Capital gains on the sale of real estate
In general terms, the sale of real estate generates capital gains, calculated as the positive difference between the sale price and the purchase price, adjusted by applying monetary coefficients and adding certain charges and expenses:
Capital gain = Sale price – Purchase price * Monetary coefficient – Charges – Expenses.
Charges: charges related to the appreciation of the property, incurred in the last 12 years (e.g., construction work).
Expenses: necessary expenses inherent to the purchase and sale (e.g., brokerage commissions and IMT).
This capital gain is subject to IRS (personal income tax) and may be totally or partially exempt from taxation, as described in the following sections.
Half taxation
If the calculated capital gain is subject to total or partial taxation, it is considered at 50% in the final calculation for tax residents in Portugal.
Sale and purchase of HPP – tax exemption
In cases where the property sold is the owner's permanent residence (HPP) and where there is an intention or actual reinvestment in another HPP, the capital gains obtained may be exempt from taxation if the following conditions are met:
- The property sold was an HPP;
- The sale price minus the value of the loan associated with the property sold is or has been reinvested in the purchase of another property considered as HPP. For reinvestment purposes, the amount used without recourse to a bank loan counts.
Amount to be reinvested using own resources = Sale price – Amortization of the loan on the property sold
- The new HPP must be acquired between 24 months prior to and 36 months after the date of sale of the property that generated the capital gain;
- The intention to reinvest must be declared in the annual IRS tax return.
The conditions are relatively clear, with number 2 usually being the least obvious.
Under that condition, if you sell a HPP for €100,000, which had an associated loan of €20,000, then when purchasing the new HPP, you would have to invest at least €80,000 (€100,000 – €20,000) of your own money to be excluded from any capital gains, in addition to any credit value.
If the reinvestment is not total, the capital gains will be taxed proportionally:
Capital gains subject to taxation = Capital gains * (1 – Amount reinvested through own resources / Amount to be reinvested through own resources)
Sale of HPP and loan amortization – tax exemption (transitional regime)
HPPs sold between 2015 and 2020, with a loan agreement signed before 2015, benefit from a transitional tax exemption regime similar to the one mentioned above, provided that:
- The sale price is used in full to repay the existing loan. If only part of the sale price is used, the tax exemption is proportional to the amount used;
- The seller of the property does not own another residential property.
- If these conditions are met, this regime may be preferable to the regime of reinvestment in a new HPP, in cases where the loan repayment amount exceeds the amount reinvested through own resources, which should not be frequent.
Examples
Let's look at some examples to better illustrate the situation, using the data below as a basis:
- Purchase price: €100,000
- Associated loan amount: €20,000
- Sale price: €170,000
- Capital gain: €70,000
It is assumed that the property sold is HPP.
Example 1
A new HPP is purchased one month after the sale of the property for €230,000, with a loan of €50,000.
This purchase meets all the criteria, so the capital gain will be excluded from IRS taxation. In particular, the amount reinvested through own resources (€180,000 = €230,000 – €50,000) is greater than the sale value minus the loan associated with the property (€150,000 = €170,000 – €20,000).
Example 2
A new HPP is purchased one month after the sale of the property for €230,000, with a loan of €200,000.
This purchase does not meet all the criteria, so the capital gain will be subject to partial income tax.
As the amount reinvested through own resources (€30,000 = €230,000 – €200,000) is less than the sale value minus the loan associated with the property (€150,000 = €170,000 – €20,000), the capital gain will be partially taxed.
Taxed capital gain = €70,000 * (1 – €30,000 / €150,000) = €56,000.
As a tax resident in Portugal, the capital gain is considered at 50%, or €28,000.
Example 3
A new HPP is purchased one month after the sale of the property for €230,000, with a loan taken out for the full amount.
This purchase does not meet all the criteria and will therefore be subject to IRS taxation.
As the reinvested amount is entirely through a bank loan, the capital gain of €70,000 will be subject to taxation in full.
However, if the criteria listed in the section Sale of HPP and loan amortization - tax exemption (transitional regime) are met, up to 17.6% (€30,000 / €170,000) of the capital gain will be exempt from taxation.
As a tax resident in Portugal, the capital gain is considered at 50%.
Example 4
A new property is purchased, but the HPP becomes a property that was used as a vacation home, purchased more than two years ago. There is no intention to reinvest in an HPP in the next three years.
As the capital gain obtained was not/will not be reinvested in the acquisition of a HPP within the time limits, the capital gain of €70,000 will be subject to taxation in full. In addition, as the seller of the property owns another property, the regime of Sale of HPP and loan amortization - exclusion from taxation (transitional regime) is also not applicable.
As a tax resident in Portugal, the capital gain is considered at 50%, i.e., €35,000.