— Calculation of capital gains
— Real estate sales may generate income subject to income tax (IRS) (with a capital gain resulting from the difference between the purchase and sale prices).
The following must be known to calculate the capital gain amount:
— purchase price and year;
— costs of property improvements (work done in the 5 years preceding the sale);
— purchase and sale expenses;
— sale price and year.
Year of purchase:
— if you purchased the home before 31 December 1988, capital gains are not subject to taxes, but must be declared in Annex G1 of the “Modelo 3” tax form;
— if you purchased the home after this date, you must determine the adjustment coefficient applicable to the purchase price, in accordance with the currency devaluation during this time;
— if less than 2 years have elapsed between the purchase and sale, the purchase price will not be adjusted.
Table to adjust the purchase price of properties sold in 2011:
|Year of purchase||Applicable coefficient|
(coefficients for 2012 will be published near to the end of the year)
The purchase and sale prices, against which Real Estate Transfer Tax (IMT) was paid, appear on the respective warranty deeds.
If the home was built by the seller, the purchase price will be the greater of the following two amounts:
— taxable assessed value, per the legal description;
— cost of land + construction cost (provided that they are documented).
The purchase price is adjusted by applying the purchase year’s coefficient.
To determine the capital gain, the following must be added to the purchase price:
— property purchase expenses, such as the Real Estate Transfer Tax (IMT), deed and registration expenses;
— cost of work done in the last 5 years (documented);
— expenses to sell the property.
One half of the resulting gain is subject to income tax (IRS); this is added to other income declared on your “Modelo 3” tax form, and taxed at the same rate as other income.
House purchased at €32,400, and:
— Real Estate Transfer Tax (IMT) not paid, due to exemption;
— €760 for deed and registry;
— electrical wiring replaced (€1,980) in 2008;
— sold for €94,700 in 2011.
The capital gain is €41,092. Since only half is subject to tax, you would pay income tax (IRS) against €20,546. However, on the income tax return, you only have to mention the property’s purchase and sale prices and dates, together with the amounts of respective fees, indicating purchase costs. The tax authorities will take care of the calculations.
Calculation of taxable capital gains:
94,700 – (32,400 x 1.57 (adjustment coefficient) + 760 + 1,980) =
94,700 – 50,868 = 41,092 x 50% = 20,546
This amount is added to the other income subject to income tax (IRS) to calculate the applicable rate.
The capital gain may not be taxed, partially or in whole, if the seller uses the money from the sale of a property where he/she resided to purchase another permanent residential property.
For reinvestment to exist, the amount received from the sale of the house must be used as follows:
— to purchase a new permanent residential property (land for the construction of a permanent primary residence, apartment or dwelling), in Portugal or another EU or EEA member state (if the exchange of tax information exists), within 36 months of the sale;
— to build, expand or improve a permanent residential property, in Portugal or another EU or EEA member state (if the exchange of tax information exists), for costs incurred within 36 months of the sale;
— to pay for a permanent residential property purchased within the preceding 24 months, or to repay loan taken out for this purpose.
When the reinvestment occurs outside of Portugal, taxpayers must provide proof of their residence and household at that location, by means of a statement issued by the competent authority of the other state.
If the taxpayer is still paying the bank for a loan taken out to purchase the sold house, the reinvestment amount will equal the amount received for the sale of the house, minus the amount used to pay off the respective loan.
All of these operations must be documented in statements issued by the bank and notary deeds, and duly indicated in Annex G of the “Modelo 3” tax form for the year in which they occurred.
If you do not intend to purchase the new residence in the year of the sale, to benefit from this scheme, you must state in Annex G of your tax return for the year of the sale that you intend to reinvest the amount of the sale or a portion thereof. Be sure to indicate the amount that you intend to reinvest. If the amount is different than that declared, you will have to submit an amended “Modelo 3” tax form, with Annex G, specifying the amount actually reinvested.
If the amount reinvested equals only part of the sale amount, only the portion corresponding to the reinvestment amount will not be subject to income tax (IRS).
The property purchased should be identified through land registry information in the tax return in which the reinvestment is being declared.
Income tax (IRS) will be due under the following circumstances:
— if you do not inhabit the reinvestment property in the 30 months following the sale originating the capital gain;
— if the amount of the sale is used in construction or improvements to a primary residence, and the respective works do not begin within the same time period, or the modifications are not recorded in the land registry in the following 2 years;
— if you purchase land for construction, the works do not begin within the following 30 months, and the home built is not recorded in the land registry in the following 2 years (exceptions only for reasons attributable to the public entities involved);
— even when purchasing another residential property financed by a new loan, only the purchase amount paid without the use of a loan is considered reinvestment.
