The idea behind paying tax on a profit made from selling real estate in Portugal is simple. Profit is realized when an asset is sold for more than it cost to acquire it; in this example, Portuguese real estate. But, like with other types of taxes, there may be ways to reduce your capital gains tax liability.
When an asset is sold for more than it was originally purchased for, the seller realises a capital gain. Even while it’s more common with investments, this also applies to private property. Is selling your house on your future agenda? Learn your tax obligations and options for mitigating them.
If you owe taxes, you have nowhere to go
In Portugal, the notary who authenticates a real estate sale is legally obligated to report the deal to the country’s Tax Authorities. As a result, if you neglect to include this information when declaring the transaction on your tax return, the tax authorities will come after you.
When selling property in Portugal, a tax return must be filed
If you sold a property in Portugal, regardless of where your primary tax residence is, you must report the sale on your Portuguese tax return. This statement must be made regardless of whether or not there was a gain and is typically filed in May of the year after the sale in the case of individual ownership and within 30 days of the sale in the case of corporate ownership (companies without activity).
Simply filing a sales report does not trigger tax liability
Only if you made a profit from the trade do you have to pay taxes. Selling an item for more than you paid for it is a capital gain, which must be reported to the IRS. You should know that the price you paid for the property has to be increased upward by the inflation rate in effect in the year you made the acquisition. For the purposes of calculating capital gains, this means that the purchase price will rise. On top of that, you’ll be required to report certain costs in order to offset your gain.
When does your sale not need collecting sales tax?
In certain cases, you may not have to pay taxes. Property bought before 1989, for instance, is exempt from CGT. Nonetheless, it is the responsibility of the taxpayer to report these activities. However, this isn’t the only way to avoid paying taxes on your profit when selling property. For instance, you can avoid paying capital gains tax if you use the proceeds from the sale of a property to acquire another house (this rule applies only to tax residents and only in the sale of their principal residence), construct a home, or purchase land for the purpose of constructing a home. Remember that you can reinvest your profits in any EU nation at any time within 36 months.
Capital gains deductible expenses
You can deduct the expenses you spend during the acquisition and sale of your property from the proceeds you get (eg IMT and registers on the purchase, real estate commission on the sale, etc). In addition to the expense of being energy certified, taxpayers can deduct any costs incurred in the property during the last twelve years, such as repairs, upgrades, and other expenditures made to boost the asset’s worth.
Ownership by Residents vs. Non-Residents
There will be an additional 28% tax imposed on any capital gains you make if you are considered a non-resident for tax reasons. However, if you are a resident, you will only have to pay tax on half of the gain and will be subject to the standard rate of taxation for your income level.
However, if you are a non-resident EU citizen, you have the option of following the rules that are applied to residents and paying tax on only half of the gain. Get in touch with us, and we’ll fill you in on the details.
Despite being subject to the same tax laws as locals, the non-resident in this situation cannot defer capital gains by purchasing another property in the same country. Only homeowners who sell their primary dwelling and use the proceeds to acquire another property to use as their primary residence are eligible to take advantage of the’reinvestment rule’ (see below).
How does the money get reinvested?
If this home is your principal residence, you can reinvest the sale’s proceeds into another purchase elsewhere in the European Union. The time frame for doing this is between 24 and 36 months after the sale has taken place. The tax will be determined on a pro-rata basis if the amount being reinvested into the replacement property is less than the entire sale price.
Note that you will be subject to a reassessment of tax and interest if you state on your tax return that you intend to reinvest the sale proceeds and then either don’t do so or reinvest a lesser amount.
Keep any invoices and receipts for any services related to your house, even if you have no immediate plans to sell. These should include your full name, tax ID number, and, most importantly, the accurate address. In addition to the sale price, the tax return will also include in the amount repaid on any mortgage loans used to finance the acquisition of the property.
To avoid unpleasant financial shocks, it’s vital that you prepare for taxes in advance.
