[BUYING AND SELLING REAL ESTATE IN ECUADOR]
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2. Real Estate Investment Trust (REIT) This is a contract under which investors participate in a Real Estate project to obtain economic benefits through the acquisition or exploitation of properties such as housing, offices, commercial premises, etc. Once the properties are acquired, it is up to the settlors to decide whether to resell them at a higher price or to lease them. Thus, investors can agree to contribute money to the development of projects with limited financing. a) Benefits: This type of investment presents several advantages for investors, including: i) The properties acquired through the Real Estate investment trust will not be part of investors' estate, as the trust has an autonomous equity; ii) The investors and the trust created for this purpose can invest in various projects simultaneously; and iii) The economic benefits associated with these types of trusts are easily predictable, especially if the properties are leased, as the investment returns will be constant and may even increase due to the financial appreciation of the assets. b) Limitations: REITs may present some limitations such as: i) delays in obtaining returns if invested in real estate projects that are about to begin or are under construction; ii) risks of investing with insolvent construction companies, which may lead to non-compliance; and, iii) When invested in real estate projects under construction, the capital becomes inaccessible, rendering these investments less or moderately liquid. TAXES AND TAX BENEFITS ON REAL ESTATE TRANSFERS When a transfer of ownership of Real Estate is made, both the owner and the buyer must
consider various taxes, which vary according to the location of the property. For properties in urban areas, taxes such as “ utilidad ” (Capital Gain Tax), “ alcabalas ” (Transfer Tax), and special contribution for improvements, as well as notary and registry fees must be paid. Meanwhile, for properties located in rural areas, the only tax to be paid is the transfer tax. a) “ Alcabalas ” (Real Estate transfer tax) : This is a municipal (city) tax which is paid when property rights over Real Estate are transferred. It is applied in several legal acts, such as the sales and purchase of Real Estate, the transfer of property by bequest to non-legitimate beneficiaries, the transfer right of enjoyment of sole property, as well as in donations and transfer to mercantile trusts. The amount to be paid is 1% of the price or value of the Real Estate, depending on the transaction. b) “ Utilidad ” (Capital gains tax): This is a tax applicable to capital gains resulting from the difference between the purchase value and the sale value of a Real Estate property, and it is paid when the property is sold. The taxpayer is the owner of the property. The rate of this tax is 10% and it is levied on the profits or capital gain generated over the property. c) “ Contribución Especial de Mejoras ” or “ CEM ” (Special Contribution for Improvements in Real Estate): The purpose of this tax is to recover part of the municipal investment in the construction and maintenance of infrastructure such as streets, sidewalks and community projects (markets, schools, hospitals, etc.). The obligation of payment of this contribution is upon completion of public works, which are expected to increase the value of the
ILN Real Estate Group – Buying and Selling Real Estate Series
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