The issue of capital gains tax payable after the sale of a property is one of the issues that raises the most questions among owners and often leads to some hesitation when deciding to sell.
What are capital gains?
Simply put, capital gains are a tax levied by the State on the difference between the purchase price of a property and the sale price. Thus, capital gains correspond to the profit or gain obtained from the sale.
If you sell for less than you bought, there is no capital gain; on the contrary, there is a capital loss. It should also be noted that capital gains correspond to both physical (tangible) assets, such as real estate, and non-physical (intangible) assets, such as stocks or other financial products.
Questions arise because there are many variables to consider when calculating the value of capital gains. We will look at this in the next step.
How do we calculate capital gains?
In Portugal, capital gains for tax residents are taxed at 50%. If you are a non-tax resident in Portugal, the capital gain will be taxed in full - at 100%.
The following formula is used to calculate capital gains:
Sale value – (purchase value x currency devaluation coefficient) – purchase and sale costs – property valuation costs
In other words, in addition to the sale and purchase price, you will need to consider:
- Currency devaluation (a coefficient that changes annually and is published by decree in the Diário da República, available for consultation);
- The costs of the sale and initial purchase, where you can consider the real estate commission and energy certificate, as well as expenses incurred with the deed, registrations, and taxes on the purchase (IMT and Stamp Duty or the former SISA);
- The costs of property appreciation, i.e., conservation, maintenance, and improvement works carried out on the property over the last 12 years.
The sale value you calculate will not yet be the final value, as the calculation of capital gains is included in your IRS tax return, if you are a tax resident, and will be subject to general and progressive rates depending on your overall income.
If you are a non-tax resident, you will be taxed at a fixed rate of 28% on the total capital gains, which is a regime that may be more punitive and has therefore been the subject of legal disputes with the Tax Authority for many years, but which is still in force.
Once the value of your capital gain has been calculated, you will have to declare it as income in Annex G of your IRS tax return for taxable capital gains when you submit your usual IRS tax return for the income year. This gain is included with any other income you may have, and the tax payable will depend on the IRS bracket you fall into.
Still have questions? Contact the UrbiSeg Imobiliária team so we can provide you with all the support and information you need to understand this process and know what to expect.