Capital Gains are the profit that you generate when selling a property. The capital gain that you make from the purchase of the property is liable to tax. We will explain you all the basics about Capital Gains tax in Portugal. When you are planning on selling your property in Portugal or already sold a property this year, keep reading!
- Capital Gains tax applies to the profit you make when selling an investment or asset, including real estate.
- It is possible to lower the Capital Gains tax by taking advantage of available deductions, exemptions, and exclusions.
Capital Gains in the real estate activity, is the difference between the sale price and the price it was purchased for.
Do we always pay Capital Gains tax?
To avoid paying tax on real estate Capital Gains, reinvest the entire amount. If the sale proceeds from a house intended for permanent residence are reinvested in another permanent residence in Portugal or another EU/EEA Member State, it becomes exempt from taxation. This exemption applies when all conditions are met within 36 months after the sale or 24 months before the purchase.
Pensioners or taxpayers over 65 years of age at the date of sale of the property may be exempt from paying Capital Gains. To do this, they must reinvest the money from the sale in a Life Branch financial insurance contract or in an open pension fund that ensures a regular periodic income.
How is Capital Gains calculated?
There are some variables to take into account, but to say it briefly: Capital Gains is the profit you get out of the sale of real estate.
This is the formula that is used for the calculation: MV = VR – (VA*CDM + EV + DA)
- MV = Capital Gains
- VR = Sales Value
- VA = Purchase Value
- CDM = Currency devaluation coefficient
- EV = Expenses for property valorization
- DA = Mandatory additional expenses (real estate sales commission, purchase and sale costs)
If there is tax to pay on the Capital Gains, we do not pay tax on the complete Capital Gains amount. We pay tax on 50% of the Capital Gains generated. These 50% will be included in our income tax declaration, then the marginal tax rate that corresponds will be applied and this will be the final amount of tax to be paid. This tax rate depends on your total income of that year, the rate can range from 14,5 % until 48%.
Example: António, without payment exemption, bought a property for € 100.000,00 and now sells it for € 150.000,00, he will obtain € 50.000,00 in Capital Gains. He had € 15.000,00 of expenses / investments in this property which leaves him with a profit of € 35.000,00.
50% of the profit obtained in this hypothetical scenario, which is; € 17.500,00 will be taxable income. The Tax Authority will include this amount with other income, regardless of its category. The tax calculation considers his taxable income, applying the corresponding tax rate to determine the amount owed. The tax rate of Antonio is: 28,5%. In a simplistic way, we can say that he will pay tax 28,5% of the value of the Capital Gains which, in this example case, corresponds to 4.987,50 euros.
How can Capital Gains tax be reduced?
In order to reduce the Capital Gains after the sale of real estate, you can deduct expenses, for example: services of the real estate agency, costs of the deed, costs related to the sale, stamp duty tax, fees. Furthermore, we can deduct and use all the investments made in real estate to enhance the property, such as renovation works, to reduce the Capital Gains. The higher the expenses are, the lower the Capital Gains. It is important to put your fiscal number (NIF), the address of the house, and your name on every invoice you received, and keep these documents for 5 years. We can deduct expenses spent on requalifying properties, from a period of up to 12 years.
When is this tax due to be paid?
The taxes on the Capital Gains need to be paid at the time we pay personal income tax (IRS).
Taxpayers submit the Personal Income Tax (IRS) declaration between April 1st and June 30th of the following year. For instance, during the period from the 1st of April to the 30th of June 2024, we will submit the income declaration for the entire year of 2023. In case there is tax liability, it must be settled by the 31st of August 2024.
Pedro Pitté of Pitté Monteiro Contabilidade e Consultoria Lda.