New Ecuador “Capital Gains Tax” Explained

The Ecuadorian government just passed a new law titled “Tax on Speculation on the Value of Land” (“El Impuesto a la Especulación sobre el Valor de las Tierras”) which takes effect now in the new year (2017).  This law has been referred to as “The New Capital Gains Tax” or the “Ley de Plusvalia”.  The concept behind the creation of this law is to prevent a future speculative bubble in real estate prices (which many of us from the US can attest might be useful).

For retirees who plan to live here for 3+ years, investors who plan to own and rent over a 3+ year period, or for those who buy land and build a home, this new law will generally save them quite a bit of money as fairly substantial gains can be realized tax-free.  Even those purchasing relatively inexpensive lots in the $39,000 range and flipping the land in less than a year can receive up to a 22% return on investment before they would have to pay a single cent of Capital Gains or Appreciation Tax under the new law.

For those planning to buy large pieces of land to flip over a short time period without making improvements… this tax is meant to make you think twice and advice from a lawyer on how best to structure your purchase and sale is recommended.  Creative short term investors will still find solutions such as buying and selling “purchase options” on a property, transferring their rights via a “promise of sale agreement”, or by creating development partnerships with project developers to be paid upon completion and final sale of the developed property.

Whether or not this new law will actually stick after the presidential elections in February remains to be seen but, not surprisingly, various interpretations of the law are being spun by different parties for their own interests.  This is especially the case as election day nears in Ecuador.

The purpose of this post is to provide you with a detailed, cut and dry summary taken directly from the government website and includes a translation of their sample calculation.  This is the scoop on the new tax law minus the sensationalism.

capital-gains

The “sensational talking point” of the new law is that sellers will be taxed 75% on their “illegitimate” capital gains. What the whaaat?!?  That was our initial response as well. But let’s take a closer look.

If you purchased your Ecuador property prior to 2017 when the law goes into effect, this new capital gains law will not apply to you when you sell.

For properties purchased in 2017 and beyond (assuming the law remains in place), here are some standards used for determining the basis for the new capital gains tax:

  1. There is a standard allowance of $8,784 of profit that is not taxable on any purchase and sale over any time frame.
  2. There is an allowance of 7.52% compounding annual appreciation that is not taxable and that appreciates on the total of your purchase value PLUS improvements.

Let’s take a look at the example provided by the government website (see our translated image below). For this example, a property is purchased for $85,000 in 2017 and sold for $135,000 in 2020.  Property tax (“Plusvalia”) due at the time of sale would only be $1,437.72, not 75% of the total difference in purchase and sale price. In fact, the capital gains tax for this example is actually less expensive than what it would have been based on the previous law ($2,975 versus $1,437).

Let’s find out the specifics for how this new capital gains tax gets calculated.

  • Purchase Price in 2017 of $85,000
  • Sum of renovations, improvement costs, etc. = $15,000
  • Initial investment ($100,000) plus interest compounded at 7.25% over 3 years = $124,299
  • Plus a set profit allowance of $8,784 brings us to a total NON-TAXABLE property value of $133,183.
  • Sales price in 2020 is $135,000
  • Difference between the sales price of $135,000 minus the non-taxable property value of $133,183 is $1,917.
  • 75% of $1,917 is $1,437.72.

plusvalia

The government provides a capital gains calculator here. It should be noted that the property value used for calculating capital gains is the amount shown on the property title (“escritura”).  In many cases, the property value on the title is the municipal value, which tends to be significantly lower than the actual purchase or sale price.  It’s worth discussing options with your accountant or lawyer prior to sale to make sure that you are making the best decision for your given situation.

So will this new law affect foreign investments in Ecuador?

capital-gain

The new law will discourage those looking to do relatively large, short-term (less than 1 year) flips with no investment in improvements and who seek to earn significantly more than the standard tax-free profit allowance of $8,784.

