Capital gains from property sales: what they are and how they work

What are capital gains from property sales?

Capital gains are the profit made from selling a property for more than its purchase price. This concept is widely used in the real estate context and has fiscal significance, as it is subject to taxation in Portugal. For instance, if you purchased a property for €200,000 and sold it for €300,000, the €100,000 difference constitutes the capital gain, which will be considered for income tax purposes. However, not all of this amount will be taxed, as possible deductions and exemptions are depending on the circumstances of the sale.

How to calculate capital gains from property sales?

The calculation of capital gains involves several factors and goes beyond the simple difference between the purchase and sale prices. The gain is determined by subtracting the adjusted acquisition value —comprising the purchase price of the property updated for inflation—and the associated costs, which include expenses directly related to the acquisition and sale, such as notary fees, registration fees, stamp duty, and verified expenses for renovations carried out in the last 12 years, from the sale price.

This calculation is essential for determining the taxable amount, making it crucial to maintain documentation that proves all associated costs. Correctly calculating capital gains requires considering all transaction costs, not just the straightforward difference between the purchase and sale prices.

Taxation of capital gains

Capital gains from property sales are subject to personal income tax (IRS) in Portugal. For residents, only 50% of the capital gains are taxed, and this amount is included with other income to determine the applicable tax rate. For non-habitual residents or non-residents, the taxation differs. Typically, non-residents pay a flat rate of 28% on the total capital gains, without the 50% reduction. However, there are situations where exemptions or reductions in tax may apply, as explained below.

Tax exemptions on capital gains

Not all capital gains from property sales are taxed, as Portuguese law provides for several important exemptions. If the gains are reinvested in purchasing, constructing, or renovating another property for primary residence within 36 months, you may qualify for full or partial exemption. Properties acquired before January 1, 1989, are exempt from capital gains taxation, as they were purchased before the current IRS Code came into effect. Retirees who use capital gains to supplement their pensions may also benefit from tax exemptions under certain conditions. These exemptions make it essential to plan property sales to maximize tax benefits.

Capital gains and the real estate market

The impact of capital gains on the real estate market goes beyond taxation. This concept directly influences decisions regarding property sales, purchases, and investments. For sellers, understanding capital gains enables informed decisions about the ideal time to sell, associated costs, and ways to minimize tax liability. For real estate investors, capital gains are a key component of long-term profitability strategies, as taxation can significantly reduce the profit from a sale. Thus, understanding the tax framework is crucial for assessing the viability of an investment.

The role of the real estate consultant in managing capital gains

An experienced real estate consultant is a vital resource in managing transactions involving capital gains. These professionals can help identify the best strategies to maximize the profit from a sale, considering costs and tax implications. If you’re considering starting a career as a real estate consultant, Engel & Völkers provides the training and support needed to achieve success in the sector. Learn how to begin a career with Engel & Völkers.

Essential documentation for property sales

To ensure the correct calculation of capital gains, it is important to gather all relevant documentation, including the property acquisition contract, land registry certificate, invoices and receipts for renovation expenses, and proof of costs related to the sale, such as notary fees and stamp duty. Organizing these documents is crucial to avoid issues with tax authorities and to ensure accurate calculations. These documents must be retained for several years, as they may be requested by the Tax Authority during audits or information verification.

Capital gains from property sales are a central concept in real estate transactions in Portugal, affecting both sellers and investors. Understanding how they work, the factors influencing their calculation, and potential exemptions is essential for ensuring a successful transaction and maximizing profits.

If you are considering selling a property or exploring opportunities in the real estate market, trust Engel & Völkers to assist you every step of the way. Our team of specialized consultants provides comprehensive support, from property valuation to contract execution, ensuring that all tax implications, including capital gains, are properly addressed.

Invest in the real estate market with confidence and security. Explore the possibilities of starting a career in the sector with Engel & Völkers, where you’ll find the tools and expertise necessary to thrive in this competitive market.