DISCLAIMER: This post is intended as general information and as a guideline. We are not tax lawyers or accountants, and we highly recommend consulting a tax specialist before making any decision regarding capital gains.
The recent Mais Habitação housing law has introduced a new measure allowing for exceptions in capital gains tax when selling a secondary residence. Existing laws already regulate for capital gains tax exemption in certain other property sales situations, and additional or higher capital gains tax in others. As such, the objective of this post is to outline these different situations so our readers can make better decisions when selling property, both home and abroad.
Capital gains, or mais-valias in Portuguese, correspond to the profit obtained from the sale of a property. The gain is the difference between the price at which the property was sold and the price at which it was purchased. This difference can be positive and represent capital gain or, much less frequently, negative, representing a negative gain, called menos-valia in Portuguese. In this post we will deal exclusively with the much more common case when there is a positive gain.
Firstly, let’s look at how the capital gain is calculated. The capital gain is the difference between the sale price minus the purchase price multiplied by the monetary inflation coefficient (last published in the annex of ordinance Portaria n.º 340/2023 de 8 de novembro), minus any deductibles.
Possible deductible costs are:
– Renovation work done in the last 12 years to improve the condition of the property, as long as there are official invoices for the work with the owner’s name, NIF, and the address of the property.
– Estate agent fees
– The cost of the energy certificate, which is obligatory to sell most properties (rustic land and ruins are exempt, for example)
– Property transfer tax (IMT, or Imposto Municipal sobre Transmissão Onerosa de Imóveis)
– Stamp duty (IS, or Imposto de Selo)
– Notary costs, including costs of the deeds and registration
So, let’s now take a look at a few different situations when capital gains on property sales are obtained:
1. SALE OF A PRIMARY RESIDENCE
This is perhaps the most common case, when an owner sells the house they and their family are currently living in, and some or all of the gain may be exempt from tax.
Note, however, that the new Mais Habitação housing law, determines that to be considered a person’s primary residence, their fiscal address has to be established at the property for at least 2 years. This new condition is now stipulated in Article 10.º, 5 e) of the Código do IRS – Imposto sobre o Rendimento das Pessoas Singulares.
Capital gains tax in the case of a primary residence, is the tax charged on 50% of the net gain calculated after considering the deductible costs specified above. The tax rate is determined taking into account worldwide income using the progressive tax brackets which for 2023 vary from 14.5% to 48%, with a range of 13.25% to 48% having already been proposed for 2024.
Full exemption for this tax is possible when investing the full amount of the sale price minus payment of any outstanding mortgage capital in a new primary residence in Portugal or any other European union country. This reinvestment must be done in the 24 months before the sale of the property, or the 36 months after.
Additionally, the Mais Habitação law introduced a new condition: the seller may not have benefited from the exemption of capital gains tax in the year of the sale, or in any of the three previous years.
Lastly, if the full amount from the sale of a primary residence is not reinvested, then tax is levied on the remainder.
2. SALE OF A SECONDARY RESIDENCE
This may apply to either residents or non-residents, and since 1st January 2023, when the 2023 State Budget came into effect, the taxation rules are exactly the same for both: the tax rate is indicated by the progressive IRS tax brackets and is determined by worldwide income (see above). The capital gains are calculated as before and the progressive tax is applied to 50% of the net gain.
However, the Mais Habitação law (Lei 56/2023 de 6 de outubro) implemented another change for this situation. It is possible to be exempt from capital gains tax on the sale of secondary residences (or land intended for construction) if the gain is reinvested to pay the mortgage on the existing primary residence of the owner or their descendants (children, grandchildren, great-grandchildren, etc) in the 3 months following the sale.
3. SALE OF AN INHERITED PROPERTY
The only difference between this case and the first two mentioned above, is that there is no sale price to use for the gains calculation. So, the number used is the tax value, called the Valor Patrimonial Tributário, or VPT, which can be found on the caderneta predial document. The VPT value at the time of the inheritance should be used. Then, the same conditions specified in the first two cases above apply, depending on whether the property is the seller’s primary or secondary residence.
4. SALE OF A PROPERTY REGISTERED AS AL (ALOJAMENTO LOCAL)
If a property is registered as an AL, and the AL registration title-holder is also the property owner, then tax (calculated as before, according to the progressive ITS tax brackets) is levied on 95% of the net gain, and not the 50% used in the previous cases.
If only part of the property is registered as AL, such as 1 or more rooms, then theoretically the 95% coefficient should be used on that percentage of the property, and the normal 50% coefficient on the rest.
If the owner is NOT the AL registration holder (for example they may have rented to a management company, who registered the AL in the company name), then the normal 50% coefficient applies.
Lastly, if the AL registration is cancelled, and the owner waits at least 3 years before selling, the higher tax no longer applies, and the capital gains are taxed according to the normal rules for a primary or secondary residence.
5. SALE OF AN OVERSEAS PROPERTY
If a property owner is fiscally resident in Portugal, and sells a property overseas, then careful consideration has to be given to the rules and regulations governing which country taxes the gain and how.
In general, all tax treaties signed by Portugal and also Article 13(1) of the OECD Model Tax Convention (in cases where a tax treaty is not in place) allow the country where the property is located to tax any gains on property sold.
If the owner has the NHR tax regime in Portugal, then the gain is exempt from tax here. If not, then the specific tax treaty should be consulted, but in most cases Portugal will tax the difference if the taxes in the country where the property is located are less than taxes here.
Also, real estate located in a blacklisted country with no tax treaty with Portugal will almost certainly be taxed here.
- Properties bought before 1st January 1989 are exempt from capital gains tax, since they were bought before the IRS tax code was introduced
- Owners who are 65 years or older, can use the capital from the sale of a primary residence to invest in certain financial products like a Retirement Savings Plan Insurance (Seguro de PPR, or Seguro de Plano Poupança Reforma) . There are several conditions to this option, such as maintaining the investment for 10 years, with a 7.5% maximum pay-out, that are beyond the scope of this post.
Once again, we thoroughly recommend that a tax specialist is consulted before selling property in the cases indicated in this post.