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Things you need to know about capital gains tax
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What you need to know about capital gains tax in Portugal and what it means for your Algarve property sale. All Finance Matters explain the tax, its exemptions and what can be deducted.
The concept of Capital Gains tax is pretty straightforward. The gain occurs when you sell something, in this case property in Portugal, for more than you spent to acquire it. However, as with all things tax related, there can be exemptions and deductions to cut your captial gains tax.
Expert tax and accountancy consultants All Finance Matters expain below all you need to know about Capital Gains tax in Portugal.
UPDATE: Find out about the changes to Capital Gains tax in 2023
Check ourMoving to Portugal Guide for insights on schools, taxation, where to live, healthcare, buying property and more.
A capital gain occurs when you sell something for more than you spent to acquire it. This happens a lot with investments, but it applies to personal property too. Are you planning to sell your home? Find out what tax you will have to pay and how to reduce this liability.
You can’t hide from the tax department
Any property transaction performed in Portugal must be reported to the Tax Authorities by the notary that executes the deed. This means that when you declare the sale on your tax return, the tax authorities already know of it, so if you fail to include this on your declaration, the taxman will be after you.
It’s mandatory to file a tax return every time you sell a Portuguese property
Irrespective of your tax domicile, if you sold a property located in Portugal, this means that you need to declare it in your tax return in Portugal. Regardless if there was a gain or not, it’s mandatory to make this declaration, which happens normally in May of the year following the sale, in case of individual ownership, or within 30 days after the sale, in case of corporate ownership (companies without activity).
Declaring the sale doesn’t mean you need to pay tax
You only pay tax, if you had a gain on the transaction. So if you sell something for more than the purchase price, then the difference is a capital gain and that is reported on your taxes. Please note that the value you paid for the property needs to be adjusted, according to the inflation coefficient, applicable to the year of purchase. This means that the purchase value will increase for the capital gains calculation. Also, some expenses will be included in the tax return and deducted from any gain obtained.
In which cases your sale is tax exempt
It is possible to be exempt from tax in certain situations. For example if the property was acquired prior to 1989, it’s not liable to any CGT. Nevertheless, taxpayers will still have to declare these operations. But this is not the only tax exemption on capital gains from the sale of a property. The law provides, for example, that if you use the full amount of the sale of a property to buy another home (only applicable to tax residents and only in the sale of their primary residence), to build a home or purchase of land intended for the construction, you don’t pay tax on capital gains. Please note that this reinvestment of the gains, needs to happen within 36 months and can be done in any EU country.
Expenses allowed to deduct your capital gains
From the sale of your property you can deduct, the costs incurred with the purchase operation and sale of the property (eg IMT and registers on the purchase, real estate commission on the sale, etc). Taxpayers can also deduct costs incurred in property over the past twelve years, such as property refurbishments or other money spent to increase the value of the asset, including the cost of the energy certification.
Residents vs Non-residents individual ownership
If you are non-resident for tax purposes, the tax applicable to your capital gain will be 28%. If, however, you are resident, the tax will be levied only on 50% of the gain and you will be taxed according to the tax bracket applicable to your overall income.
However, if you are non-resident and an EU national, it’s possible to opt for the rules that are applied to residents and be taxed only on 50% of the gain. Contact us and we will tell you how this can be done.
In this case, although the non-resident is taxed under the same rules as a resident, as this is not the non-resident's primary residence, the gains cannot be rolled over if he/she buys another property. The 'reinvestment rule' (see below) is available only to residents who sell their main residence and buy another property, which will be in turn become their main residence.
How does the reinvestment work?
If you are resident and this is your primary residence, you can reinvest the proceedings of the sale in another purchase within the EU. This needs to be done on a purchase made between 24 months prior and 36 months after the sale. If the reinvestment in the new property is lower than the total sale, than the tax will be calculated pro-rata.
Please note that if you declare on your tax return that you wish to reinvest the proceedings of the sale and then fail to do so, or reinvest a lower amount, the tax will be re-assessed and you will pay interest.
Even if you do not plan to sell your home for now, it is important that you keep all paperwork for supporting charges and make sure these invoices include your name and fiscal number and, very important: the correct address of the property. The repayment of mortgage loans, incurred to purchase the property, will also be taken into consideration, when calculating the tax return.
It’s important that you plan ahead, as you can’t afford any tax surprises. Please feel free to visit us for a friendly chat and ask us for a capital gain tax simulation on your property. If you fear that you may be liable for a big capital gain tax bill, then let’s study your case, we may find a way of substantially reducing this tax burden.
DISCLAIMER: this text contains description of a generic nature and cannot preclude specialist advice in connection with specific situations.
Information originally published by All Finance Matters.
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