How to Calculate Real Estate Profit When Selling a Property

Step-by-Step Guide to Calculating Real Estate Profit

Calculating real estate profit involves assessing the selling price and subtracting various costs, including the purchase price and eligible expenses. The basic formula is:

Real Estate Profit = Selling Price - (Purchase Price + Eligible Expenses)

Determining the Selling Price

The selling price is the amount for which the property was sold. This figure must be documented in the public deed and is typically the price the buyer pays the seller. Note that the selling price must be officially declared, as it is the amount used by the Tax Authority to calculate capital gains.

Purchase Price of the Property

The purchase price is the amount you paid when you acquired the property. However, this value can be adjusted for inflation, especially if the property was purchased many years ago. In Portugal, it’s possible to adjust the purchase price using government-determined annual coefficients, which reflect accumulated inflation.

Deductible Expenses

In addition to the purchase price, certain expenses can be deducted from the selling price, reducing the taxable amount. Deductible expenses include costs for property improvements, such as renovations or upgrades. Other deductible items include acquisition-related costs such as notary fees, taxes paid at the time of purchase (like the Municipal Property Transfer Tax, IMT), real estate agent commissions, and administrative fees. Additionally, expenses related to the sale process, such as agency commissions—like those of Engel & Völkers—can also be deducted. Subtracting these expenses lowers the taxable amount, thereby reducing the profit subject to taxation.

Taxation on Real Estate Profit

The calculation of real estate profit is closely tied to the capital gains tax. In Portugal, only 50% of the profit is taxable for residents. This amount is added to the seller’s annual income and taxed according to the IRS (personal income tax) table.

For non-residents, the taxation rate is fixed at 28% of the total profit, without the benefit of taxing only half of the amount.

Exemptions and Reductions in Capital Gains Tax

In some cases, it is possible to reduce or even eliminate taxes on real estate profit. For instance, if the profit from the sale is reinvested in the purchase of another primary residence in Portugal or within the European Union, an exemption from capital gains tax may apply. This reinvestment must occur within 36 months after the sale or up to 24 months before it. Additionally, properties acquired before January 1, 1989, are exempt from capital gains tax, as this tax did not exist before that date. Lastly, sellers over 65 years old who use the profit to purchase financial insurance or investment contracts may also qualify for a capital gains exemption.

The Importance of Professional Accounting or Tax Advisory Services

The process of calculating real estate profit can be complex, requiring strict compliance with tax regulations. It is advisable to consult a professional accountant or tax advisor who can guide you through each step, help identify all applicable deductions, and optimize the capital gains calculation within the law. Engel & Völkers collaborates with a network of partners to simplify this process.

Engel & Völkers is a leading name in the Portuguese real estate market, offering extensive experience and a highly qualified team. When you sell your property with Engel & Völkers, you can rely on dedicated professionals who provide support at every stage of the process, from evaluation to promotion and negotiation.

Calculating real estate profit when selling a property in Portugal requires careful analysis of factors such as the selling price and deductible expenses. With proper planning and an understanding of tax deductions and exemptions, it is possible to maximize the gains from the sale. Engel & Völkers ensures a smooth and secure selling experience, with a team ready to assist you at every step, guaranteeing an efficient and transparent process.