Residential construction or improvements: you must be living in the home, with your family, for at least 5 years before the sale originating the capital gain.
House purchased for €32,400.00, and
— Real Estate Transfer Tax (IMT) not paid, due to exemption;
— €760.00 for deed and registry;
— electrical wiring replaced (€1,980.00) in 2008;
— sold for €94,700.00 in 2011;
— total exemption from income tax (IRS).
According to this example, if the taxpayer:
— owes €27,800 to the bank (principal plus interest);
— purchased a home for €125,000 in the same year.
In order for the capital gain not to be taxed, the taxpayer would have to invest at least €66,900 (the difference between the sale amount of the house, €94,700, and the €27,800 paid to the bank).
If the taxpayer takes out a new loan to purchase the house, this loan cannot be more than €58,100 (the difference between the amount of the house, €125,000, and the amount of €66,900 invested in the above example).
— If you need money for Real Estate Transfer Tax (IMT), notary expenses, minor works or furnishings, or any other expenses involving your new home, these should be financed by another means. Any loan associated with this property will result in a reduction of the reinvestment amount, as shown in the example below:
— If the property sold has two mortgages: purchase or other purposes (e.g. expenses for warranty deed, works, furnishings, etc.), only the repayment of the loan for the purchase of the property (per the respective warranty deed) will be considered.
— All reinvestment calculations are done using the amounts paid by the taxpayer without a loan. If you purchase a house for €200,000 (requested from bank), the tax authorities will not consider this reinvestment, and any capital gains resulting from a subsequent sale will be taxed under the normal scheme.
II – Partial exemption from income tax (IRS)
According to the example, if the taxpayer took out a loan for €90,000 to purchase the new home, only the €35,000 paid without the use of the loan (i.e. 36.96% of the €94,700 received) is considered reinvestment.
Only 36.96% of the amount of the capital gain would be exempt from income tax (IRS).
In cases of partial reinvestment, the tax authorities do not count the repaid loan amount (for the property sold) in calculating the reinvestment percentage, which penalizes the taxpayer, increasing the amount subject to income tax.
As such, it is important to carefully plan the loan amount for purchasing the reinvestment property to avoid situations of partial reinvestment whenever possible.
Residence with loan
The costs to purchase primary residential or rental property are subject to a 15% deduction (€591 maximum).
Annual deductible costs:
— interest from bank loans taken out for this purpose (agreements signed before 31 December 2011). Amounts paid with the balance of a housing savings account are not deductible;
— instalments for housing co-ops or group purchases (agreements signed before 31 December 2011). Amounts paid with the balance of a housing savings account are not deductible;
— rent paid for permanent housing, if not subsidized or financed by the state, with a legal rental agreement.
The amount of the deduction for housing expenses varies according to the taxpayer’s income bracket. The limit of €591 will be increased as follows:
— 50% for taxpayers in the 2nd bracket (income up to €7,250), to €886.50;
— 20% for taxpayers in the 3rd bracket (income up to €17,979), to €709.20;
— 10% for taxpayers in the 4th bracket (income up to €41,349), to €650.10.
Expenses involving mortgage instalments, financial leasing and co-ops will only be deductible through 2016, with the following limits:
— €443.25 (2013);
— €295.50 (2014);
— €147.75 (2015).
Rental expenses will be deductible through 2018, with the following limits:
— €502.35 (2013);
— €413.70 (2014);
— €325.05 (2015);
— €236.40 (2016);
— €147.75 (2017).
This amount is subject to a combined limit, with deductions for health, child support, education and retirement homes, as follows:
— 1,250 – 3rd bracket (taxable income of 7,410 to 18,375 *);
— 1,200 – 4th bracket (taxable income of 18,375 to 42,259 *);
— 1,150 – 5th bracket (taxable income of 42,259 to 61,244 *);
— 1,100 – 6th bracket (taxable income of 61,244 to 66,045 *).
* For taxpayers who are married or de facto partners, 50% of the couple’s taxable income is used for the purposes of ranking in the tax bracket. These amounts are increased by 10% for each dependent or child under legal guardianship (afilhado civil) who does not pay income tax.
Taxpayers in the last two income tax brackets (income above €66,045 per taxpayer) cannot take any deduction.