The new law will actually tend to benefit most others, in particular, those who own their property for any length of time.  Property value plus money spent on improvements can appreciate at a rate of 7.52%, compounded annually, tax-free.  The accumulated compounded appreciation is above and beyond the automatic $8,784 of allowable tax-free appreciation.  Based on the 7.52% compounding interest rate, the property can double in value over 10 years and the owner would pay ZERO in capital gains tax or “Plusvalia” upon sale.

The new law also does not apply to the first sale of a property. In other words,  those who build their own homes (either as individuals or companies), or develop their properties will be completely exempt from paying capital gains tax when they sell their homes.  That means that if you purchase a beachfront lot at a great price and build a home, you will pay zero capital gains tax upon the sale of that property.

In addition, there are no capital gains collected on the transfer of a property as a result of an inheritance, prize winnings, or donations. There is also a statement in the new law that foreign institutions and international organizations are exempt from paying capital gains, something warranting further investigation.

Overall, the law allows for solid tax-free gains via property appreciation and should help to limit the speculative appreciation of prices.  While this new law may temper gains from short-term, high-value property flips, it should also prevent the formation of a real estate bubble that would leave buyers underwater.

Ecuador’s Halftime Super Bowl Ad

Ecuador saw a 14% increase in international tourism between the years 2013 and 2014 and are hedging their bets that an expensive ad during the Super Bowl on February 1 will have big payoffs for even greater numbers of visitors in 2015.

Ecuador is the first foreign country to buy an advertising spot during the Super Bowl to promote tourism. According to Ecuador’s Ministry of Tourism, the 30 second Super Bowl ad that boasts, “All You Need is Ecuador,” cost $3.8 million (earlier news stories reporting lower amounts did not include taxes).

Ecuador's Super Bowl commercial boasts that "All You Need is Ecuador"

Ecuador’s ambitious Super Bowl halftime commercial boasts that “All You Need is Ecuador”

 

The Super Bowl advertisement will be featured during half time and will be aired in 13 major markets, including New York, Boston, Philadelphia, Chicago, Seattle, L.A., San Francisco, Dallas, Houston, Denver, Atlanta and Miami. There will be an additional 8 commercials that will run during NBC’s “Today Show” leading up to the Super Bowl.

The focus of this bold campaign is to highlight Ecuador’s four unique tourist destinations: Galapagos, Coast, Andes and Amazon. Truly, this small country has a lot to be proud of!

The "All You Need is Ecuador" campaign highlights

The “All You Need is Ecuador” commercial is to be aired during the Super Bowl and highlights Ecuador’s four distinct regions

 

Inspired by The Beatles’ “All You Need is Love” tune, the first phase of the “All You Need is Ecuador” campaign was launched in April 2014 and was featured in 19 major cities throughout the world including NYC, Paris, Madrid, London, Berlin, and Amsterdam to name a few. The $19 million campaign lasted 10 days and consisted of displaying one giant letter in a major plaza of each participating city. Together the letters formed the words “All You Need is Ecuador.”  Each letter was covered with iconic images that show off Ecuador’s tremendous beauty and diversity, including giant tortoises, rare birds and orchids, colonial buildings and cathedrals, and spectacular natural landscapes.

Unique campaign strategy

The Ministry of Tourism’s unique campaign of placing giant letters from their slogan in key cities around the world.

 

In conjunction with the theme of “All You Need is Ecuador,” the government of Ecuador has adopted the slogan of Ecuador: Ama la Vida which can now be seen on buses, sides of government buildings, and even Ecuadorian product packaging. This upbeat reference to savoring life is reminiscent to me of Costa Rica’s famous “Pura Vida!

Ecuador's new slogan

Ecuador’s new upbeat slogan

 

While the first phase of the “All You Need” campaign focused on highlighting the richness and diversity that Ecuador has to offer, the airing of Ecuador’s Super Bowl commercial presents the second phase which aims to emphasize how all of these incredible experiences are concentrated into one tiny country. “One Country. Like Nowhere Else, All in One Place, So Close” is the motto.

Only the size of the state of Nevada, Ecuador offers much to explore.

Merely the size of the U.S. state of Nevada, Ecuador is a rich play land ready for exploration. A 30-minute domestic flight west from the snow capped Andean volcanoes transports you to the beautiful, warm Pacific coast. Thirty minutes to the east and you’ve arrived to one of the most biodiverse rainforests on the globe. Where else in the world is that possible?

