ALL you ever wanted to know about the capital gains tax on real estate and were afraid to ask
The ABC’s of CGT
Over the coming weeks, we will investigate the ins and outs of the taxation of profits from the sale of real estate and the impact of new legislation as well as the eventual changes in the wind.
Part 1: Brussels demands overhaul of capital gains tax laws
Part 2: CGT for individuals – tax relief for residents
Part 3: The double whammy on offshore (and almost-offshore)
Part 4: Small Portuguese property holding companies – the best of both worlds
When you sell a property in Portugal, the notary who performs the deed is required to report the transaction to the Finanças. Stated more bluntly, if you don’t report the sale, he will, and they’ll come after you.
In one recent example, an apprehended taxpayer received notification of the missing transaction before his tax assessment was even issued. He was fortunate – he had only to pay a re-submission fine. Others are forced to pay penalties as well as accumulated interest, which, on the larger amounts that are typical in many house sales, can prove quite costly.
How to calculate the gain
Although it is the Finanças, not you, who does the actual calculation, it may be worthwhile knowing what you will have to pay. Let’s suppose that you sell your home in 2004, which you originally purchased in 1994. Calculate your capital gains as follows:
Step 1 From the sales price, subtract any selling costs (commissions, notary fees, etc.)
Step 2 From the purchase price, add qualifying expenses (closing costs, legal fees, etc) and then multiply by the inflation adjustment coefficient
Step 3 Add to the purchase price any documented capital improvements in the past five years.
Conclusion – The difference between the adjusted purchase and sales prices is your net taxable profit.
Proper invoices can be a major problem. Many contractors will give only informal receipts that are not valid for tax purposes. If this dilemma reaches significant proportions in your instance, specific tax advice may be in order.
Taxation – resident vs. non-resident
As with all aspects of taxation, in most countries, tax breaks exist for residents (who, by the way, are voters), that do not exist for non-residents (who don’t vote). Therefore, those that make their principal abode outside of Portugal, pay a flat tax of 25 per cent – more than any higher rate resident taxpayer would pay. Residents receive a 50 per cent exemption before the gain is added to their other income and taxed at marginal rates.
If the property is your principal residence, then you can roll over your profit into a new property. You have a three-year window to do so – up to one year before the sale and as much as two years after. If you re-invest less than the full amount, the reduction will be on a pro rata basis. In the event that you do not fulfill your declared intentions, an assessment will be made on the entire non-reinvested balance plus interest.
Finally, given the EU pressure on this domestic tax break, it is likely, in the not too distant future, that such relief may be extended to new principal residence reinvestment anywhere within the 25 member states. Time will tell.
DENNIS SWING GREENE
International fiscal consultant,
Finesco International Financial
• Dennis Swing Greene is an International Fiscal Consultant for Finesco International Financial, with offices in the Algarve and in Lisbon. Appointments may be scheduled in Guia (Albufeira) on 289 561 333, or in Lisbon (Chiado) on 213 210 131.