How does capital gains reinvestment in secondary housing work in Portugal?

What are capital gains and how are they taxed?

Capital gains refer to the positive difference between the sale price of a property and its acquisition value, including possible improvements and duly documented expenses. In Portugal, these gains are subject to taxation under the Personal Income Tax (IRS) regime.

For tax residents in Portugal:

• 50% of the capital gain is subject to IRS taxation.

• The amount is added to the remaining income and taxed according to the progressive IRS brackets.

• A portion of the capital gains can be excluded if the taxpayer reinvests the amount in another eligible property, under specific conditions.

What qualifies as secondary housing?

A secondary residence is one that does not qualify as your permanent home. For example:

• A vacation house.

• A property that is rented out.

• A house intended for occasional or leisure use.

Unlike the main residence, the sale of a secondary property does not automatically benefit from total capital gains exemption, even if there is a reinvestment. However, in some cases, there may still be ways to optimize taxation.

Capital gains reinvestment: only for permanent residence

Portuguese tax law currently allows capital gains exemption when the proceeds from the sale of a permanent home are reinvested in the acquisition, construction, or improvement of another permanent home, either in Portugal or within the European Union/European Economic Area.

The essential requirements are:

• The sold property must have been the seller's permanent residence.

• The reinvestment must take place within 36 months after or 24 months before the sale.

• The reinvestment must be declared in the annual IRS return.

Therefore, secondary housing is excluded from this exemption. That means, if the property sold is not your tax-declared permanent residence, you must pay IRS on the capital gains, regardless of whether you intend to use the money to buy another property.

Are there alternatives for mitigating the tax?

Even if there is no full exemption, there are some legal strategies that can help reduce the IRS amount to be paid:

1. Proof of expenses and improvements

All documented expenses related to the acquisition and sale of the property can be deducted from the capital gain, such as:

• Notary and registration costs.

• Real estate agent commissions.

• Certified improvement works (with invoices).

Keeping all documentation up to date and organized can make a big difference in the final taxable amount.

2. Property owned for a long time

Properties purchased before January 1, 1989 are not subject to capital gains tax, as they predate the IRS code. If this is your case, you can sell the property without IRS taxation.

3. Joint ownership and income brackets

If the property is owned by a couple, the gain is split between both owners, which may keep each taxpayer within lower IRS brackets, reducing the total tax burden.

Consulting with a tax advisor is always advisable to assess the best way to structure the operation and minimize the impact.

Planning a sale? Consider market timing and professional advice

To ensure that the sale of a secondary home is advantageous, it's not just tax planning that counts. It's also crucial to define the ideal time to sell, the correct valuation of the property, and the marketing strategy to attract buyers.

Working with a team experienced in the real estate sector, such as Engel & Völkers, can be decisive. In addition to facilitating the sale process, they help the owner to:

• Obtain a free and accurate property valuation.

• Position the property in national and international markets.

• Reach a qualified buyer audience.

• Negotiate the best price and conditions.

If you're looking to sell your apartment in Setúbal, Lisbon, or other high-demand areas, Engel & Völkers is an ideal partner for a successful and informed transaction.

When is it worth reinvesting after selling a secondary residence?

Although capital gains reinvestment from secondary residences does not offer tax exemption, using the proceeds to acquire other properties can be a strategic decision. Many sellers choose to:

• Buy new properties for rental income.

• Diversify into more valuable or better-located real estate.

• Acquire land or properties for future development.

In all cases, the important thing is to plan well and align the investment with your financial goals.

Final notes for informed sellers

If you are selling a secondary residence in Portugal, be aware of the fiscal implications of the transaction. Reinvestment will not guarantee tax exemption, but with the right support, you can reduce your tax burden and reinvest your gains with confidence.

Count on a real estate team with sector experience, capable of advising not only on the sale but also on the most intelligent ways to reinvest in the real estate market. This way, you ensure that every decision contributes to protecting your equity and generating new opportunities.

FAQ – Frequently Asked Questions About Capital Gains Reinvestment in Secondary Housing

1. Can I reinvest capital gains from a secondary residence and be exempt from IRS?

No. The exemption only applies to reinvestment from the sale of a permanent residence.

2. Is it possible to reduce the amount of tax payable even if I don’t get an exemption?

Yes. You can deduct acquisition and sale expenses, improvement works, and distribute gains between co-owners.

3. How long do I have to reinvest the gains?

In the case of exemption (for primary residences), the reinvestment must occur 24 months before or up to 36 months after the sale. For secondary homes, this rule does not apply for exemption, but you can still reinvest as part of your financial strategy.

4. Should I consult a tax advisor before selling?

Yes, especially if you aim to minimize your tax burden. A tax expert can guide you according to your specific case.

5. What documents should I keep to declare capital gains correctly?

Keep purchase and sale deeds, invoices for works, commissions paid, and any expense that affects the acquisition or sale value.

6. Can a real estate agent help with the process?

Absolutely. A professional like those at Engel & Völkers can support not only the sale but also advise on the reinvestment strategy and tax documentation required.