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IRS 2009 Income Nº 7 – CAPITAL GAINS – Real Estate

By DENNIS SWING GREENE [email protected]

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

In this series of articles, we examine different forms of income that must be reported on “IRS”

tax declarations:

1. Income from Salaries,

2. Self-Employment – the Simplified Regime,

3. Income from Capital – Bank Interest,

4. Income from Capital – Dividends,

5. Rental Income,

6. Capital Gains on Investment Portfolios,

7.  Capital Gains on Real Estate

It is no secret that property in Portugal has proved to be an excellent investment over the years. However, if you sell your house, you still have to reckon with the Taxman before spending those profits.

This means that in Spring following the sale, you must report your gain in a Portuguese “IRS” Personal Income

Tax declaration.

How is the Capital Gain calculated?  

Although it is 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)

Year           Coefficient

1989                      2.32

1990                      2.07

1991                      1.84

1992                      1.69

1993                      1.57

1994                      1.49

1995                      1.44

1996                      1.40

1997                      1.38

1998                      1.33

1999                      1.31

2000                      1.28

2001                      1.20

2002                      1.16

2003                      1.12

2004                      1.10

2005                      1.08

2006                      1.05

2007                      1.03

2008                      1.00

Step 3:  Add to the purchase price any documented capital improvements to the property in the past 5 years.

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

Step 5:  One half of the net profit is assessed unless the gain is rolled over into another principal residence. Either way, report the sale on your annual IRS declaration.

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 should be 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% 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 1 January 1989 is added to overall income for the fiscal year and taxed at marginal rates (Properties purchased prior to 1989 are exempt for Capital Gains Tax).  2)  However, the gain may be rolled over if another principal residence of equal or greater value is bought between twelve months prior and 24 months after the sale.  For newly acquired properties of lesser value, the gain is calculated on a pro-rata basis.

QUESTIONS & ANSWERS

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?

If the reinvestment is less than the amount of the sale, you may owe additional tax and have to pay interest to Finanças on the non-reinvested balance.  In the event that no reinvestment takes place, an assessment will be made on the entire non-reinvested balance

plus interest.

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

At last!  Brussels condemned Portugal legislation as being incompatible with the basic European Union principles (free movement of citizens, goods and capital) and the law finally changed in late 2007.  Note, however, that proof of residency is required from the Competent Authority in the new country of residence.

Next:  PENSION INCOME

Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCO s.a. Consultations can be scheduled in Guia (Albufeira) 289561333, Lisbon (Chiado) 21342421 and in Funchal (Sé), Madeira 291221095.