Real estate capital gains: what are they and how are they calculated?

When a house is sold, this transaction generates real estate capital gains for the seller, which correspond to the profit he earns in the process.

According to the Finance Portal, "realized gains or losses are considered to be the gains or losses incurred through the onerous transfer, whatever the title in which it operates, as well as those arising from claims resulting from the allocation".

To know the gains generated in your favor with the sale of a property, you can use the following formula:

Sale value - (acquisition value x currency devaluation coefficient) - purchase and sale charges - charges incurred with property appreciation (in the last 5 years)

In the calculation above, note that the "charges incurred with the valuation of the property" refer, for example, to the installation of a central heating system in the house, which is something that contributes to the value of a house.
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In turn, the "purchase and sale charges" include the following expenses:

. Application for an energy certificate;

. Land registration and the resulting taxes;

. Stamp duty;

. Deed costs;

. Municipal Tax on Transfer of Property (IMT);

. Commission paid to the real estate company (if any).

The value of real estate capital gains is subject to taxation at the IRS corresponding to 50% of the profit obtained. For example, if the real estate capital gains are 14 thousand euros, the taxation amounts to 7 thousand euros.

Take note:

The IRS is an annual tax basis, which means that if you sell a property in 2021, you will have to include this transaction in this year´s IRS return, which will be filed in 2022.

All data relating to real estate capital gains must be declared in annex G of the IRS, which is one of the annexes of model 3 of the income statement, unless there is an exemption from taxation.

By declaring these expenses related to the purchase, sale and appreciation of the property, you can thus reduce the amount of tax you will pay. The amount you will pay from the IRS is then calculated based on the remaining income presented.

Important:

Within a period of five years, all expenses and charges mentioned above may be subject to proof by invoice, so it is important that you gather this documentation before declaring it to the IRS.

Is it possible to have IRS exemption on real estate capital gains?

Portuguese taxpayers may be exempt from real estate capital gains in two different situations.

#1 - Acquisition of property prior to 1989

First, if the property that is for sale was acquired before 1989 (which was the year in which the IRS Code came into force), then its sale is not subject to IRS.

But note that, even not subject to tax in this case, the transaction must be declared in Annex G1, which refers to untaxed capital gains.

#2 - Reinvesting in another house

Secondly, if the property that is for sale is a permanent home, there will be an IRS exemption if the owner opts for the reinvestment regime. This means that if the amount acquired from the sale of the house is reinvested in the purchase of another dwelling (or even a building plot), then the capital gain will not be subject to tax.

But attention:

If you choose to reinvest, note that it must be carried out within the 24 months prior to or 36 months after the sale of the property for the exemption to apply.

If the solution chosen by you resides in reinvestment, find out how much the financing for the new property will cost you through our simulator:

NEW HOUSE FINANCING

If the real estate capital gains are not invested in the acquisition of another house, the IRS declaration must still describe any costs that may have been incurred with works/improvements carried out in the dwelling, replacement of windows, issuance of an energy certificate, IMT, expenses with the deed and the like.

It should also be noted that the reinvestment can be partial, that is, used, for example, to carry out expansion works on another property. In this case, it is necessary to calculate what proportion of the surplus value is not subject to IRS.

However, it should be noted that if the residence that is for sale is a second home (a holiday home, for example), the reinvestment regime cannot be applied and, consequently, 50% of the capital gain will be taxed.

Also consider the existence of losses

If, contrary to all that has been described so far, the sale of a house generates a loss instead of a profit, then we are dealing with a loss.

If the sale of the property results in a loss rather than a gain, this loss must be reported within 5 years.

It should also be noted that annual taxation corresponds to the balance between real estate capital gains and capital losses. Therefore, if, for example, you sell two properties and in one of them there is a gain and in the other a loss, the difference between the two (therefore, the balance) will be what is subject to IRS.

In short, the profit you can get from the sale of a house will never be exempt from taxation unless you use that amount to buy another property (reinvestment hypothesis). And whether capital gains are generated or not and they are taxed or not, it will always be necessary to declare the transaction to the IRS.

Source: Dinheiro Vivo