Capital Gains Taxation Following a Property Sale
In this article, Casas do Barlavento explains how the capital gains from the sale of your house will be taxed.
Firstly, it is imperative that you declare the sale or inheritance of a home to the Tax Office by completing the IRS statement (Annex G) related to the transaction year. Capital Gains Tax is a tax on the profit when you sell a property or an asset that has increased in value. It’s the gain you make which is taxed, not the amount of money you receive. In Annex G all the information on the investment made and the transaction costs, such as commission for real estate agents, must be declared.
In the "Despesas e Encargos” (Expenses and Charges) section you can also deduct other expenses and improvements made in the property, which may have added value to your asset and have been carried out in the last 12 years (e.g. air conditioning installation, energy certificate emission and IMT). In the case of an inherited property, the capital appreciation is calculated by the Tax Patrimonial Value mentioned in the land registry, when transacted. The Tax Authorities apply a monetary correction on this amount so that the value makes sense in the present day.
Capital Gains Exemption
1. If you are considering reinvesting in the purchase of new main permanent dwelling (tax resident domiciled in Portugal), you have 36 months to do so, and become exempt from the payment of the capital gains tax. However, it is mandatory to communicate your intentions to reinvest to the Tax Office so that taxation is suspended for that period. You have to live in the new property within six months of the end of the three-year limit for it to be considered as your main residence.
2. In case you have invested in a house before the sale of the current one, you have 24 months to communicate to the Tax Authorities that the profit obtained was channelled into the new property. This is possible by declaring the amount of the sale and purchase of the dwelling in the year you dispose of the first one. If you have resorted to a bank loan to purchase the current house, you must inform the loan amount to determine the profit obtained.
3. It is mandatory to apply to the urban land registry if the sale proceeds of a house are to be used to acquire a plot for construction or renovation of a property. You’ll have up to five years, in total, after the sale to declare the property as your main permanent home.
4. If the property you are selling was acquired before 1989 (the year the IRS Code came into effect) the sale isn’t subject to taxation. However, you must declare this sale in Annex G1, which is the section of untaxed capital gains.
Non-habitual residents
“If you are resident under the non-habitual resident (NHR) regime, a gain is ‘exempt with progression’ in Portugal if it is taxable in the country of source. This means that such gains are added to the overall taxable income, and then the tax on this is deducted from the overall liability”1.
Non-residents
“Non-resident individuals pay tax on 100% of the gains from the sale of their property in Portugal at 28%. For UK residents, the gain would also be taxable in the UK, but tax paid in Portugal is deducted from the tax payable in the UK” 1.
You can use the following formula to calculate the capital gains, in Portugal:
Sale Price - (acquisition costs x currency devaluation coefficient) - costs incurred during the transfer of ownership - property improvement costs (within the last 5 years)
When you sell a property as a resident, only 50% of the gain is liable for tax. As an example, if the capital gains of property are €10,000.00, the charge will be, in broad terms, €5,000.00.
However, this calculation depends on many factors such as: The State Budget, the IRS of the owner, if you resorted to credit from the bank, if you are resident, non-resident or approved under the non-habitual resident’s regime, or also if you will reinvest in a main permanent dwelling.
In summary, whether or not it generates capital gains and whether or not they are taxed, it will always be necessary to declare the operation to the Tax Office.
1 From Stefano Lucatello article - Property Expert Sky Channel 198