Gifting Property vs. Selling to a Family Member in Ecuador: A Tax and Legal Comparison for Expats

When considering how to transfer property ownership to a loved one – be it a spouse, child, or other relative – two primary avenues present themselves: a donation (donación) or a sale (compraventa). While both result in a change of ownership, their legal and fiscal consequences differ significantly. Understanding these distinctions is crucial for making an informed decision that aligns with your financial and estate planning objectives.

The Legal Framework: Donation vs. Sale in Ecuador

Ecuadorian law, rooted in the Civil Law tradition, distinguishes clearly between a donation and a sale.

Donation (Gift)

A donation, or donación, is defined in Artículo 1402 of the Ecuadorian Civil Code (Código Civil) as an act by which one person (the donor, donante) gratuitously transfers ownership of a property to another person (the donee, donatario) who accepts it.

Key Characteristics of a Donation:

• Gratuitous Nature: The essential element is the absence of payment. The donor's intent is to enrich the donee out of pure liberality.
• Formalities: The transfer of real estate via donation is a solemn act. It legally requires an escritura pública (public deed) executed before a Notary Public (Notario Público) and subsequently registered at the Property Registry (Registro de la Propiedad) of the canton where the property is located. Without these formalities, the gift is legally void.
• Revocability: While generally irrevocable upon acceptance, Artículo 1445 of the Civil Code allows for revocation under very specific and serious circumstances, primarily for acts of extreme ingratitude (ingratitud) by the donee against the donor. This is a complex judicial process and not a simple "take-back."

Sale

A sale, or compraventa, is a contract defined in Artículo 1732 of the Civil Code where one party (the seller, vendedor) is obligated to transfer ownership of a thing (the property) to another party (the buyer, comprador), who is obligated to pay a determined price in money.

Key Characteristics of a Sale:

• Onerous Nature: A price or consideration is exchanged. This is the defining difference from a donation. Hyper-Specific Detail 1: A common mistake is executing a "sale" for a nominal fee (e.g., $1,000 for a $150,000 property) to avoid gift tax. The tax authority, the Servicio de Rentas Internas (SRI), can reclassify this as a "disguised donation" (donación encubierta) if the price is significantly below the municipal cadastral value (avalúo catastral), and impose the full gift tax plus substantial penalties.
• Formalities: Similar to donations, a sale of real estate is perfected through a public deed and its registration in the Property Registry.
• Irrevocability: Once completed and registered, a sale is irrevocable, barring issues like fraud, hidden defects (vicios redhibitorios), or other grounds for contractual nullity.

Tax Implications: The Crucial Difference

This is where the most significant divergence between gifting and selling arises.

Taxes on Donations

When property is gifted, it is subject to the Inheritance, Legacy, and Gift Tax (Impuesto a las Herencias, Legados y Donaciones), regulated by the Ley Orgánica de Régimen Tributario Interno (LORTI).

• Who Pays: The donee (the recipient) is legally responsible for declaring and paying this tax.
• Taxable Base: The taxable base is the full commercial or municipal cadastral value of the property, whichever is higher.
• Tax Rates & Exemptions: The tax is progressive. There is a substantial tax-free base amount (fracción básica exenta) that is updated annually. Hyper-Specific Detail 2: For 2024, the tax-free base for inheritances and gifts to direct heirs (parents, children, spouse) is $76,665. The tax is calculated on the value exceeding this amount, with rates starting at 5% and rising to 35%. Gifts between unrelated parties or more distant relatives have a much lower exemption and higher effective rates.
• Declaration: The donee must file Formulario 108 with the SRI to declare the gift and calculate the tax due, a step required before the Notary can finalize the deed.

