estate pieces comes in, which is different in Latin America than

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in Europe.

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And I can explain why.

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Yeah, can you?

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Because I'm like, tell me, tell me more.

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When do people come to you?

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Are they coming to you to file the first tax return?

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Hey, I now own this property in Costa Rica or Latin America.

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Or are they coming to you, they know to come to you, and they're saying, I'm thinking

about buying this property.

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What are the next steps?

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When are you engaging with them?

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Yeah, so.

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I think that's where Costa Rica has been a little different than how I engage with my

other clients and that, you know, the clients I have that are in the UK or France or

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something, and I'm going to stereotype here, but it is what it is.

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They, I feel like a lot of times they're a little bit more sophisticated investors.

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Like if there's somebody going to the UK or somewhere like that, there there's other

professionals there and there's other people there that are telling them about us taxes.

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In my experience, the people investing are moving in Panama or

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Costa Rica, it's usually just some guy from Minnesota, you know, that he's been working

his whole life and he has, and he has savings built up and he wants to say he's been

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vacationing in Costa Rica for a decade and he wants to buy a house down there and he's

been working with his local tax professionals whole life.

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They don't know.

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They don't know what they don't know, you know?

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And so usually people are getting to me.

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I know a lot of attorneys and real estate agents in Costa Rica.

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And so they connect me through there.

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So

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Costa Rica it makes sense to set up their version of an LLC which is the SRL.

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And so that's where the wheels start to fall off if they don't talk to someone like me is

because they set up the LLC and all of sudden they have a controlled foreign corporation.

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They've never had something like that.

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Their tax preparer in the U.S.

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has no idea what to do about that.

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And then they're they have their their personally using a house that's in a controlled

foreign corporation that causes problems.

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They sell it later and they're triggering subpart F that they don't know about.

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So it just it causes a lot of problems which is

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very simply avoided with the check the box selection.

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know, that's really, but I mean, generally how I do it when I talk to my clients is I kind

of phase it out.

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The first thing is

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We want to make sure you're filing the right tax forms on time so that we don't have

stupid penalties.

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That's like step one of tax planning.

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And then step two is how do we actually structure this in a way that doesn't get you worse

off from a tax perspective?

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And then step three is how do we make it better?

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You know, and usually like step one is where people mess up, which is not filing the right

forms on time.

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Yeah.

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But that's how they're getting to me.

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Usually it's just like they, they see like I have, I have,

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YouTube channel where I talk about a lot of this stuff and people find me through there

but otherwise it's local contacts that people ask the right questions or sometimes they're

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like 10 years into a property and we have to figure out how to unwind things which is a

little more problematic but yeah.

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YouTube channel, by the way, super educational.

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And so we'll be sure to link that as well as a great resource for anyone who's looking to

learn more about uh property ownership and real estate and a lot of great tax content as

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well.

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So thank you so much for doing that.

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um we covered a lot of big words.

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So I want to kind of like break it down.

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Break it down.

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Like check the box election and subpart F and foreign controlled.

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corporation.

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Can you break down some of these terms so they don't sound so intimidating to people who

are thinking about buying property in Latin America?

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Yeah, for sure.

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I mean, the first step is when you're purchasing a property down here, like in Costa Rica,

you, it usually makes sense to have their version of the LLC.

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There's liable.

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They have liability protection.

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That's one thing, although it's not really like a it's not like the U.S.

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where everybody sues everybody for no particular reason.

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So you don't.

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But you do want that protection.

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But more so in my experience, it's that it's easy to give attorneys in Costa Rica power of

attorney to do things for you.

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Like if you're in the U.S.

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and your electricity gets shut off and you don't have somebody down there that has a power

of attorney to go to the

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the municipality and get it turned back on, you're gonna have problems.

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And it's a lot easier to assign that authority over when you have a company owning it.

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That's about as technical as I can get with that.

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the scenario, but I know it's just more complicated from an individual perspective.

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So you have the company there, but the problem is when you have an LLC, so in in a in any

foreign country, but in Costa Rica in particular, ah it defaults to a foreign corporation.

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So everybody like the rule in the US is if you set up an LLC and it owns a rental

property, ah it's going to default to a flow through.

