Ecuador's Tax Advantage for US Retirees: What It Actually Means

"Move to Ecuador and stop paying taxes." You've probably seen some version of this in a retirement forum, a YouTube video, or a Facebook group. It's not entirely wrong. It's not entirely right, either.

We've been helping US retirees relocate to Cuenca for over 25 years. Tax questions come up in almost every initial consultation, and the misunderstandings are remarkably consistent. This post lays out what Ecuador's tax system actually does for a US retiree, what it does not do, and where people get tripped up.

This is not tax advice. We are immigration attorneys, not CPAs. Talk to a qualified cross-border tax professional before making decisions based on anything you read here or anywhere else.

What Ecuador Actually Does: No Tax on Foreign-Sourced Income

Ecuador uses a territorial tax system. The core principle is straightforward: income sourced outside of Ecuador is generally not taxed by Ecuador, provided it was already subject to taxation in its country of origin.

For a US retiree, this typically means:

• Social Security payments - sourced in the US, not taxed by Ecuador
• US pension income (401k distributions, IRA withdrawals, government pensions) - sourced in the US, not taxed by Ecuador
• US investment income (dividends, interest, capital gains from US securities) - sourced in the US, not taxed by Ecuador

This is the real advantage. If your income comes from the US, Ecuador generally does not add a second layer of taxation on top of what you already owe the IRS.

What Ecuador Does Tax: Ecuador-Sourced Income

If you earn income inside Ecuador - rental income from Ecuadorian property, local employment, local business profits - that income is subject to Ecuador's graduated income tax rates. For 2026, these range from 0% on the first $12,208 up to 37% on income above approximately $108,000.

Most retirees who simply live in Ecuador on US retirement income will not owe Ecuador income tax. But if you buy a rental property in Cuenca or start a local business, that changes.

Tax Residency: The 183-Day Trigger

Ecuador considers you a tax resident if you spend more than 183 days in the country within a 12-month period. The days do not need to be consecutive, and even partial days count.

Once you are a tax resident, Ecuador technically requires you to report worldwide income. However, under the territorial principle, foreign-sourced income that was already taxed abroad generally remains exempt. The practical result for most US retirees is that tax residency does not change your Ecuador tax liability if your income is all US-sourced.

Still, becoming a tax resident does create filing obligations. A local accountant can keep you compliant for a very reasonable fee.

The Part People Forget: You Still Owe the IRS

Here is where the "move to Ecuador, stop paying taxes" narrative falls apart.

The United States is one of only two countries in the world (the other being Eritrea) that taxes its citizens on worldwide income regardless of where they live. If you are a US citizen or green card holder, you owe US federal income tax on your worldwide income no matter what. Moving to Ecuador does not change this.

Your Social Security benefits? Still reportable to the IRS. Your 401k distributions? Still reportable. Your investment dividends? Still reportable. Ecuador's territorial tax system helps you avoid a second layer of tax. It does not eliminate the first.

Tools for US Expats: FEIE and FTC

For US citizens working abroad (not retirees living on passive income), two IRS provisions help reduce double taxation:

• Foreign Earned Income Exclusion (FEIE): For tax year 2026, you can exclude up to $132,900 of foreign earned income from US taxation. This applies to wages and self-employment income, not to Social Security, pensions, or investment income.
• Foreign Tax Credit (FTC): If you pay income tax to Ecuador on Ecuador-sourced income, you can use that payment as a credit against your US tax liability on the same income.

For a typical retiree living on Social Security and pension distributions, the FEIE is largely irrelevant (it covers earned income, not retirement income). The FTC only helps if you have Ecuador-sourced income and actually pay Ecuadorian tax on it.

No US-Ecuador Tax Treaty

The US and Ecuador do not have an income tax treaty. They do have a Tax Information Exchange Agreement (signed 2021), which means the two governments share financial information - but there is no treaty that allocates taxing rights or provides specific double-taxation relief.

There is also no totalization agreement, which means self-employed expats could potentially owe into both countries' social security systems.

The practical effect of no treaty: you cannot rely on treaty provisions to reduce withholding rates or resolve conflicts. You rely on Ecuador's territorial system and the IRS's foreign tax credit instead.

Property Tax: Genuinely Low

This one is real and straightforward. Ecuador's annual property tax (impuesto predial) ranges from roughly 0.025% to 0.5% of the municipal assessed value. In practice, that means annual property tax on a $200,000 home in Cuenca is often $100-$200 per year.

Compare that to the US, where property taxes on a comparable home can easily run $2,000-$6,000 or more annually depending on the state.

Additional details:

• Over-65 exemption: Property owners over 65 with a property valued under approximately $190,000 are exempt from property tax entirely.
• Early payment discounts: Many municipalities offer 10% discounts for paying in January, decreasing through mid-year.

Capital Gains on Real Estate

Ecuador imposes a 10% tax on real estate capital gains. However, if you have owned and used the property as your personal residence for 20 or more years, the gain is exempt. Property owners over 65 also receive favorable treatment on properties below certain value thresholds.

This is not the same as the US, where the primary residence exclusion ($250k single / $500k married) kicks in after just two years. If you buy and sell property in Ecuador on shorter timelines, expect to pay the 10% tax on the gain.

So What Is the Real Tax Advantage?

Let's be clear about what is and is not a benefit:

Real advantages:

• Ecuador does not tax your US Social Security, pension income, or investment income
• Property taxes are a fraction of US rates
• No state income tax equivalent (you may escape your US state's income tax if you properly establish domicile in Ecuador - consult your CPA on this)
• IVA (Ecuador's sales tax) is 15%, but everyday necessities are zero-rated or reduced

Not advantages (for US citizens):

• You do not stop paying federal income tax by moving to Ecuador
• You do not stop filing US tax returns
• You may still owe FBAR and FATCA reporting on foreign financial accounts
• The FEIE does not shelter retirement income

The honest summary: The tax advantage of retiring in Ecuador is not that you "escape" taxes. It's that you avoid being taxed twice. Ecuador does not pile its own income tax on top of what you already owe the IRS. Combined with extremely low property taxes and a low cost of living, your after-tax dollars go significantly further.

Common Mistakes We See

1. Assuming "no Ecuador tax" means "no tax at all." US citizens always owe the IRS. Always.
2. Not filing FBAR/FATCA. If you have Ecuadorian bank accounts exceeding $10,000 in aggregate at any point during the year, you must file FinCEN Form 114 (FBAR). FATCA reporting (Form 8938) may also apply. Penalties for non-filing are severe.
3. Not establishing domicile properly. If you want to stop paying your former US state's income tax, simply moving is not always enough. Some states are aggressive about claiming you as a resident.
4. Thinking the FEIE covers everything. It covers earned income only. Social Security, pensions, and investment income are not earned income.
5. Ignoring Ecuador-sourced income. If you rent out property in Cuenca, that rental income is taxable in Ecuador. Plan for it.

Keep reading:

• Social Security and Ecuador's Retirement Visa
• Estate Planning for Expats in Ecuador
• Cuenca Cost of Living 2026

Have questions about the financial side of relocating to Ecuador? Schedule a consultation or call 651-621-3652.