Few issues create as much confusion and stress as the capital gains tax when selling a house. Understanding whether you need to pay capital gains tax, and how much, is essential before completing a property sale. In simple terms, capital gains refer to the profit made on the sale of a property.
How are capital gains calculated in Portugal? Is there a specific formula used to determine the taxable amount? And how does capital gains taxation work under the Portuguese IRS system?
The weekly Deco Alerta column is produced by Deco* – the Portuguese Association for Consumer Protection – for idealista/news and is aimed at consumers across Portugal.
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We've decided to sell our house because our family is growing, but we're worried about capital gains tax. We don't even know what it is, let alone if we'll have to pay tax on the infamous capital gains tax…
Can Deco (Portuguese Consumer Protection Association) shed some light on this for us? Count on Deco to inform and support you.
First, it’s important to clarify what is meant by capital gains tax on real estate. Whenever a homeowner sells a house, the transaction must be declared on their income tax return in the following year, allowing the tax authorities to assess whether a capital gain has been made and whether capital gains tax is due.
But what are capital gains from real estate?
Capital gains on real estate refer to the profit made when a property is sold. This profit is calculated as the difference between the sale price of the house and the original purchase price.
If the final amount is higher than the purchase price, the result is a capital gain. If the property is sold for less than it was bought for, this difference represents a capital loss.
What data is needed for the calculation?
To calculate capital gains on the sale of a property in Portugal, the following information is required:
- Year of purchase and purchase price: the amount originally paid for the house.
- Year of sale and sale price: the amount for which the property is sold.
Monetary devaluation coefficient: a coefficient used to update the purchase value of the property, based on the year it was acquired.
This applies when more than 24 months have passed between the date of purchase and the date of sale.
These coefficients are updated annually by decree and published in the Official Gazette.
- Expenses and charges: eligible costs related to the property, such as construction works, improvements or window replacement, estate agency fees, the cost of obtaining an energy performance certificate, Municipal Property Transfer Tax (IMT), and expenses associated with registrations and deeds.
What expenses and charges can be deducted from capital gains?
When calculating capital gains on the sale of a property in Portugal, certain expenses and charges can be deducted, helping to reduce the taxable amount. These include:
- Energy performance certificate costs.
- IMT (Municipal Property Transfer Tax) paid at the time of purchase.
- Stamp Duty (Imposto do Selo – IS)
- Estate agency commission paid for the sale of the property.
- Solicitor or lawyer’s fees related to the transaction.
- Deed and registration costs (often referred to as escritura costs).
- Property improvement expenses, including maintenance and conservation works that increase the property’s value, provided they were carried out within the 12 years before the sale.
These deductible expenses are taken into account when determining the final capital gain subject to tax under the Portuguese IRS system.
How are capital gains calculated?
Capital gains are calculated by subtracting the acquisition value of the property from the sale price. In the case of an inherited property, the relevant figure is the Taxable Asset Value recorded at the time of inheritance.
In addition, certain documented costs can be deducted before determining the final taxable gain, as mentioned above.
What is the formula for calculating capital gains?
The formula used to calculate capital gains on the sale of a property is as follows:
Capital gains = Realisation value – (acquisition value × monetary devaluation coefficient) – (acquisition and sale costs + property improvement expenses).
How does capital gains taxation work?
When you sell your home in Portugal, the transaction must be declared to the IRS on your income tax return for the year in which the sale took place. This obligation applies even if no capital gains tax is ultimately due.
After submitting the declaration, the tax authorities will assess whether a capital gain has been made and calculate the amount subject to taxation under the IRS rules. It is also important to check carefully whether you qualify for an exemption, as Portuguese law provides specific situations in which capital gains tax does not apply.
Who is exempt from paying capital gains tax on real estate?
Certain situations allow homeowners in Portugal to benefit from an exemption from capital gains tax on the sale of property.
Properties acquired before January 1989, the year the Federal Revenue Code entered into force, are not subject to capital gains tax when sold.
In addition, capital gains arising from the sale of a property used as a primary and permanent residence may be exempt from taxation, provided specific conditions are met:
Reinvestment of capital gains in another main home: after deducting any outstanding mortgage amount repaid at the time of sale, the remaining proceeds must be reinvested in the purchase of another property intended as the seller’s primary and permanent residence.
This reinvestment must take place within 24 months before or up to 36 months after the sale. To qualify, the property sold must have been the owner’s main residence, evidenced by their registered tax domicile, during the 24 months prior to the transaction.
- Declaration of intention to reinvest: if the new property is not purchased in the same year as the sale, the seller must declare their intention to reinvest the proceeds, even partially, in their income tax return for the year in which the sale occurred to maintain the right to the exemption.
Contact us for more information.
*Contact Deco by phone at 21 371 02 00 or by email at deco@deco.pt. You can also call via WhatsApp (+351 966 449 110) or schedule an appointment via Skype. Follow us on Facebook, Bluesky, Instagram, YouTube and LinkedIn.
