A Legal Guide to Capital Gains Tax in Ecuadorian Real Estate: Who Pays and How to Protect Your Title

As a Certified Ecuadorian Real Estate Attorney specializing in land acquisitions, my primary role is to secure your title and mitigate financial risk. A recurring and critical point of failure in transactions, especially for foreign buyers, is the mishandling of the seller's capital gains tax (Impuesto a la Renta por Ganancia de Capital). An ostensibly simple request from a seller to have you, the buyer, "handle the tax" can spiral into an insecure title and significant financial liability.

This guide provides the definitive legal and procedural framework for managing this tax, moving beyond generic advice to give you the actionable, experience-based details necessary to protect your investment.

The Unmistakable Legal Framework: The Seller's Tax Obligation

In Ecuador, the law is unequivocal: the individual or entity realizing a profit from the sale of a property is liable for the resulting income tax. This is not a transactional cost to be divided; it is the seller's personal income tax liability.

Key Legal Basis:

• Ley de Régimen Tributario Interno (LRTI): This is Ecuador's primary tax law. It establishes that capital gains from the sale of real estate are considered taxable income for the seller.
• Código Orgánico de Organización Territorial (COOTAD): This law governs municipalities and grants them the authority to levy their own, separate tax on property value increases, known as the Impuesto a la Plusvalía. Crucially, both the national (SRI) and municipal (Municipio) capital gains taxes must be settled by the seller for the title to be transferred.

The national capital gains tax is calculated on the net profit: the sale price minus the original registered purchase price, plus the value of any legally documented improvements. The tax is calculated on a progressive scale. However, sellers often incorrectly assume a flat rate, leading to miscalculations.

The Common Pitfall: "The Seller Asks You to Pay"

It is a frequent occurrence for sellers to ask the buyer to pay them the full purchase price and then "take care of" the tax payments. Their motivations range from a desire for simplicity to, in some cases, an attempt to obscure the transaction from tax authorities.

Accepting this proposal is a grave mistake that exposes you to severe risks:

1. Incomplete Title Registration: A notary public will not execute the final public deed (Escritura Pública de Compraventa) without proof that the seller's taxes have been paid. This proof comes in the form of official payment receipts from the SRI (Servicio de Rentas Internas) and the local Municipal Treasury. If you give the tax money to the seller and they fail to pay, the entire transaction halts, leaving your funds in limbo and the property title in the seller's name.
2. Assuming Seller's Liability: If the seller under-calculates or fails to pay the tax, the SRI can place a lien (embargo) on the property in the future—even after it's in your name. You would then be forced to pay the seller's delinquent taxes, plus fines and interest, to clear your own title.
3. Loss of Financial Control: You lose all control and transparency. You have no way to verify the correct tax amount or confirm its actual payment to the government until it is too late.

The Professional Standard: The Correct Legal Procedure

Protecting your investment requires a strict, non-negotiable process. The seller's capital gains tax must be handled transparently and verified before you release the final payment and sign the public deed.

Here is the secure, attorney-supervised procedure:

1. Contractual Stipulation: The initial purchase agreement (Promesa de Compraventa) must explicitly state that the seller is solely responsible for the calculation and payment of all national and municipal capital gains taxes and that proof of said payments is a condition precedent to closing. A Promesa is a binding promise to transact; it does not transfer ownership. The final transfer only occurs with the registered Escritura Pública.

2. Accurate Tax Calculation: The seller, or their accountant, must calculate the exact tax liability. Your legal team should review this calculation for accuracy against the property's acquisition records.

3. The Withholding Mechanism (Agente de Retención): This is the gold-standard risk mitigation strategy and what my office implements for our clients. Instead of entrusting the seller with the tax funds, you, the buyer, become a "Withholding Agent" (Agente de Retención).

   • At the closing, the calculated tax amount is withheld directly from the purchase price paid to the seller.
   • These withheld funds are then paid by you (or your attorney on your behalf) directly to the SRI and the Municipality.
   • This action legally satisfies the seller's tax obligation and provides you with the official receipts required by the notary. It completely eliminates the risk of the seller failing to pay.

4. Notary Verification: At the signing of the Escritura Pública, we present the notary with the official payment receipts for the seller's taxes. The notary verifies these documents, along with other clearances, before proceeding.

5. Final Registration: With all taxes settled and documented, the Escritura Pública is signed and can then be submitted to the cantonal Property Registry (Registro de la Propiedad) for final inscription, officially transferring legal title to you.

Hyper-Specific Due Diligence: The Non-Negotiable Checklist

An expert-led due diligence process goes far beyond a simple review. We secure and scrutinize specific official documents to ensure a clean title transfer.

• Secure a Certificado de Gravámenes y Prohibiciones: This is the most critical document. We obtain an updated certificate (no more than 30 days old) directly from the Registro de la Propiedad of the specific canton (e.g., Cantón Manta). This document certifies that the property is free of mortgages (hipotecas), liens (embargos), court-ordered sales prohibitions (prohibiciones de enajenar), and reveals any shared ownership issues (proindiviso), which can severely complicate a sale.
• Verify Municipal Tax Compliance: We obtain a Certificado de no Adeudar al Municipio for the property. This confirms that all annual property taxes (impuestos prediales) are paid to date. A notary will not proceed without this clearance.
• Cross-Reference the Clave Catastral: We verify that the property's unique tax ID number (clave catastral) on the municipal tax certificate matches the number on the property registry documents and the seller's prior deed. Discrepancies are a major red flag for boundary issues or fraud and must be rectified before closing.
• For Rural Properties, Scrutinize Water Rights: If acquiring rural land for agriculture, a water use permit (Autorización de Uso y Aprovechamiento del Agua) from the national water authority, SENAGUA, is essential. We verify the existence and status of this permit. The current process involves submitting a request through their online portal, followed by a field inspection by a SENAGUA technician to confirm the water source (fuente) and flow rate (caudal). Without this, you may own the land but have no legal right to use the water on it.

⚠️ Title Risk Warning: The Legal Quagmire of an Unregistered Deed

The most catastrophic error a buyer can make is to pay the full purchase price to the seller in exchange for a signed Escritura Pública before the seller's tax obligations have been proven and paid. If the taxes are not paid, the Registro de la Propiedad will reject the registration of your deed.

Legally, you are left in a perilous position: you have paid for the property, but you are not the legal owner. Your Escritura Pública is an unperfected instrument. Your only recourse is to sue the seller for breach of contract, a costly and time-consuming process. The property remains legally in the seller's name, vulnerable to their creditors, until you can force the tax payment and complete the registration.

Conclusion: Professional Oversight is Not a Discretionary Expense

Navigating an Ecuadorian real estate transaction is not a DIY endeavor. The legal and financial integrity of your purchase hinges on a rigorous, professionally managed process. The seller's capital gains tax is a clear liability that must be handled with precision. By engaging qualified legal counsel to enforce the correct procedures, such as acting as a withholding agent and conducting exhaustive due diligence, you transform a potentially high-risk transaction into a secure, long-term investment.

Ensure your investment is protected. Schedule a confidential due diligence consultation with a licensed Ecuadorian Real Estate Attorney to secure your property purchase with absolute legal certainty.