Have you heard about the capital gains resulting from the sale of a property? If you're selling your house, inform yourself about capital gains before even putting the house on the market. It's crucial to understand that not everything equates to profit, and you should consider that when determining the selling price of your property. Read this article and get detailed answers to relevant questions on the subject.

Photo by Daniil Silantev – Unsplash

What are capital gains?

You've probably heard about capital gains, but perhaps you haven't delved into their meaning until you needed this knowledge to initiate the process of selling your house. To simplify the answer to the question 'What are capital gains?' we can say that they refer to the difference between the value at which you acquired the property and the value at which you sold it. It's always crucial to bear in mind that when selling a house, the obtained value is subject to tax treatment.

Capital gains apply to both real estate and financial products, as described in the Diário da República. They encompass tangible assets (real estate) and intangible assets (stocks), not being a term exclusive to the real estate sector. Despite this being a concise definition of the concept of capital gains, it's important to emphasize that there are other relevant criteria you should be aware of before selling your house.

How can I calculate the capital gains from selling the house?

First, it's important to know that the amount taxable on capital gains from the sale of the home is later determined based on your personal income tax (IRS). Second, only 50% of the capital gain is taxed, not the entire amount. So, if you realise a €40,000 gain on the sale of your home, you'll have to pay tax on €20,000 of the capital gain.

To calculate the capital gains from selling the house, you'll need some data, such as the acquisition value, the selling price of your house, the acquisition date, and the selling date.

For the calculation, you'll subtract the selling price of the property from the acquisition value (applying an updated monetary coefficient). You can subtract some expenses, such as renovations, taxes, and even some appliances, like air conditioning if they remain in the house at the time of sale. To deduct these expenses, you must have the invoice with your NIF, and the address of the house in question should also be included. You can submit expenses from the last 12 years. Additionally, you can deduct the real estate agency commission and expenses related to the energy certificate when submitting your IRS with Annex G (Model 3) duly filled with the sales data and the mentioned expenses. If you acquired the property before 1989, you must fill out Annex G1.

To ensure that this process goes smoothly, we advise consulting an accountant or a lawyer and providing all the details about the property sale.

Photo by Olga Delawrence – Unsplash

When are capital gains taxes paid?

Capital gains will be taxed when you submit your personal income tax (IRS). Keep in mind that the return always pertains to the previous year. Therefore, if you sold a house in 2023, you will have to declare the sale in the 2024 IRS.

At this stage, capital gains are calculated and taxation is determined. Don't forget to include all the details, such as acquisition and sale dates, amounts, and property expenses, to benefit from reductions in the tax.

In what situation am I exempt from paying capital gains?

As you've had the opportunity to read, if the selling price of a house is higher than the acquisition cost, it may lead to the payment of a tax on capital gains. However, there are situations where the tax is not applied because it falls under one of the exemptions provided by law.

Since 2021, exemptions related to capital gains have been decreasing. Find out which ones still apply and if your case falls under any.

• You are exempt from paying capital gains tax if you sell your own permanent property and fully invest the profit in the purchase, construction, or renovation of another permanent residence. To benefit from this exemption, you must invest this amount within 36 months (3 years). If you have already acquired a new property two years before selling the house, you should inform the tax authorities that you will use the capital gains for the payment of the new property.

• Individuals already retired or aged over 65 who invest this amount in an insurance policy, such as a Personal Pension Plan (PPR), in contributions to the public capitalization scheme, like retirement certificates, or an open pension fund are also exempt if they do so within six months following the sale of the property.

• Owners of properties acquired before 1989 also benefit from the exemption of capital gains tax. However, they must declare the sale of the house to the IRS. This exemption occurs because the IRS tax only came into effect in 1989, thus exempting them from this payment.

• The owners of a building plot acquired before June 9, 1965.

• From 7 October 2023, the sale of a second home may exceptionally be exempt from capital gains tax. This measure applies to sales of second homes made between 1 January 2022 and 31 December 2024. The exemption is complete if the entire sale value is reinvested.