 

Ecuador’s government increasingly recognizes the economic potential of tourism saying that it is the future of Ecuador. Last year, approximately $600 million dollars was generated by the tourist sector. The goal of Ecuador’s Super Bowl ad is to make the estimated 120 million spectators fall in love with this little known place and come visit.  Of the 1.5+ million tourists to Ecuador in 2014, twenty-one percent visited from the U.S. Officials say that  a 1% increase in U.S. visitors to Ecuador in 2015 will cover the money invested on the Super Bowl ad.

To wrap up this post, below is a playlist of eight promotional videos from the Ministry of Tourism that are definitely worth the watch.

 

It is no doubt an exciting time to be here in Ecuador watching a myriad of transformations taking place.  When we bought a house on the coast in 2006 we never could have imagined how quickly Ecuador would become a global destination for both tourists and expats alike.

 

**UPDATE (Feb 5): Here is the final advertisement that was run at halftime.

 

VIDEO – Intro to obtaining your Ecuador resident visa by Dr. Miguel Andrade

We recently sat down with Dr. Miguel Andrade to discuss our options and the services he offers for obtaining a resident visa in Ecuador.  He was nice enough to let us record his explanation so that we can share it with you.  Please take a look at his video and his website http://www.lawyerecuador.com and http://www.baclaw.ec to learn more about his law firm.

Smaller than Nevada but that’s a good thing

Ecuador is just slightly smaller than the state of Nevada in the US.

This geographic factoid becomes increasingly difficult to believe once you begin to explore the incredible diversity that Ecuador has to offer.
The spectacular Andes mountains run north to south and roughly divide the country into thirds.
In the central Andean region, you will observe towering volcanoes (many still active) and snow and glacier-covered peaks. In the surrounding valleys and foothills are attractive colonial cities, colorful indigenous markets, high elevation lakes and hot springs, and historic haciendas.
On a clear day in Quito, ride up 3,600 feet to a final elevation of over 13,000 ft on the “teleferico” (gondola). From there you will see the vast extent of the highlands, including three very impressive volcanoes (Antisana 18,700 ft; Cayambe 18,725; and Cotopaxi 19,347 ft). If you are an outdoor enthusiast, there are endless activities to keep you busy!

Tom approaching the summit of Cotopaxi
Lynn biking in the Andean foothills
Donkey we befriended along the bike ride
In the eastern third of the country, the “Oriente,” you find yourself in the headwaters of the Amazon Basin. This is the land of cloudforests and rainforests teeming with waterfalls and abundant life including jaguar, monkeys, tapir, and dazzling tropical birds. Tom and I actually saw 8 species of monkey in 2 days near Ecuador’s border with Peru! Here in these remote areas exist an impressive diversity of indigenous groups, many of whom still maintain their traditional ways of life. There are jungle lodges to visit, white-water rafting trips to take, and more hot springs to soak in.

El Jardin in Puyo

Rafting on the upper Pastaza
Rainforest at Tashapi (near Puyo)
Then of course, heading west you will drop down to the Pacific Ocean. We enjoy travel to the Andes and the Oriente but for living purposes, we absolutely love the coast!

Tom’s mom, JoAnn, enjoying a book and a good “hammocking” session at our house in Crucita

Tom, Eduardo, Paola and Red (who purchased a beachfront lot from us last March) making sushi rolls from fresh tuna
The beach in Crucita where we live
The icing on Ecuador’s cake of course is the Galapagos Islands, 300 miles off the coast.
Young sea lion
Blue-footed boobie with baby
While Ecuador is not a big country, we hope you’re beginning to recognize that there are so many amazing places to visit and explore!
And being small definitely has its benefits! A flight from Quito to Manta is a mere 30 minutes!
So imagine leaving your home on a cold wintry morning in the US, landing in Quito around 4pm and then arriving to the coast in time to enjoy your seafood dinner at sunset! Yes, this can and does happen! We invite you to give it try!