An American client of mine, before he was my client, purchased a condo here in Cuenca from another American and used a popular local lawyer to do all the paperwork related to the sale. The lawyer did not understand that the way he was doing the paperwork would cause there to be a “plusvalia”, which is a type of capital gains tax, to be assessed to the tune of a little under five thousand dollars. The buyer, although technically not liable for the tax, could not get his title because the city would not give it to him until the capital gains tax was paid. The seller left the country and refused to pay the tax. In the end the buyer ended up having to pay an extra $5,000 for his apartment.
HOW I WOULD HAVE COUNSELED THE BUYER
Here sales prices are not accurately recorded in almost all cases. There is an Ecuadorian tradition of underreporting the purchase prices of real estate. This is partly to keep property taxes low and also helps people pay lower notary fees which are both largely based on the property’s purchase price. As is common for city properties the condo’s paperwork showed a purchase price of a little less than 1/3 of it’s actual selling price. The lawyer was understandably uncomfortable with knowingly underreporting the real purchase price by that great of a margin. He encouraged the buyer to report the purchase price as being halfway between the previously reported sale price (from when the seller purchased it) and the price that he was actually paying. They property purchase was recorded as being closed at 2/3 of the real purchase price. As a result the municipality assessed a “Plusvalia” of just under five grand because to their knowledge the seller sold the property for twice as much as they bought it for. It could have been even worse. If the actual purchase price would have been placed on the official paperwork the capital gains tax would have been over $9,000.00!
On his next purchase the buyer from the above story went through us to purchase a rural property. When in Rome do as the Romans do. With rural Ecuadorian properties the difference between the reported purchase values normally range from 1/8th to 1/20th of what the real purchase values are. In this case our clients purchase price for this rural property was over ten times what the previously recorded values were. We advised our client of what his options were and he was able to make an informed decision regarding how to fill out the paperwork.
If we had been working with the client on the condo purchase I would have advised him that his new neighbors would be upset with him if he caused their property taxes to raise next year. I would have advised him that you cannot count on the seller to pay the capital gains tax just because they are legally obligated to. I would defiantly have advised him to let us review all real estate related paperwork for accuracy, legitimacy, and completeness and that he have us help him come up with the terms of the purchase agreement. If he had insisted on recording the actual purchase price then I would have advised him to put some of the purchase money into escrow to be released after the seller paid the capital gains tax.
A medical doctor would be able to a much better job than the average Joe would when it comes to your dental work. Imagine the painful and ugly screw-ups that could result from an M.D. trying to give you a root canal. If you would not trust your doctor to fix your teeth correctly then why would you expect a lawyer to be able to adequately protect your interests in a property purchase?