Capital Gains Tax (CGT) is one of the major matters of interest when it comes to deciding where to buy a property, so it might be worthwhile knowing how it is calculated in Portugal.
If you have bought your property after the 31st of December 1988 and sell it with a gain, this gain will be taxed in two different ways, depending if your are resident or non-resident in Portugal. Properties purchased before 1989 are exempt from CGT. In any case, even if the property is sold without a gain or exempt from CGT, a tax declaration must be filed.
1. How to calculate the gain?
Let’s imagine you sell your property in 2016 for 450,000€ which you had originally purchased in 2002 for 300,000€, then your capital gain is calculated as follows:
1.2. Adjusted Purchase Price
The purchase price will be increased by qualifying expenses, such as IMT tax (previously called sisa) and notary and registration fees. This figure will then be multiplied by the inflation adjustment coefficient, which for the year 2002 is 1,24.
Let’s assume the qualifying expenses on the above mentioned example were 15,000€, then the adjusted purchase price is calculated as follows:
(Purchase Price + Expenses) x Inflation Adjustment Coefficient = Adjusted Purchase Price
(300,000€ + 15,000€) x 1,24 = 390,600€
To find out the coefficient for the year you purchased your property, check the complete list here.
Any capital improvements (all types of renovation, extensions, etc.) carried out within the last 5 years will also be taken into account, as long as the related expenses are documented through invoices, which must state your name and fiscal number and clearly identify the property. Let’s suppose you renovated a bathroom in 2014 for 5,000€, then the Adjusted Purchase Price will be 395,600€.
1.2. Adjusted Sales Price
The sales price will be reduced by a possible sales commission payable to the real estate agency which found a buyer for your property.
Sales Price – Commission = Adjusted Sales Price
450,000€ – 27,675€ = 422,325€
Adjusted Sales Price – Adjusted Purchase Price = Gain, i.e. Net Taxable Profit
422,325€ – 395,600€ = 26,725€
2. How is the gain taxed?
Residents receive a 50% exemption before the gain is added to their income and taxed at marginal rates whilst non-residents pay a flat tax of 28%.
Although the EU insists that it goes against the European ideology to tax residents and non-residents in different ways, Portugal has not changed the rules so far.
3. What if I built the house I am selling?
If you bought a piece of land and built on it, your purchase costs for tax purposes can be one of the following two, depending on which is higher.
- [(Purchase price of plot + qualifying expenses) x respective inflation adjustment coefficient] + (building costs x respective inflation adjustment coefficient);
- First valuation of the property (plot + building) carried out by the tax office when the house was registered, multiplied by the respective inflation adjustment coefficient.
4. What if I am selling my permanent home?
If the property you are selling is your permanent home, then you are allowed to reinvest the sales price in another property within the EU without being liable for CGT. If you invest less than the total amount, then only the invested amount is exempt (pro-rata calculation).
The reinvestment can be made during a time window of 5 years, i.e. up to 2 years before the sale of your property and as much as 3 years after. If the new residence is purchased within 3 years after the sale, then reinvestment includes the purchase, construction, refurbishment or extension of a property. If the new property is purchased within 2 years prior to the sale of your residence, only the purchase of a property is considered a reinvestment.