Capital gains on real estate for individuals.jpg

Capital gains on real estate for individuals

By DENNIS SWING-GREENE

[email protected]

Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO s.a

PROPERTY IN Portugal has proven to be an excellent investment over the years.

However, you will always have to settle first with the Finanças when selling your piece of Portugal before complying with tax obligations in your home country. This means that in spring following the sale, you must report your gain in a Portuguese IRS Personal Income Tax declaration, regardless of where you are resident for tax purposes.

How is the Capital Gain calculated?

Although it is the Finanças, not you, who does the actual calculation, it may be worthwhile knowing what the damage will be. Let’s suppose that you sold your home last year that you had originally purchased in 1994. Calculate your capital gains as follows:

Step 1: From the sales price, subtract any qualifying buying or selling costs (commissions, notary and legal fees, transfer tax, etc.)

Step 2: Based on the year of acquisition, multiply the purchase price by the Inflation Adjustment Coefficient (see table).

Step 3: Add to the purchase price any documented capital improvements to the property in the five years previous to sale.

Step 4: The difference between the adjusted purchase and sales prices is your net taxable profit.

Year          Coefficient

1989 – 2.21

1990 – 1.97

1991 – 1.75

1992 – 1.61

1993 – 1.49

1994 – 1.42

1995 – 1.37

1996 – 1.33

1997 – 1.31

1998 – 1.27

1999 – 1.25

2000 – 1.22

2001 – 1.14

2002 – 1.10

2003 – 1.07

2004 – 1.05

2005 – 1.03

2006 – 1.00

2007 – 1.00

Important Note:

If you own your home through an Offshore or another form of non-resident company, the full gain is assessable in the year of sale and reported on the company’s ‘IRC’ declaration.

Resident vs. Non-Resident Individuals

If you are non-resident for tax purposes in Portugal, the Capital Gains Tax calculation is quite simple: 25 per cent of the full net profit.  If you are resident in Portugal, there are two options:

1) one half of the capital gain of the adjusted net profit on the sale of your principal residence acquired after January 1,  1989 is added to overall income for the fiscal year and taxed at marginal rates (properties purchased prior to 1989 are exempt from Capital Gains Tax).

2) when selling and replacing your principal residence of equal or greater value, the gain may be rolled over within twelve months prior and 24 months after the sale. For transactions of lesser value, the gain is calculated on a pro-rata basis.

Questions & Answers

Q. Last year, I sold my home and declared my intention to reinvest the proceeds of the sale.  What happens if I only reinvest part of these proceeds?

A. If the reinvestment is less than the amount of the sale, you may owe additional tax and have to pay interest to the Finanças on the non-reinvested balance.  In the event that you fail to purchase a replacement home, an assessment will be made on the entire non-reinvested balance plus interest.

Q. I plan to move to another EU country.  Can I get rollover relief on such an EU reinvestment?

A. Yes.  A new decree law authorising reinvestment throughout the EU has recently been approved.  Keep in mind that this is only for Portuguese tax residents moving to another EU country.  Fiscal residency also makes you assessable on your worldwide income for the entire tax year.  In other words, there are two sides to the coin so any change should be planned carefully.

Q. I sold a property in 2004 and failed to report the transaction. Last week, I received a demand from the Finanças, even though I reported the gain in my home country.  What should I do?

A. Unfortunately, you have few options at this point. Since all purchases and sales are reported by Notaries directly to the Finanças, they have sufficient information on which to base the assessment.  Your failure to declare penalises you in two ways: first, there are fines and late interest penalties for late declaration; second, you lose eligibility for deduction of necessary expenses as well as capital improvements. The tax you pay in Portugal will serve as a tax credit in your home jurisdiction.

Conclusion

By leaving things to the last minute, you paint yourself into a corner.  On the other hand, appropriate tax planning can open up a number of tax mitigation solutions.  If you start preparing for eventual Capital Gains when you first purchase, you should be able to avoid the worst of the pain.

Private consultations can be scheduled at offices in Guia (Albufeira), Lisbon (Chiado) and, starting January 2008, in Funchal (Sé), Madeira. In the Algarve, call 289 561 333, Lisbon at 213 424 210, Madeira at 291 221 095.