Photo by Andre Taissin – Unsplash

How much do I have to reinvest to be fully exempt from capital gains tax?

Although the tax applies to only 50% of the total profit from capital gains, for the full exemption, it is necessary to reinvest the entire amount. For example, if you sell your house for €100,000 and, after calculations, have capital gains of €20,000, the exemption from tax payment will only be effective if you reinvest the full €100,000. Opting to reinvest only a portion of the money will not exempt you but may result in a tax reduction.

How to reduce capital gains tax?

We've already mentioned some measures to help reduce capital gains tax, but we want to underscore this method of boosting funds after selling your house. Some expenses can be factored into the tax calculation, so be vigilant if you wish to decrease the amount. Don't forget to include invoices with your Tax Identification Number (NIF) and the property address in your IRS declaration, in the corresponding annex for your case (Annex G or Annex G1).

• The cost of conservation and maintenance works, such as insulation, and painting, among others, is included.

• The amount spent on fixed appliances, like extractors and air conditioning, as long as they remain in the house, also contributes to reducing the tax.

• Expenses related to acquisition and sale, such as IMT (Municipal Tax on Property Transfer), energy certificate, stamp duty, notarial charges, land registry fees, and commissions paid to the real estate agent or fees paid to a solicitor, if necessary, can be declared in the IRS.

Add up the amounts of these expenses and declare them in Annex G, in box 4, designated as "expenses and charges."

How do capital gains work in the case of inheritance?

Similar to the sale of a property you have purchased, you must also pay capital gains tax on the sale of an inherited property. In this particular case, there is no acquisition value as the property was inherited and not purchased. However, there's a way to arrive at an amount to facilitate the calculation.

In regular situations, we subtract the acquisition value from the sale amount. In the case of inheritance, the acquisition value is replaced by the Taxable Asset Value (VPT), ensuring the correct calculation of property capital gains.

Even with split inheritances, if you decide to sell your share, the taxable value of the acquisition will be taken into account, and the taxed value of the capital gains will be applied to your share. The various options for exemption from capital gains tax mentioned above are applied in the same way in this case.

Photo by Daryn Stumbaugh – Unsplash

Are there also capital losses?

The answer is yes. Whenever the selling process results in a loss, we consider it a capital loss. If you sell a property at a loss in a given year, you can deduct that amount from capital gains in the following 5 years.

To calculate this value, let's say you acquired a property for €100,000 and later sold it for €70,000, with deductible expenses of €30,000. The calculation would be as follows: Sale amount (€70,000) — Purchase amount (€100,000) — Deductible expenses (€30,000) = Capital loss (-€60,000). The amount subject to taxation is always 50%, just like with capital gains, resulting in a capital loss of -€30,000 in this case.

Imagine that in the following year (or within the 5 years after the loss from selling the property), you have capital gains of €80,000, taxed at 50%, i.e., €40,000. You can deduct the capital losses from this €40,000, resulting in €10,000. This means that only €10,000 will be subject to tax treatment.

I want to sell my house – How do I decide on the value?

Capital gains on properties should always be taken into account when a property hits the market. Not including taxes in the final property value can result in a loss of money. It is recommended that you speak to an accountant or a real estate agent to establish an appropriate value for the house sale.

In addition to taxes on capital gains, there are other points to consider. Setting a fair initial price benefits both the seller and the buyer, facilitating a quicker sale. A real estate agent with knowledge of the area can provide insights into factors determining the final property value, such as location, type, housing conditions, and nearby amenities like schools, transportation, and commercial areas.

Among these factors are also the sale prices of neighbouring houses, influencing the final value of your property. For this reason, it is crucial to contact a real estate agent with specific knowledge of your housing area. Only they can arrive at a fair value for both parties, ensuring a swift sale.

The real estate sector can be complex and requires knowledge in order to make profitable sales. If you have a house for sale in the Barlavento Algarvio region, don't hesitate to contact Casas do Barlavento. We would be delighted to be part of this stage of your life.