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So a disregarded entity or a partnership, depending on

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the number of owners and all that really means is the income and losses of the company or

of the rental are going to flow through to you personally as if you owned it directly as

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opposed to like a corporate setup where corporation pays tax and then you pay tax on the

distribution nobody does that in the US you don't set up a C Corp to own a rental property

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and you don't want to do the same thing in foreign country it's just that the default rule

is the opposite with a foreign LLC the default rules are based on whether it provides

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liable

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protection to all the owners and LLC by definition does that so it defaults to a foreign

corporation so that's where the check the box election comes in or an entity

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classification election you want to proactively make an election to treat it as a flow

through so a partnership or a disregarded entity depending on who owns it that way the

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benefit of that is control foreign corporations are messy and complicated they're gonna

have

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There's ordinary income tax on the rental income and then it can be the biggest problem I

see other than the complexity of the filings is later if you want to sell that property,

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it's not a capital gain.

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It's ordinary income to you.

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And there's other nuances, but that's the main problem.

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um So there's really, there's very few situations where you want to keep it in a foreign

corporation.

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It can be different in Europe in some places because the tax rates are high there.

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So if you have, there's exceptions to some of the complexities with having the foreign

corporate set up.

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And one of those is if you're paying enough tax in the foreign country, then you're not

subject to these anti-deferral rules where you have to pick up the income.

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regardless of whether you take it out.

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But anyway, mean, the short answer is keeping it in that flow through structure is very

beneficial.

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So that's like the first main gotcha.

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You from there, there's a lot we can do.

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But if you try to make that election later, so you have 75 days to make it, you can

technically still do it if you haven't filed your tax return related to that year yet.

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But after that, if you try to make that election to treat it as a flow through, it's

treated as a deemed sale of the property.

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So when people come to me saying...

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coming across clients who they've held this property for five, 10 years.

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It's in this uh foreign entity type.

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They never did the check the box election because they were working with their aunt in

Minnesota who's the local accountant.

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And now you're basically, you're now delivering them the bad news.

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Right, yeah, I mean, that's one of the scenarios.

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Sometimes I get lucky and people find me when they're in the closing process of selling

their houses or purchasing the places down here.

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But yeah, if it's late like that.

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we're going to have to deal with the deemed sale rules.

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So then it's just a question of, you do have the benefit when it's a deemed sale.

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So if you make the election, it's treated as a deemed sale of the property ah in the

company.

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so, I mean, these, by the way, these are just U S concepts, right?

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Like if you set up an S R L in Costa Rica and you make an entity classification election,

it's still an S R L in Costa Rica.

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It doesn't change anything locally for their

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This is all US tax imagination stuff.

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I think that's a really good point though.

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Like, yes, the US tax system does not align with these foreign systems.

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We're back to the round peg in the square hole.

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mean, it's,

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Right, doesn't, this is all US tax return things.

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In Costa Rica, nothing changes.

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It's still an SRL owning the company.

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We make an election for US purposes to treat it as a flow through.

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But if you do it too late, it's a deemed sale of the property because the IRS looks at it

as a liquidation.

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Just like if you wanted to liquidate a USC corporation, you have to sell the property and

liquidate the proceeds.

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So it's the same concept.

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So what we play with is like how aggressive can we be with the sales price, the deemed

sales price of the property?

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Like if you purchased it for $300,000 two years ago and we want to make an election, we

can go back

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to January 125, you know, maybe we say it's worth $350,000.

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So you take a hit on a $50,000 gain for the benefit of maybe five years from now it's

worth $500,000 and you have a capital gain on that difference.

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Whereas if you just kept it like it was and sold it five years from now, you would have

had a $200,000 capital.

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$200,000 ordinary gain tax like wages as opposed to uh a $50,000 ordinary gain and

$150,000 capital gain.

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Yeah, if that makes sense, I know.

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yeah, so I mean, there's, but otherwise, I mean, I have some clients that, yeah, they've

owned the property since, you know, 1997 and it just is what it is.

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They're kind of stuck in that and we just have to manage it that way.

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be at the tech.

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Is the planning opportunity hold it till you die at that point then?

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Yeah, probably.

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Or, I mean, another option is if you sell it, sell the stock in the company and not the

property itself.

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You just have to find some.

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Uh, unadvised American or, somebody, somebody from another country.

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Cause like if you're Canadian or, you know, and you want to, it could be beneficial.

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It's not necessarily a negative thing for a Canadian.

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That's a resident in Costa Rica to purchase the stock of the company.

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They don't have the same citizenship based taxation we do.

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So it's not a problem for them.

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But yeah, if you're an American, you could sell the stock and you get the capital gain and

you're good.

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That's usually what I'm trying to.

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just limits your, your, basically can't sell to us people that have tax advisors is what

it comes down to.

