On December 30, 2016 a new capital gains law came into effect in Ecuador.
This law, which has been widely opposed by all commerce, industry and construction chambers; by top economists and analysts and by many people across the board, establishes a whopping 75% fixed rate on the “Extraordinary Gains” of real estate transactions.
The tax is to be paid upon the transfer of any type of real estate, whether urban or not. As said, the law establishes a tax of 75% upon the “Extraordinary Gains” in real estate sales. The “Ordinary Gains” will not be taxed.
To calculate the Ordinary Gains you need to create a basis that starts with the purchase price (as established on the deed). Then all improvements that have a material effect in the sales price and which can be duly supported are added. Improvements that exceed 30% of the municipal assessment must be reported to the Municipality (so the assessment can be increased) and if any improvements contribution tax has already been paid, this should be added in as part of the basis. Deduct the basis from the sales price and multiply this basis by the Adjustment Factor which is one percent above the Passive Referential Rate for deposits of 361 days and over, issued by the Central Bank of Ecuador. Such rate is at 7.53% right now.
This means that the Ordinary Gains above the basis that will not be taxed in the transfer of real estate will be those of up to 8.53% per year.
For those dedicated to the development business, all due construction costs can be deducted.
The 75% tax on “extraordinary gains” will not be paid in case of donations, inheritance, raffles or state sponsored sales or auctions.
One more break is that the “extraordinary gains” up to 24 minimum wages (currently $366), or $8,784 at this time, are not subject to the 75% tax. All profit above the basis, the 8.53% per annum and the $8,784 is subject to 75% tax.
The payment of this tax must be made before the deed is issued.
It is important to note that the new capital gains tax law applies to the second transfer of properties from the time of its issuance. All next transfers of properties acquired before the law came in effect will pay under the old system, which establishes a tax of 10% of the capital gains, and which goes down each year until the 20th year where it pays zero.
For urban land with no construction, the new law will enter effect on December 31, 2021 in case no previous sales have been made. So the second sale rule will not apply after this date.
Finally, those who willingly update the Municipal assessment will pay property taxes with the previous assessment for 2 years.
I believe this law is absurd, uncalled for and eminently negative. Pretty much every single candidate to the Presidency of Ecuador, except the candidate of the “Incumbent Party” Lenin Moreno, the former Vice President under Correa, has expressed that they will act to take down this law if they become elected.
Some analysts believe, as I do, that President Correa presented this absurd law to our National Assembly, now that we have Presidential elections a month and a half away, for political reasons.
He had been championing the law as a great tool to stifle speculation with land. He says big money is soaking up properties, at times with the benefit of insider information, and that this law will allow for more affordable properties across the board, including for developer’s themselves.
Of course, these explanations make no sense. They are political demagoguery at its worst or an utter failure to understand the dynamics of free economics and enterprise.
With the presentation and approval of this law Correa, who is on his way out, but wants to have his former Vice-President elected, perhaps wants:
– To try and generate a distraction via heated debate from the ever-increasing alarms of corruption that have been plaguing his regime and are costing the incumbent party points in the polls.
– To send a wink to the many less well off, who have become disenfranchised with his Government, trying to play some sort of Robin Hood.
– To leave a lasting message that he is truly a very left socialist (a la 60s and 70s).
These types of absurd laws hinder investment, hurt sellers and buyers too, limit development and most always don’t stand the test of time. I believe this law will be greatly moderated or thrown to the trash altogether.
While many real estate transactions will pay zero capital gains tax in the future (when under the former law they must have had to pay) it is rather insufferable, to put it some way, that the government would seek to put a 75% tax on Extraordinary Gains, which are one of the factors that actually drive entrepreneurship, savings, risk taking and the economy in general.
Notwithstanding this new capital gains tax law, which in all likelihood will be greatly changed or thrown out in the future, Ecuador remains one of the best places to buy real estate. We have excellent values in real estate and in truly remarkable locations. The economic crisis we are going through has created a buyer’s market where exceptional opportunities can be had by those who seek them.
If you have any questions as to how this new law may affect you (whether you have a property on Ecuador or plan to buy one as a home and or investment) go ahead, send me an email to email@example.com
Dr. Andres Cordova