Introduction
Capital gains resulting from the sale of properties represent a significant part of the tax obligations associated with real estate transactions in Portugal. With recent legislative changes, it is crucial for real estate owners and investors to be aware of developments that may impact their taxes on real estate gains.
What Are Real Estate Capital Gains?
Capital gains are the profits obtained from the sale of properties, calculated by the difference between the sale value and the acquisition value, adjusted by certain currency devaluation coefficients and costs associated with the sale and improvements to the property.
Main Changes
The tax regime applicable to real estate capital gains in Portugal has undergone important changes, affecting owners who sell their properties. These changes mainly impact the reinvestment of capital gains, the exemption in cases of sales of second homes and sales to the State. Here's what changed:
Reinvestment of Capital Gains with Stricter Conditions
The Mais Habitação program implemented changes to the tax exemption system on profits obtained from the sale of properties used as permanent housing, when these profits are reinvested in the purchase of another property for the same use. Specifically, two new criteria have been introduced that limit the applicability of this exemption, which should reduce the number of cases in which the exemption is granted.
Previously, profits from the sale of properties intended for owner's own permanent residence were exempt from taxation, as long as the amount obtained from the sale—after deducting any financing for the acquisition of the property—was reinvested in the purchase of another property or land for construction, also for owner's own permanent residence, within 24 months before to 36 months after the sale.
With the new rules, two conditions are added:
1. The property sold must have been used as the owner's or his family's own permanent residence, proven by the tax residence, for a period of at least 24 months prior to the date of sale of the property.
2. Owners may not have used this exemption regime on gains obtained in the current year and in the three previous years, unless they can demonstrate, during the tax assessment process, that non-compliance with this rule was due to exceptional circumstances.
Exemption for Sale of Second Home for Credit Amortization
The Mais Habitação program introduces a temporary measure that allows tax exemption on capital gains obtained from the sale of land for construction and secondary residences, if these gains are used to partially or fully amortize the real estate loan on the seller's own permanent residence or their descendants. This exemption applies when the value obtained from the sale, after deducting the amortization of any loan related to the acquisition of the property sold, is used to amortize the outstanding capital of the housing loan intended for the seller's own permanent home or their descendants.
If the value obtained from the sale exceeds the amount due on the home loan, the remaining amount will be taxed in accordance with the general rules of the IRS Code.
This rule is valid for sales made between January 1, 2022 and December 31, 2024. It is important to note that the tax authority may ask taxpayers to present proof of payment after submitting the Model 3 IRS declaration for the years 2023 and 2024.
Additionally, the loan must be repaid within a period of three months after the sale of the land or second home. For sales made before the new law came into force, on October 7, this three-month period starts from that date.
Sales to the State and Right to Exemption from Capital Gains
The new legislation determines that profits obtained from the sale of residential properties to the State, the Autonomous Regions, public business entities in the housing sector or local authorities are exempt from personal income tax (IRS) and income tax. corporate income (IRC).
However, there are some exceptions to the rule. Not included in this exemption:
- Profits obtained by individuals who have tax domicile in countries, territories or regions with tax regimes considered more favorable, identified in an official list approved by the minister responsible for the financial area;
- Profits derived from sales made under the exercise of the preemptive right.
Furthermore, income that benefits from this exemption must be considered in the IRS calculation to determine the rate applicable to the taxpayer's other income.