You’ll find that buying property in Ecuador is pretty straightforward. You won’t have to deal with a middleman. Nor are there title companies, and sellers and buyers are required to pay their own debts outside the sales process, like insurance, taxes, real estate commissions, etc. These issues are not brought to a closing, which is strictly between the buyer, seller, and the notary.
As always in a foreign country, be sure to engage a qualified local attorney, and he or she should be able to manage the transaction with few complications, avoiding potential pitfalls.
Once you have agreed on a price with the seller, have your attorney check the title. It is essential to have your attorney ensure the title is free and clear, without any liens or encumbrances.
If you are not purchasing immediately, your attorney will prepare a promesa de compraventa, or “promise to buy.” This binding, notarized document is signed by both buyer and seller, and will state the closing date of the purchase and the purchase price, as well as any penalties for default or other interim conditions of the sale. This is usually accompanied by a 10% down payment to the seller, which is typically non-refundable unless otherwise stipulated in the contract. If you are ready to purchase the property immediately, you can forgo the promesa de compraventa and move right to the compraventa (Step 3), which will mean savings in legal fees and notary charges.
Once you are ready to proceed with the purchase, both parties will sign (in the office of a notary) the purchase document, called a compraventa. Your attorney will have prepared this document in Spanish. To ensure that you are aware of all its terms, you should obtain a fully translated version. Moreover, if you are not fluent in Spanish, Ecuadorian law requires that a qualified translator represent you during the process. (This translator should not be your real estate agent.) If you claim fluency, most notaries will engage you in a brief conversation to assure themselves that you are. At this stage, you will pay the seller the agreed purchase price, or the outstanding balance if you’ve signed a prior agreement.
Your attorney will then arrange for the necessary tax payments and register your property at the land registry. The fee for this registration is minimal, and you’ll need two certified, notarized copies of your completed compraventa, as well as proof that any required fees and taxes have been paid. The registry will perform its own title verification, register the property, and return one registered (stamped) version to you for retention, keeping the other for its records. This is your final deed to the property. The process for registration and the fees required may vary slightly in different parts of Ecuador, but your local attorney will be familiar with these requirements. If you can’t be in Ecuador for any of the transactions that require your presence, you can give power of attorney to a friend or your lawyer at any notary office or Ecuadorian consulate.
For matters of real estate, foreigners and Ecuadorian natives are almost on an equal footing. There are restrictions on ownership of property that lies within 50 kilometers of the coast or an international border. Foreigners must request permission (which is routinely granted) to buy or live on such properties. Certain lands are marked as areas of national security by the government, and therefore cannot be purchased.
When looking to purchase a home in Ecuador, one particular danger area is the purchase of derechos y acciones, or rights and shares to a property, instead of cuerpo cierto, which is an outright sale. Derechos y acciones are the rights granted to heirs when a property owner dies without a will. This is quite common in Ecuador, and makes for an extremely risky purchase. Unless you can verify that all heirs are accounted for prior to the sale (and then complete the sale cuerpo cierto), you should avoid this type of purchase, because you may subsequently be open to claims from people who believe themselves heirs.
If you purchase property in Ecuador, we strongly recommend engaging the services of a real estate attorney who has worked with other foreign buyers. A title search can save you considerable grief down the road. Although many Ecuadorian real estate agents will tell you that this is not necessary, don’t believe them. Title insurance is available in Ecuador through First American Title Insurance Co. To guarantee ownership of your property, we strongly recommend that you take out a title insurance policy.
It is typical in Ecuador to pay a fee to the agents who are scouting properties on your behalf and showing you around. At first, this really went against the grain of how we at International Living are accustomed to doing business, but after a few years of struggling to find the best buys on inexpensive properties, it’s come through as the best method.
For starters, unlike a “normal” real estate company, many of these people are showing properties that they learned about by word of mouth or from the local papers. Often the owners of these less-expensive properties are not willing to list with an agent and won’t pay commissions. We’ve found that straying from the agencies has led us into a whole new market, where the buys have been much better.
What you get when you hire this type of contact is a personal agent who is working for you, rather than for the seller’s commission. For the fee that you may pay them, they’ll be at your beck and call, being your representative for any number of tasks. When a commission is paid by the seller, the daily fee is often refundable.
Of course, there is still a multitude of good real estate companies that work in the traditional fashion. Their commissions run between 3% and 5%, and are normally paid by the seller.
Regardless of who you use, you’ll get the same good service. Just be sure to clarify terms or fees up front.
As with many U.S. locations, taxes in Ecuador are based on the municipal value (assessed value), which tends to be about 2% to 2.5% of the purchase price (market value). This amount depends on the province and canton in which the property is located. (Ecuador is divided into 22 provinces, which are split into 205 cantons). Different levies apply for rural property and urban property. For example, tax records currently show a rural house costing $34,000 that has a municipal value of $250, while an urban home costing $170,000 has a value of $4,250.
There is a registration tax levied for recording the transfer of any real property. The amount charged is 1% of the municipal value shown in the deed, and is payable by the buyer.
VAT is levied on most goods and services at a standard rate of 12%. This does not apply on the transfer of real estate.
Residential property taxes are based on a percentage of the municipal value of the property, with city and rural properties being taxed at different rates. To use the examples above, the $170,000 house is currently on the city of Cuenca’s tax roles for an annual property tax of $110. The $34,000 rural property mentioned is on Loja’s roles for $7.50.
Homeowners over the age of 65 pay less than half of these rates. Commercial property tax is calculated according to a different schedule.
Rental income derived in Ecuador is subject to regular income tax. This is charged at progressive rates, ranging from 0% to 25%.
Any gain on the sale of property is subject to capital gains tax, up to a maximum of 25% of the net gain in municipal value. For example, if you sold the $170,000 house mentioned above (municipal value $4,250) for $270,000 (estimated municipal value of $6,250), you’d pay tax on the difference in municipal value of $2,000, which would result in a tax of just over $500 on the $100,000 actual gain.
Inheritance tax is levied on a graduated scale at the regular income tax rate of between 5% and 25%. There is no gift tax, unless the gift requires a legal transfer of property. For example, if you give someone half your house, and go to the city to put it in his name, the recipient will have to pay tax on his portion of the property’s municipal value. Cash or other property gifts are not taxed.
Alcabalas tax is charged on the transfer of real property at the time of registry. The amount levied depends on the value of the property, and ranges from as little as 10%, up to a maximum of 38% of the municipal value. There is an additional tax charged, which is about 1% of the amount paid for alcabalas tax. Water tax is sometimes collected, and is again 1% of alcabalas tax.
The former financial transactions tax (FTT) levied on many banking transactions has been abolished.