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You

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my gosh, I mean, I think I have this conversation every single day of my life, but like

the handcuffs that we wear as American citizens abroad are, I mean, this is like a great

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example.

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It's like, we're going to have to do all this magical accounting that doesn't exist

anywhere else.

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you know, Costa Rica is not asking for this.

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It's just the U.S.

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to be compliant for these rules that just, that are not lining up at all.

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um Interesting.

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Costa, so it sounds like Costa Rica does not have high tax rates.

259

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It's not, it's nothing like Europe.

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Like what are roughly the tax rates?

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What are the considerations if you sell property, if when you go to sell the property

there?

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Well, mean, actually, Latin America does have pretty high tax rates in general.

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Yeah, mean, Costa Rica, I mean, the problem in Latin America in general is there's like

the rules and then there's what everybody does, right?

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And so you have to figure out, it's just a little more, I don't know if lax is the right

word, but I mean, but yes, the tax rates are high like on in corporate, so selling a

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company or selling a property.

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can be a 25 % tax rate in Costa Rica.

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There are concessions for like if it's your first property, they have concessions for

that.

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uh And their rules around like basis and things like that are just different.

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So you come up with very different calculations sometimes with your US gain and the gain

in Costa Rica.

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But...

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But I mean, yeah, in the U.S., that's part of the reason or a big part of the reason why

we do the flow through strategy, though, honestly, is because you're just going to pay the

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higher of the two rates in that scenario.

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So you're going to get a credit in the U.S.

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for anything you pay in Costa Rica.

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oh But I mean, one thing I've found in particular, Costa Rica in particular is more

expensive than probably any other Latin America.

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Mm-hmm.

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If you want to buy a rental property down here, mean, I'm not, you

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If you want to buy a rental property down here, don't do it expecting you're doing it to

make money on your rental property, because you're not going to.

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Honestly, it's very expensive.

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because the costs are too high and the rents are too low.

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It's like.

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Well, there's a lot of competition for rents.

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There's an Airbnb on every corner.

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And ah it's expensive to operate.

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The costs are expensive.

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You have VAT filings.

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So you have to have monthly filings for VAT for the Airbnb operation or whatever you're

doing.

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Right.

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Yeah, it's like the monthly sales tax here.

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then there's annual corporate tax filing.

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So I mean they also allow expenses and things like that against the property so that's why

a lot of times it's not really an income tax issue just because you're probably not making

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net profit when you factor in depreciation and things like that.

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uh But that's where some of the tax planning comes in too.

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That's like we look at that's the next step is looking at real estate professional rules

and uh and avoiding some of these like passive loss.

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situations or personal use situations that can limit your ability to use losses.

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ah So that's part of what we look at in kind of phase two.

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After we have everything set up correctly and you're filing the right forms on time, then

we try to figure out, how can we use or how can we basically, how can we save taxes on

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what you have going on?

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And I'm also curious, are there rules, because we were putting these all in these foreign

corporate, what are the rules around then actually using this property?

300

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If you've worked your whole life to buy this property, now we've put it into this foreign

entity and we have all these rules around it, are you then also limited about how long you

301

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can actually stay at your property every year?

302

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Well, and that's a big reason we don't want it in the foreign corporation, because if you

start staying in the corporation's house, it's their house, it's not your house.

303

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That's our house.

304

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So you have to start compensating yourself and paying yourself rent, and then it just gets

way too complicated.

305

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And honestly, nobody really does that.

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They just do it and...

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So that's another reason you don't want the foreign company because it makes that

complicated.

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But if it's a disregarded entity or a partnership, you don't have to pay yourself rent.

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But there are limitations on your ability to take losses if you spend too much time

personally on the property.

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And so you're limited to, it's a very confusing calculation, but it's basically, you're

limited to 14 days in the property yourself or 10 % of your total rental days.

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So like if you rent the place out for 300 days a year, you can spend 30 days in it.

312

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ah

313

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If you spend more time than that, it just means you can't take more losses than you had

income.

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And the additional losses get parked in this basket to be used later.

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So like a, a strategy I use sometimes with people is let's say, cause there's still the

passive activity loss rules, which means like, like if you have any rental property, it's

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considered passive and losses get stuck in a passive activity basket and you can use it

for later for income or if you sell the property.

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But if you fall under these real estate professional rules, which basically means 750

hours or more work like working related to the rental property, which is easier to hit

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than you think.

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The biggest threshold is that you can't spend more time on another job.

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So if you're full-time employee, realistically, there's no way you could justify spending

more time on your rental than your full-time job.

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So it only really works for like retired people or if one of the spouses maybe isn't

working.

