Selling a House and Dealing with Capital Gains in Portugal

Find out how to sell a house and deal with capital gains in Portugal, taking advantage of possible exemptions and benefiting from tax strategies to reduce taxes.

Selling a house in Portugal can result in capital gains, which are the profits obtained from the difference between the sale price and the purchase price of the property. However, this profit is subject to income tax, but there are ways to optimise the process and minimise the taxes due. Understanding the tax rules and the conditions for exemption is essential for anyone who wants to make a profitable sale.

What are capital gains on property?

Capital gains on property arise when the sale price of a house is higher than its purchase price, minus any expenses incurred in the purchase, sale and any improvements made to the property. This profit is taxed, but it will not always be necessary to pay tax, as there are several tax benefits that can be applied, such as exemptions in certain cases.

For example, if your house was purchased for £120,000 and you sold it for £200,000, the capital gains would be calculated based on the difference between the sale price and the purchase price, minus additional costs such as improvements or selling expenses.

How Are Capital Gains Calculated on the Sale of a Property?

Calculating capital gains may seem simple, but it involves a few important steps to ensure that the purchase and sale values are correctly adjusted. The basic formula is as follows:

Capital gains = Sale value - (Purchase value + Charges + Improvements)

• Sale value: This is the amount you obtained from the sale of the property.
• Purchase Price: The price you paid for the property, adjusted for inflation.
• Charges: These include all expenses related to the purchase and sale, such as taxes, registration fees, deeds and commissions.
• Improvements: Costs related to improvement works carried out on the property, provided they are duly proven with invoices.

How does capital gains tax work?

In Portugal, capital gains are taxed at 50% of the calculated value. This amount is added to your income for IRS purposes and subject to your marginal tax rate, which varies between 14.5% and 48%, depending on your income bracket. Therefore, the tax payable will depend not only on the profit made on the sale, but also on your annual tax situation.

Tax Benefits and Exemptions

There are several situations that allow for exemption or reduction of capital gains tax. Some of the most common include:

Reinvestment in Permanent Own Home

If the sale is used to purchase another home, provided that it is also for your own permanent residence, you may benefit from tax exemption, provided that the reinvestment is made within 36 months of the sale.

Properties Purchased Before 1989

If the house was purchased before 1989, it will be exempt from capital gains tax. This benefit applies to properties acquired before the entry into force of the IRS Code.

Amortisation of Mortgage Loans

During the period from 2022 to 2024, capital gains obtained on the sale of a second home may be exempt from taxation if the amount obtained is used to amortise the mortgage loan.

Practical Examples of Capital Gains Calculation

Here are two examples of capital gains calculation to illustrate the most common situations:

Example 1: If you sell a house for £300,000, purchased for £150,000, and have carried out renovations worth £20,000, the calculation would be:

Capital gains = £300,000 - (£150,000 + £20,000) = £130,000

The taxable amount will be 50% of the capital gains calculated, i.e. £65,000.

Example 2: If the house was purchased before 1989 and sold for €500,000, the capital gains are exempt from taxation.

These examples help to understand how deductions for expenses and improvements impact the calculation of capital gains and, consequently, the amount to be taxed.

How to declare capital gains on your income tax return?

Capital gains must be reported on your income tax return, specifically in Annex G. The calculated amount will be added to your income for the year and tax will be calculated based on your marginal income tax rate. For properties purchased before 1989, you must complete Annex G1.

It is essential to keep all documentation proving the purchase price, the costs associated with the sale and any improvements made to the property, so that the declaration can be made correctly and without any problems.

Selling a house and dealing with capital gains in Portugal requires a good knowledge of the tax rules in order to take full advantage of the exemptions and tax benefits available. By calculating capital gains correctly, planning ahead and taking advantage of exemption opportunities, you can significantly reduce the tax you pay and maximise the return on your sale.

Source: SUPERCASA