Taxes on Sales

When property is sold, even to a family member, a different set of taxes applies:

• Municipal Taxes (Paid by Buyer & Seller):
  • Alcabala: This is the primary transfer tax, paid by the buyer. Its rate is set by each municipality, but is typically 1% of the sale price or cadastral value.
  • Plusvalía: This is a municipal capital gains tax, paid by the seller, on the difference between the sale price and the acquisition price (as adjusted by the municipality). This is separate from the national capital gains tax.
  • Hyper-Specific Detail 3: In Cuenca, a critical and often-missed step is that the parties must first go to the Municipality (Municipio de Cuenca) to calculate and pay the alcabala and plusvalía taxes. The Notary Public will refuse to execute the final escritura de compraventa without the official payment receipt (comprobante de pago) from the municipal revenue office. This procedural bottleneck can delay closings by days or even weeks if not anticipated.
• National Capital Gains Tax (Impuesto a la Renta por Ganancia Ocasional): Paid by the seller to the SRI. This is calculated on the real profit (sale price minus purchase cost, improvements, and associated fees). The rate for individuals is a flat 10% on the profit, as stipulated in the LORTI. This is separate and in addition to the municipal plusvalía.
• Value Added Tax (VAT - IVA): The sale of real estate intended for housing is exempt from VAT, as per Artículo 55 of the LORTI. This exemption does not apply to the first sale of a property by a professional construction company.

Practical Steps and Required Documents

1. Obtain Property Certificates: Before anything else, obtain a recent Certificado de Gravámenes y Limitaciones de Dominio (Certificate of Liens and Encumbrances) from the local Property Registry. Hyper-Specific Detail 4: This certificate costs approximately $20-$25 in most cantons and is valid for 60 days. It is the definitive proof of ownership and reveals any mortgages, liens, or legal prohibitions on the property.
2. Obtain Municipal Clearance: Secure the Certificado de no adeudar al Municipio, which confirms all property taxes (impuestos prediales) are paid to date. This is non-negotiable.
3. Gather Personal Documents: All parties need their valid Cédula (for residents) or passport, and a recent voting certificate (certificado de votación) if applicable. Married individuals require their spouse's consent and documents, even if the property is not in the spouse's name, due to community property laws (sociedad conyugal).
4. Draft the Deed (Minuta): An Ecuadorian lawyer must draft the deed's text, known as the minuta. This document specifies whether it is a donation or a sale, identifies the parties and the property (with its cadastral code and registration number), and states the terms.
5. Pay Applicable Taxes:
   • For Donation: The donee files Formulario 108 and pays the Gift Tax to the SRI.
   • For Sale: The parties go to the municipality to pay alcabala and plusvalía. The seller calculates and prepares to pay the national capital gains tax with their annual income tax return.
6. Sign Before a Notary: With all certificates and tax receipts in hand, the parties sign the final escritura pública before the Notary. Hyper-Specific Detail 5: Notary fees (derechos notariales) are regulated by a national fee schedule established by the Consejo de la Judicatura. For a $100,000 property, these fees are typically in the range of $600-$800, plus small administrative costs.
7. Register the Deed: The Notary provides certified copies of the deed, which must be taken to the local Registro de la Propiedad for final registration. Ownership is only legally transferred once this registration is complete.

⚠️ Legal Alert: When to Stop and Consult an Attorney

You must stop and consult with a qualified Ecuadorian attorney immediately if:

• You are considering a sale price significantly below market value to a family member. This is a red flag for the SRI.
• The property has any existing liens, mortgages, or legal disputes revealed on the Certificado de Gravámenes.
• The family member receiving the property is a minor or under legal guardianship, which requires judicial authorization.
• You want to retain rights to the property, such as a life estate (usufructo vitalicio). This is a common and excellent estate planning tool but requires precise legal drafting in the deed.
• Any party is a non-resident for tax purposes, which can trigger different tax withholding rules.
• You are not fluent in Spanish. Do not sign legal documents like an escritura without a trusted lawyer or official translator to explain every clause.

Conclusion: A Calculated Decision

Choosing between gifting and selling property to a family member in Ecuador is a decision with significant legal and financial ramifications. A donation may seem simpler but can trigger a substantial, immediate tax liability for the recipient if the property value exceeds the exemption. A sale appears more complex due to the two-tiered capital gains tax system (municipal and national) but can be more tax-efficient if the capital gain is low or non-existent.

The optimal path depends entirely on the property's value, your basis in it, the specific family relationship, and your overall financial objectives.