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then you go the real estate professional route.

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So this is a little more complicated, but if it's a real estate professional, you can take

those, if you're, if one of you is a real estate professional, you can take the loss from

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the rental property and offset it against ordinary income, which is a huge benefit after

depreciation deductions and things like that.

325

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But if you spend too much time in the property, that 10 % or 14 day rule, it still gets

locked out.

326

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So what we can do is,

327

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Let's say let's say it gets locked out under that scenario for like three years and you

kind of built up these losses Well, maybe you have a big income year in one particular

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year.

329

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I advise my clients well go stay and go rent a property next door to your house and in

that year make sure we don't hit those personal you stays and you can unlock all of those

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losses in that year to offset against the bigger income event that you had for that

331

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But that's just an example of like one of the, there's limitations you have to work

around, but you know, with foresight and timing and things like that, you know, you can

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use it to your advantage.

333

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So there are things you can do, right.

334

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uh

335

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year.

336

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Planning is all year.

337

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Yeah, yeah.

338

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I totally get that.

339

00:27:14,931 --> 00:27:16,992

OK, we're just about at time.

340

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I really, you know, I've learned a lot today.

341

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Like, I don't know anything about Costa Rica or real estate.

342

00:27:22,685 --> 00:27:24,236

So I've already learned a lot.

343

00:27:24,236 --> 00:27:32,011

But I really want to, kind of as a last question, for anyone who's listening and

considering buying a property abroad, whether that's in Costa Rica or in France or

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wherever, what's kind of one piece of advice that you would want them to walk away with

today?

345

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Yeah, I would say don't assume setting up a non US company has the same impact as it would

setting up a US company.

346

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So if you set up a French LLC or an LLC in any other country, don't assume it's going to

have it's going to work the same as a US one because it almost always is not.

347

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So I mean, like always get get advice on the front end, not later.

348

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And if you can find somebody that can help you navigate that country as well, not

necessarily do it, but put you

349

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in touch with the right people so that you're not just mindlessly scrolling on Google for

qualified professionals to help you, you know, that's even better.

350

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But I would say, like always, get advice on the front end and don't assume things are

going to work the way they work in the US because they usually don't.

351

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Because they don't.

352

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absolutely do not.

353

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And every country is, every country works differently.

354

00:28:30,167 --> 00:28:39,731

And em yeah, and it all comes down to the advice for, like you said, the advice for France

is not the advice for Costa Rica, is not the advice for the UK, is not the advice for

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Mexico.

356

00:28:40,531 --> 00:28:42,532

It gets really, really specific.

357

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And to just kind of build on your point is for people, oftentimes people are coming and

they're spending a significant amount of money on these properties and they'll kind of

358

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breeze past the compliance considerations.

359

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And I always tell people, like, run a draft return.

360

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What would the impact, what is it going to look like?

361

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How is it going to be reported?

362

00:29:00,485 --> 00:29:02,427

How much is it going to cost every single year?

363

00:29:02,427 --> 00:29:10,118

Just so you're aware before you commit this giant pot of money to this dream.

364

00:29:10,118 --> 00:29:12,359

Like, you really want to think through it all the way.

365

00:29:12,359 --> 00:29:13,352

oh

366

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for sure.

367

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Visit the place for sure.

368

00:29:15,764 --> 00:29:20,037

know, visit different places in that country to make sure it's the right place for you.

369

00:29:20,037 --> 00:29:23,110

Like, for example, I don't own anything in Costa Rica personally.

370

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It's not, it's mainly because it's such a big country and I just don't feel like I know it

well enough to where I know where I would want to be, you know?

371

00:29:32,497 --> 00:29:34,038

But I mean, everybody's different.

372

00:29:34,038 --> 00:29:37,862

Sometimes you just land somewhere and you're like, this is the spot and I know it, you

know?

373

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And that's fine too.

374

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But...

375

00:29:39,872 --> 00:29:49,108

Anyway, yeah, get good advice and don't make assumptions and you're going to be in a lot

better position than some of the other people, I think.

376

00:29:49,454 --> 00:29:50,085

Absolutely.

377

00:29:50,085 --> 00:29:53,030

Alex, thank you so much for talking to us from the beach.

378

00:29:53,030 --> 00:29:54,623

I really appreciate you finding some time.

379

00:29:54,623 --> 00:29:56,301

Have a great day.

380

00:29:56,301 --> 00:29:57,183

Yeah, yeah, definitely.

381

00:29:57,183 --> 00:29:58,136

Thank you.