Buying and selling property in an overseas market can be complex, making it essential for every expat to understand the tax framework and charges they may be liable to pay.
Like most European countries, Portugal levies a capital gains tax against the profits made on a property sale, but several allowances and exemptions may apply.
The expat tax specialists in Chase Buchanan Wealth Management’s team in Portugal clarify how the capital gains system works, how it applies to tax residents, non-residents and non-habitual residents, and the basis of tax calculations against property sales.
An Overview of Property Capital Gains Charges in Portugal
Capital gains is a tax levied against the gains, or profits, achieved through the sale of an asset – that could include a property, investment or any other asset that returns a capital gain. Tax is payable when that gain is realised, which is when you sell or transfer the asset and extract the accrued value.
Property transactions are one such capital gain. As the real estate market evolves and grows, many property owners find that if they come to sell a few years after purchasing a residence, the property will have naturally appreciated – resulting in a potentially taxable gain.
Of course, Portuguese taxes also depend on a number of factors, such as your residency status and the nature of the property you are selling. The general rules are fairly straightforward:
- Gains achieved on the sale of a primary residence are not taxable, provided you use that gain towards the purchase of a new permanent home within 36 months or in the 24 months before the sale.
- Otherwise, 50% of the gain made on a property sale is taxable, which includes investment properties, second homes or rental properties.
In Portugal, capital gains tax is called the Imposto Sobre Mais-Valias and tax rates depend on the value of the gain made – this profit is normally added to your income and is therefore taxed against the relevant earnings brackets.
Income Tax Brackets in Portugal
In effect, a gain made on the sale of a property in Portugal that is not exempt will be taxed in the same way as your other earnings and income, based on 50% of the gain. The current income tax rates are as follows:
Portuguese Capital Gains Tax for Residents
Expats who live permanently or primarily in Portugal are normally considered tax residents and are subject to taxation as any other Portuguese citizen. All capital gains made on worldwide property sales and investments are taxable, excluding properties purchased before 1st January 1989.
Although other types of gains are taxed at a flat rate of 28%, property gains that are not exempt are taxed against the relevant income tax brackets as above.
A gain made on the sale of a main home is not normally taxable, depending on the circ*mstances. There are two ways that tax residents can claim exemption and avoid paying any capital gains tax on the return:
- Purchasing a new primary residence with the gain, either within Portugal or elsewhere in the EU or EEA. The subsequent purchase must be made within 24 months before the sale or up to 36 months after, and you need to live in the new home within six months of the deadline to remain eligible for capital gains tax exemption.
- Reinvesting the capital gain into a pension plan or other eligible savings product. This additional exemption was introduced in 2019 and allows retirees or those over 65 to reinvest gains made on a property sale into a pension fund or other insurance product within six months – in which case no capital gains tax is payable.
It is important to note that UK-based properties are excluded from the exemption since they do not constitute a reinvestment into a primary home within the EU or EEA since the UK is no longer a part of the EU following Brexit.
Capital Gains Tax in Portugal for Non-Habitual Residents
The non-habitual resident scheme has now closed to new applicants as of 1st January 2024, however, a transition period is in place that will last until the end of this year, open to applicants who submitted their documentation before the closure date.
Those already living in Portugal under the NHR tax scheme and prospective expats who may be granted NHR tax status in the next few months will normally be exempt from paying capital gains tax on most transactions, provided they have relocated from a country with a relevant double tax treaty.
For example, the sale of a property in the UK, which may remain subject to UK taxation, will not be taxable in Portugal even if the resident is taxed as a resident for other purposes.
However, there is a caveat in that non-taxable gains made by NHR status holders are classed as ‘exempt with progression’. There may be no direct tax liability to pay, but the arising gain is added to the individual’s assessed annual income and could, therefore, tip them over into a higher income tax bracket.
Paying Capital Gains Tax on a Property Sale in Portugal as a Non-Resident
Changes to the capital gains tax scheme, with effect from 1st January 2023, amended how non-resident expats who own property in Portugal are taxed on capital gains. Previously, these owners paid a flat rate 28% tax rate applied to 100% of the gain from the sale of an ‘immovable property’.
The revised rules mean that non-residents remain subject to capital gains tax, but only against 50% of the realised gain, as with other categories of residents. Rather than paying a flat rate, their capital gains obligations are added to their other income and assessed against the income tax brackets, as shown above.
While a non-resident may not be subject to taxation against their worldwide income within Portugal, they remain liable to pay the taxes arising on incomes generated within the country. The difference is that transactions, incomes and capital gains originating outside of Portugal are not taxable under this tax system but depend on the tax obligations arising in the individual’s country of tax residency.
Taxation calculations may be complicated and rely on an evaluation of myriad other factors, including your tax residency status.
Related Items:Property Transactions, Tax System
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