Understanding 'Plusvalía' & Capital Gains: Ecuador's Property Sale Taxes for Expats

When you sell a property for more than you acquired it for, you are dealing with two separate government bodies and two separate tax obligations:

Municipal Plusvalía Tax: Paid to the local municipality (the GAD Municipal) where the property is located. This is a transactional tax that must be paid to complete the sale.
Capital Gains Tax (Ganancia de Capital): Declared and paid to the national tax authority, the Servicio de Rentas Internas (SRI), as part of your annual income tax return.

Failing to distinguish between these two can lead to significant penalties and complications. Let's examine each in detail.

1. The Municipal 'Plusvalía' Tax: The Gatekeeper to Your Sale

This is the tax most people refer to when they say "Plusvalía." It is governed by the Código Orgánico de Organización Territorial, Autonomía y Descentralización (COOTAD). The core purpose of this tax is for the municipality to capture a share of the "extraordinary" increase in property value that results from public works (new roads, parks, utility infrastructure, etc.).

How is Municipal Plusvalía Calculated?

The legal framework is laid out in Artículo 556 of the COOTAD. The calculation is as follows:

Taxable Base: (Sale Price) - (Adjusted Acquisition Cost) - (5% Annual Deduction for Inflation)
Tax Rate: 10% of the calculated taxable base.

Key Components & Hyper-Specific Details:

Adjusted Acquisition Cost: This is your original purchase price plus the proven cost of any significant improvements (mejoras) you made. Vague claims of "renovations" are insufficient; you must have official invoices (facturas) and, for major works like additions, the corresponding municipal construction permits (permisos de construcción).
5% Annual Deduction: The COOTAD allows for a 5% deduction from the profit for each year that has passed since the property was acquired, intended to account for inflation.
The Crucial Document: The calculation is not based on your old property tax receipts. You must obtain an updated Certificado de Avalúo y Catastro from the municipal records office (Dirección de Avalúos y Catastros) for the specific purpose of the sale. In Cuenca, this office is located downtown, and the certificate currently costs approximately $7.00. This document provides the official assessed value which the municipality uses as a baseline.

⚠️ Common Expat Pitfall in Cuenca:

A frequent and costly error is assuming the process is automatic. The seller is responsible for initiating this calculation at the municipality. The payment of the municipal plusvalía tax is an absolute prerequisite for finalizing the sale. The Notary Public (Notario) will not authorize the final deed (Escritura Pública de Compraventa), and the Property Registry (Registro de la Propiedad) will not inscribe it, until they see the official receipt for this tax payment. Do not leave this step for the last day.

2. SRI Capital Gains Tax: The National Income Tax Component

Separate from the municipal obligation, the profit from selling real estate is considered income by the national government and is subject to income tax. This is regulated by the Ley de Régimen Tributario Interno (LRTI).

How is SRI Capital Gains Tax Calculated?

The profit from the occasional sale of real estate by an individual is considered an "extraordinary" capital gain.

Taxable Base: (Sale Price) - (Acquisition Cost) - (Documented Sale-Related Expenses)
Tax Rate: For residents, this gain is added to your other income for the year and is taxed according to the progressive income tax table. For non-residents, a flat rate may apply, requiring specific consultation.

Key Legal Considerations & Hyper-Specific Details:

Deductible Expenses: The SRI is meticulous. To deduct expenses, you need legally valid facturas. This includes real estate commissions, legal fees for the sale, notary fees, and transfer taxes you paid.
Reporting: This gain must be reported on your annual income tax declaration (Formulario 102 for individuals), which is filed in March of the year following the sale, according to the 9th digit of your cédula or RUC. This is a completely separate process and deadline from the municipal tax.
Primary Residence Exemption: Artículo 9.5 of the LRTI provides a potential exemption. Generally, profits from the sale of a primary residence are exempt if the seller has owned it for at least two years and the funds are reinvested into acquiring another primary residence. However, the conditions are strict and must be documented precisely for the SRI. Do not assume you automatically qualify.
Anexo de Información de Notarios: Be aware that Notaries are required to report all transactions they authorize to the SRI through a specific informational annex. The SRI will know you sold a property. Ignoring your declaration obligation is not a viable strategy and will lead to fines and interest.

Essential Documents for Both Tax Calculations

Meticulous record-keeping is non-negotiable. Before you even list your property, you should have a file containing:

The original notarized deed of your purchase (Escritura Pública de Compraventa).
Proof of payment for acquisition-related taxes and fees.
All legal facturas and municipal permits for any improvements made.
Annual property tax payment receipts (comprobantes de pago del impuesto predial).
Your RUC (Registro Único de Contribuyentes) must be active with the SRI.

⚠️ Legal Alert: When to Stop and Consult an Attorney

Immediately consult a qualified Ecuadorian lawyer or tax advisor BEFORE you sign a sales agreement (Promesa de Compraventa) if:

You have made substantial renovations without permits or proper facturas.
Your original purchase deed is lost or contains ambiguities.
The property was inherited or is co-owned, as this complicates the calculation of the acquisition basis for each owner.
You plan to claim the primary residence exemption and need to ensure your transaction is structured correctly.
You are a non-resident of Ecuador, as specific tax withholding rules may apply to you.

Navigating these dual tax systems requires expertise. Proactive professional advice is not an expense; it is an investment in protecting your profit and ensuring a smooth, legally sound transaction.

Conclusion

While the term "Plusvalía" is used broadly, understanding it as two distinct obligations—the immediate municipal tax required to close the sale and the subsequent national capital gains tax declared to the SRI—is the key to compliance. By preparing your documentation meticulously and understanding the specific requirements of both the COOTAD and the LRTI, you can manage this final, crucial step of your real estate journey in Ecuador.

Ready to Secure Your Property Transaction?

Navigating Ecuadorian real estate law and tax obligations is complex. Don't leave your financial well-being to chance. Schedule a no-obligation consultation with our legal team in Cuenca today. We provide the clear, expert guidance you need to ensure a successful and compliant sale.