Selling Property in Ecuador: U.S. Tax, Section 121, and Records

I recently helped a client sell a property he'd owned in Cuenca for over a decade. What started as a seemingly simple transaction turned into a multi-form filing involving capital gains exclusions, depreciation recapture, foreign tax credits, and auction sales of inherited items. It's one of the most complex cross-border tax situations American expats face.

Here's what you need to know if you're selling real estate in Ecuador.

Yes, You Have to Report It

US citizens must report the sale of any property worldwide, including real estate in Ecuador, when the property is a U.S.-reportable disposition under the applicable rules. The reporting depends on the ownership, use, asset type, any exclusion or election, rental or business treatment, and the applicable return.

Even if your gain is fully excluded under Section 121, you still need to file the return and report the sale.

The Section 121 Exclusion: Your Best Friend

If the Ecuador property was your primary residence and you lived in it for at least 2 of the last 5 years before the sale, you qualify for the Section 121 exclusion:

This applies to foreign properties identically to US properties. The 2-out-of-5-year test counts physical presence, so keep records of your time in the home — utility bills, lease agreements, cedula registration address, and travel records all help.

What Counts as "Primary Residence"

The IRS looks at where you actually live, not where you say you live. Strong evidence includes:

• Your Ecuador cedula listing the property address
• Utility bills in your name at that address
• Bank statements mailed to that address
• Voter registration (if applicable)
• The address you use on your tax return

The Rental Portion Trap

If you rented out any part of the property — even a ground-floor store while you lived upstairs — the IRS requires you to split the sale.

Example: You own a 3-story building in Cuenca. You live on floors 2 and 3 and rent out the ground floor store. The ground floor is 1/3 of the property.

Depreciation Recapture

This is the part that surprises people. Even if you never claimed depreciation on your US tax return for the rental portion, the IRS taxes you on the depreciation you were entitled to take. This is called "depreciation recapture" and is taxed at a maximum rate of 25%.

For a property held for 13 years with a rental portion, this can add up to a meaningful amount. The depreciation is calculated using the 39-year straight-line method for commercial property or 27.5 years for residential rental property.

Calculating Your Cost Basis

Your cost basis is what you paid for the property, plus:

• Closing costs at the time of purchase
• Major improvements over the years (renovations, additions, not routine maintenance)
• Selling expenses (real estate agent commission, architect fees, contractor work to prepare for sale)

Inherited Property

If you inherited the property, your basis is generally determined under section 1014 using the fair market value on the date of the decedent's death (or an alternate valuation date where a valid estate election applies), subject to statutory exceptions and consistent-basis rules. If the property was purchased by a parent for $265,000 but was worth $200,000 at their death, your basis would generally be $200,000. Confirm the valuation date, ownership share, and records against the current rules rather than assuming a single answer.

Keep records: the original escritura (deed), appraisal documents, bank transfer records, and any estate filings.

The Escritura Problem

In Ecuador, it's common for the escritura to list a lower price than what was actually paid — sellers do this to minimize plusvalia and alcabala taxes. This creates a problem when you need to prove your actual cost basis to the IRS.

If the escritura understates the price, gather supporting evidence:

• Bank wire transfer records from the year of purchase
• The seller's or your parent's US tax returns that may have disclosed the purchase
• Correspondence showing the actual purchase price
• Estate records

Ecuador Taxes You Paid: Foreign Tax Credit

Ecuador imposes taxes on real estate sales:

The plusvalia can qualify as a creditable foreign income tax — but only if the levy meets the current foreign-income-tax or in-lieu-of rules, is imposed on you as the legal taxpayer, and fits the Form 1116 sourcing and limitation analysis. File Form 1116 (Foreign Tax Credit) to claim it only after that analysis supports creditability.

Form 8938: Foreign Asset Reporting

If the property's value exceeds FATCA reporting thresholds, you may have been required to report it on Form 8938 during the years you owned it.

For expats filing single, the threshold is $200,000 at year-end or $300,000 at any point during the year. Foreign real estate held directly (not through a foreign entity) is generally not reportable on Form 8938, but the sale proceeds deposited in a foreign bank account are.

What About Auction Sales of Contents?

If you sold furniture, art, or other personal items along with or separately from the property:

• Items sold at a loss compared to their cost basis generate no deductible loss (personal property losses aren't deductible)
• Items sold at a gain are reported on Form 8949
• Inherited items get a stepped-up basis to fair market value at the date of death
• Long-term capital gains rates apply if held over one year

Putting It All Together

A typical Ecuador property sale for an American expat involves:

1. Form 8949 — Report the sale (possibly split personal/rental)
2. Schedule D — Capital gains summary
3. Schedule E — Final year rental income (if applicable)
4. Form 1116 — Foreign Tax Credit for plusvalia paid
5. Section 121 exclusion — Claimed on the personal-use portion
6. Depreciation recapture — On the rental portion

This is not a DIY tax return. The interaction between Section 121, depreciation recapture, and the Foreign Tax Credit requires careful calculation.

Need Help?

I specialize in exactly this type of cross-border Ecuador/US tax situation. If you sold or expect to sell directly owned property in Ecuador, use the foreign home sale consultation to map ownership, use, U.S.-dollar basis and proceeds, depreciation, foreign tax, and the records needed before preparation.

Related:

• Ecuador's Territorial Tax System
• FEIE vs Foreign Tax Credit
• Moving to Ecuador Tax Checklist

Official IRS sources

• Sale of home
• Foreign tax credit