NEWSLETTERS

Capital Gains of Real Estate Assets

Before you sell a real estate property, you need to know exactly what this will represent in terms of tax; in order to avoid future surprises most of them unpleasant!

The tax authority considers that a capital gain is made when:
A)	There is a sale of the rights to real estate;
B)	There is a transfer of the real estate property from an individual to an activity that will create income either as a company or as a professional activity exercised by the owner of the real estate..

Capital gains are only taxable when the acquisition of the real estate asset (or the royal rights) took place after 1st January 1989.

In general, the tax falls due on profit made at the moment of sale.

However, in the case of a promissory contract of purchase and sale or exchange, the profits are considered as having occurred upon the taking of possession of the asset or rights which are the object of the contract.

Capital gains are calculated as follows:

Sale Price - Purchase price x legal coefficient of inflation
+ Any legitimate and documented capital expenditure within in the previous 5 years
+ Any necessary costs involved in the purchase and sale of the property

The purchase price is updated using the legal coefficient that is annually published by the Government, in order to reduce the negative effects of inflation.

From the sale price will be deducted any capital expenditure made on the property in the last 5 years duly proved by presentation of legal invoices. These expenses are for example construction works in the property or other expenses that improve the asset (refurbishing).

Any costs incurred with the purchase and sale of the property, such as the IMT tax, notary fees, registry, and, also the commission paid to real estate agencies that intervened can be also deducted.

For the assessment of the capital gains tax due there is a different treatment between those owners who are tax residents in Portugal and non residents.

Residents can choose to reinvest, part or totally, the sales proceeds (deducting the repayment of an eventual loan that was made on the acquisition of the property), in:
A)	The acquisition of another property for habitation purposes, or
B)	A land for urban construction, or
C)	For the construction or improvement of another property located in Portugal or in another country of the European Union, provided that there is exchange of fiscal information between those countries.

In the case of reinvestment in the acquisition of another property, the individual must transfer his fiscal residency to this new property within six months of the reinvestment being made.

If the reinvestment is in the purchase of a plot of land for urban construction, the purchaser must initiate construction within six months of the reinvestment being made (unless the delay is due to a public authority), request the registration of the property with the Finance Department within a maximum of 24 months counting from the start of the works and transfer the person’s address to this property by the end of the fifth year counting from the year of acquisition.

In case of construction or improvement of an existing property, the work must start within six months of the reinvestment being made. The registraton of the property or its alterations with the Finance Department must be made within 24 months counting from the start of the work and once again the owner must transfer his address to this property by the end of the fifth year counting from the year of acquisition.

This option must be declared in the IRS (tax return) annual declaration and the reinvestment must be made within of 24 months after the sale or 12 months before the sale.

If the individual does not choose to reinvest, only 50% of the capital gain made will be considered and that will be included in the individuals annual income declaration. The tax rate applied will be whichever results from the global income declared according to the different categories reported.

If the individual is a non-resident, the capital gains will be charged at the special rate of 25% and he must submit the IRS declaration (tax return) in Portugal in the year following the disposal. The payment of the tax gains will be made in that following year (usually in August or September).

It is important to note that in case of an individual buying a plot of land and then build a house, he must keep retain all the invoices regarding the construction, in order to offset these costs in the capital gains tax upon an eventual sale.