Don’t Be The Last Guy Buying In Ecuador
Years ago I bought a lot in a small development on Santa Cruz Island in the Galapagos. This wasn’t a commonplace real estate purchase. Only 3% of the land in the Galapagos can be owned privately. The rest is national park or preserve. And that 3% that can be owned by individuals comes with restrictions. I had to partner with a local Galapagan (that the developer found for me).
I’m in the process now of selling that lot, and the process is reminding me of some of the quirks associated with buying property in Ecuador.
When I bought my Galapagos lot, others I knew were buying into the same development. One other buyer wrote to ask about the price listed in the title document she had been sent to sign. Lots were selling for US$11,000, but the title in this case was being registered with a price of US$500. The buyer was concerned something was wrong with the deal.
No, nothing was wrong. Big differences between sales prices and title registration prices are the norm in Ecuador. Transfer and capital gains taxes are based on the registered price. Therefore, for decades, sellers have under-recorded sales prices; they register prices as low as they can get away with, as evidenced by the registered price of US$500 for a US$11,000 piece of land.
Ecuador isn’t the only country where this happens, but it is the only country I know where the process continues as aggressively as it does. In most other countries where this practice has been common, authorities have or are now in the process of cracking down. This creates a risk for the buyer in any of these countries. You don’t want to be the last guy buying before the government cracks down hard. If that happens, when you eventually sell, you’ll have no choice but to record the actual full sales price on the registration, meaning you could end up paying capital gains taxes on maybe way more gains than you’ve actually realized.
I’ve always recommended against going along with this practice, because I’ve always figured it was a matter of time before countries where it’s practiced decided to put an end to it. This has not happened in Ecuador yet. Still, I offer the same advice:
If you buy property in this country, insist on pushing up the registered value up as much as possible. You want the registered price to be as close to the actual sales price as you can manage without killing the deal. Remember, the higher the price you register, the greater the capital gains tax burden for the seller…thus the conflict. Depending on how long you intend to hold your purchase, it could even be worth offering to pay some of the seller’s capital gains tax for him.
I did this when purchasing my apartment in Medellin, Colombia. It’s been common practice in Colombia, too, to under-register property sales prices. In Colombia, the practice isn’t as aggressive as in Ecuador, but in Colombia authorities have had enough and are actively working to put a halt to it. I realized the winds were changing (thanks to my attorney), so, when I made my purchase four years ago, I negotiated with the seller to be able to register very close to the full sales price.
Back to my lot in the Galapagos. I’ve owned this for several years but have never paid the annual property tax. This wasn’t a pre-meditated plan. I just was never able to figure out how to pay. Probably there is a municipality office on Santa Cruz where the bills are paid in person…but I’ve never been to see my lot.
So, when a buyer presented himself, I included the back taxes in the sales price…along with all other costs associated with the purchase. In other words, I’m receiving a net price and everything else is for the buyer’s account.
In Ecuador, everything is negotiable.
Lief Simon
Continue reading: The Rising Cost Of Living In Cuenca, Ecuador
