The single biggest tax decision most families make before moving to Costa Rica is not about Costa Rica at all. It is what to do with the US house.
Sell it before you go. Rent it out. Leave it empty and visit twice a year. Each choice triggers a different tax outcome, a different state residency exposure, and a different month-by-month cash drain. Get the sequence wrong and you can lose a $500,000 federal tax exclusion that took you fifteen years to earn.
The core insight
The IRS gives you a window, and the window closes faster than people realize.
If you have owned and used the house as your primary residence for at least 2 of the last 5 years, Section 121 lets a married couple exclude up to $500,000 of capital gain when you sell (single filers get $250,000). That is per the IRS, current as of 2026. Source: IRS Topic 701. Tax laws may change.
The trap: that 2-of-5 clock keeps ticking after you leave. If you rent the house out for 3 years and 1 day after moving to Costa Rica, you no longer meet the use test. The exclusion is gone. On a house with $400,000 of unrealized gain, that is roughly $60,000 to $95,000 in federal capital gains tax that you did not owe a few months earlier.
So before you list, rent, or hold, you need to know which clock you are racing.
Option one: sell before you go
Cleanest. Usually the highest after-tax outcome for families with significant home equity.
Mechanics that actually matter:
- Close before your residency moves so the state still treats you as a resident at the time of sale (relevant if your state has no income tax on capital gains, e.g., Florida or Texas, in which case selling before the move is neutral on state tax).
- Federal capital gains exclusion is $500,000 married / $250,000 single under Section 121 (IRS Topic 701).
- Any gain above the exclusion is taxed at the long-term capital gains rate, currently 0%, 15%, or 20% depending on income, plus the 3.8% Net Investment Income Tax for higher earners (IRS Topic 559). Tax laws may change.
- State capital gains tax follows your domicile at the time of sale. California, for example, taxes capital gains as ordinary income up to 13.3%. If you sell while still domiciled in California, that bite is real.
The case for selling: you collapse the asset into investable cash, you exit the carrying costs, and you remove the state's strongest argument that you are still a resident. Most relocating families I have worked with end up here.
Option two: rent it out
Tempting. Cash flow during the move. Optionality to return. A hedge against the "what if Costa Rica doesn't work" question.
What people miss:
You start a 3-year shot clock on your Section 121 exclusion. Once the house is not your primary residence for 3 of the last 5 years, the exclusion is gone. The clock does not stop when you "decide" you are still going to come back. It tracks actual use.
Rental income on a US property is US-source income regardless of where you live. You owe US tax on it, you owe state tax on it if the property is in a state with income tax, and you cannot exclude it under the Foreign Earned Income Exclusion. The FEIE is for foreign earned income only (IRS Pub 54). Rental income from a US house is neither earned nor foreign-source.
Depreciation recapture is its own line item. When you eventually sell, the depreciation you took (or were required to take) while it was a rental gets recaptured at up to 25% (IRS Pub 544). On a house depreciated for 5 years at $12,000 per year, that is $60,000 of recapture before any capital gain math even begins.
Operationally, you need a property manager. From Costa Rica, you cannot fix a broken HVAC on a Thursday at 4pm. A property manager runs 8-10% of gross rent in most markets, which often turns a "cash flow positive" rental into break-even.
Renting can still be the right answer. It is rarely the right answer for the reasons people initially choose it.
Option three: leave it empty
The most common path among Costa Rica relocators in the first year. Usually because they want a US base for visits and have not committed to staying.
The honest math:
- You are paying property tax, insurance, utilities at a baseline, HOA if applicable, and lawn or snow service. On a $600,000 home, that runs $15,000 to $30,000 per year of pure outflow with no offsetting income.
- Insurance gets complicated. Most homeowner's policies have a "vacancy clause" that voids coverage if the house sits empty more than 30 to 60 consecutive days. You may need a vacant-home policy, which often costs more.
- You are still federally on the hook for Section 121's clock. The use test requires you to live there. Empty does not count as use.
- You retain your strongest state residency tether without any of the offsetting income. Several aggressive states (New York, California, Massachusetts) will use a kept-but-empty primary home as one factor in a residency audit (state Department of Revenue rules vary; check your specific state).
If you are using the house once or twice a year and you have decided Costa Rica is permanent, every year you delay selling costs you money and increases state audit risk.
The state residency trap
Federal tax follows your US citizenship. State tax follows your domicile.
If you keep the US house, do not change your driver's license, leave your voter registration, and continue to use the address as your mailing address, your old state has a credible argument that your domicile never moved. Some states (California, New York, New Mexico, Virginia) are well known for aggressive residency audits when high earners move abroad without cleanly cutting ties.
Selling the house is the single cleanest break. Renting it is a weaker break but still a break (you are no longer using it). Keeping it empty for "visits" is the weakest break.
The math is not always about taxes. It is sometimes about how defensible your move looks if your former state audits you in year three.
Who selling works for
- Families whose realized gain is at or under the Section 121 exclusion ($500,000 married / $250,000 single). You walk away with no federal capital gains tax.
- Families committed to Costa Rica long-term. The first year is often the year you are most likely to second-guess. If you wait until you are sure, the 2-of-5 window closes.
- High earners moving from California, New York, or other high-tax states. The state residency argument matters as much as the federal math.
Who renting works for
- Families using the rental as a 2 to 3 year "trial separation" from the house, with a real plan to either sell in year 2 or move back in.
- Families with a property already structured as an investment (duplex, second home, multi-unit). You already lost the Section 121 exclusion when you stopped using it as your primary residence, so the math is different.
- Families in low or no income tax states (Florida, Texas, Tennessee) where the state side of the equation is neutral.
Who holding empty works for
Almost no one for more than 6 to 12 months. The cash drain is real, the insurance gets complicated, and the state residency exposure compounds. The honest version of "I want to keep it for visits" usually turns into "I am paying $25,000 a year for the option to second-guess my decision."
If you want a US base for visits, renting a furnished short-term place in your old town for the 4 weeks a year you visit is dramatically cheaper than holding a $600,000 empty house.
Common mistakes
- Listing the house after the move. The Section 121 clock starts the day you stop using it as your primary residence. List before you leave, or have a clear plan to close within the 3-year window.
- Treating rental income as foreign income. It is US-source, period. The FEIE does not apply (IRS Pub 54).
- Forgetting depreciation recapture in the eventual sale math. If you rented the property at any point, you took depreciation (or were required to), and it comes back at up to 25%.
- Keeping the house empty for "flexibility" while domiciled in a high-tax state. You are paying carrying costs and increasing state audit risk for the same dollars.
- Selling under a 1031 like-kind exchange thinking it defers everything. Section 1031 only applies to investment property, and personal residences do not qualify (IRS Pub 544). A few advisors get this wrong.
What to do next
If you are within 12 months of moving, the US house decision is one of the three or four highest-dollar choices on your relocation timeline. The right answer depends on your gain, your state, your timeline, and what you want the next 5 years to look like.
If you want to walk through the specific numbers for your situation, the Cross-Border Blueprint is built for exactly this. Or take the readiness quiz at /quiz and we can talk about whether the math points to sell, rent, or hold for your family.
The window on Section 121 is real. So is the cost of holding empty. The cheapest decisions are usually the ones made before the move, not after.
This post is educational and does not constitute personalized investment, tax, or legal advice. Vitality Wealth Planning, LLC is a registered investment adviser. Tax laws change; verify current rules with a qualified professional.