Are you in the process of purchasing or selling property in Portugal? Whether it’s your initial home purchase or the sale of a vacation property it’s crucial to understand the Portuguese capital gains tax regulations when it comes to property transactions.
The amount of tax you’ll owe hinges on several factors, including your residency status in Portugal, whether you’re selling while under non-habitual residence status, and your eligibility for tax relief.
What is capital gains tax?
As seasoned investors, our aspirations often center on making astute property acquisitions in Portugal. Over time, we anticipate the appreciation of these assets, envisioning the day when we can reap a substantial profit.
This profit, often coined as a ‘capital gain,’ emerges from the variance between the property’s selling price and the initial purchase cost. However, it’s imperative to recognize that this financial gain is not entirely yours to keep, as it incurs taxation upon sale.
The taxation of capital gains is a crucial consideration in any property investment strategy, especially when dealing with Portugal capital gains tax. The extent to which you can mitigate or potentially circumvent this tax liability hinges on a multitude of factors, including your understanding of Portugal taxes and the specific rules related to Portugal expat taxes.
Capital gains tax for Portugal Residents
Portugal residents are subject to worldwide property and investment gains tax as part of the country’s tax regulations, which includes tax rates in Portugal. Properties acquired prior to January 1, 1989, are exempt from capital gains tax.
Only 50% of the profit gained from the sale of real estate is considered taxable income, which is a crucial aspect of the Portugal tax rate for expats. This effectively reduces the taxable portion of the gain, making it more favorable for property sellers.
When it comes to real estate, the gains derived from property sales are integrated into your annual income and taxed using a progressive scale, which is another important element of tax rates in Portugal. This scale ranges from 14.5% to 48%, depending on the total income amount, including income for expats. Therefore, individuals with higher incomes typically face higher tax rates on their real estate gains.
Shares, securities, and bonds face a flat 28% rate and assets originated from ‘tax havens’ are taxed at a single rate of 35%.
Primary residence reliefs
When you sell your primary residence, you have the potential to entirely avoid capital gains tax, which is a significant aspect of capital gains tax in Portugal, depending on specific circumstances and how you handle the sale proceeds.
There are two reliefs accessible for this purpose: one for reinvesting the proceeds into a new primary residence and another for investing in a long-term savings plan or pension.
a) Reinvestment in a new primary home
Reinvesting the proceeds in another primary residence in Portugal or any EU/EEA nation with a tax treaty exempts you from capital gains tax in Portugal. To qualify for this exemption, you must reinvest within 36 months post-sale (or 24 months before) and reside in the new property within six months of the three-year deadline.
Regrettably, this exemption no longer applies to UK properties, affecting British expatriates returning to the UK.
b) Reinvestment in a long-term savings plan / pension
A further capital gains tax relief introduced in 2019 is especially advantageous for retirees. If you are retired or over 65, gains become exempt by reinvesting the proceeds from your primary residence into an eligible insurance contract or pension fund within six months of the sale.
Portugal capital gains tax for non-habitual residents (NHR)
The Non-Habitual Residency (NHR) tax regime in Portugal is an attractive program designed to encourage foreign residents, particularly retirees and high-net-worth individuals, to establish tax residency in Portugal.
Individuals holding NHR status are exempt from capital gains tax on specific global gains, contingent on the country with taxing rights as defined in double tax treaties.
For instance, when the gain is taxable in the source country, like UK real estate, non-habitual residents in Portugal bear no tax liability.
Nonetheless, these gains are categorized as ‘exempt with progression,’ thus contributing to your annual taxable income and affecting your effective Portuguese tax rate. Therefore, although not subject to direct taxation, the gain may raise your overall tax burden.
Capital gains tax on property owned by non-residents
Until 2022, non-residents who acquired immovable properties in Portugal were subject to an autonomous tax rate of 28% on the entire capital gains generated from these purchases.
Starting from January 1, 2023, non-residents are required to include real estate capital gains, equivalent to 50% of their value, in their overall income. These gains are then subjected to the respective progressive IRS rates, which can go up to 53%.
It’s crucial to emphasize that when the law requires the consolidation of income for individuals who are not tax residents in Portugal, all income, whether sourced within or outside Portugal, will be taken into account when determining the tax rate applicable to income generated within Portugal. This treatment aligns with the same conditions applied to Portuguese Tax Residents.
To clarify, the intention is not to tax foreign income in Portugal but rather to include it solely for the purpose of calculating the appropriate tax rate for the Portuguese income that is subject to taxation.
How to avoid capital gains tax when selling a house?
There is a set of expenses and charges related to the sale of a property that are accepted for tax deduction purposes in the IRS (Income Tax Return) and can significantly help reduce the tax payable on capital gains, and they are:
The energy certificate
The energy certificate is mandatory for both new and old buildings from the moment they are placed on the market for sale or rent, either by the property owners or real estate agents. This document’s primary purpose is to assess a property’s energy efficiency.
Municipal Property Transfer Tax (IMT)
This tax is paid to the state for onerous property transfers, meaning it’s the tax paid whenever there’s a financial transfer involved in buying and selling property within Portuguese territory.
Stamp Duty (IS)
This is the oldest tax in the Portuguese tax system and applies to acts, contracts, documents, titles, books, papers, and other events outlined in the General Table, which have occurred in Portugal and are exempt from VAT. There is no fixed value for this tax; it varies depending on the type of situation. It is usually calculated as a percentage of the transaction value, and the corresponding amount must be paid.
Real estate agency fee
If you choose to sell your property through a real estate agency, they will charge you a commission on the sale. This expense can also be deducted from your income tax return, along with other expenses associated with the sale of the house.
This is a cost that can be included in your income tax return as an expense related to the property buying and selling process. There is no fixed value, and it depends on the fees charged by each notary.
In addition to expenses related to buying and selling, you can also present amounts spent on maintenance and conservation work aimed at increasing the property’s value, provided that these have been carried out within the last 12 years.
Why choose to work with us for investing in Portugal?
We know Portugal. Due to our extensive local knowledge, we believe that concentrating our services in a single country destination is the best way to give you the most thorough and useful information.
One single channel of communication for the entire process. We provide you with a comprehensive service that covers all aspects of your move, from identifying the ideal residency visa to finding your new home or helping you to settle.
We recommend what’s best for you based on an extensive process experience that saves time and money to clients. Our pricing is clear and competitive, and we don’t sell services that make us more money.
Technology plays a very important role in our company. We minimize our clients’ involvement in paperwork. We are customers ourselves and we know how to serve you.
Frequently asked questions about Portugal Capital Gains Tax on Property
What is Capital Gains Tax on property?
Capital Gains Tax is a tax imposed on the profit made from the sale of property or real estate assets in Portugal.
Who is liable for Portugal's capital gains on property?
Both individuals and companies can be liable for capital gains tax in Portugal when they sell property, depending on their residency status and the type of property sold.
Do I need to declare my worldwide income in Portugal?
Yes, residents in Portugal are generally required to declare their worldwide income for tax purposes, which includes capital gains from property sales worldwide.
What is the capital gains tax in Portugal?
50% of the capital gains resulting from the sale of real estate in Portugal, whether by tax residents or non-residents, are subject to taxation at marginal rates ranging from 14.50% to 48%.
Can I live in Portugal and not be tax resident?
To be recognized as a tax resident in Portugal, you must meet one of the following criteria: stay in the country for more than 183 days, whether consecutively or not, during a 12-month period that starts or ends in the year when you apply for a tax residency status.