Learn all about IRS capital gains on real estate

What are capital gains on real estate?

Capital gains on real estate refer to the profit obtained from the sale of a property, which is the positive difference between the sale price and the purchase price of the property, adjusted for certain factors. This profit is considered income and, as such, must be declared in the IRS (Personal Income Tax).

For example, if you purchased a property for €100,000 in 2000 and sold it for €200,000 in 2023, the capital gain would initially amount to €100,000. However, there are deductions and adjustments that can reduce the final taxable value.

How are capital gains calculated for IRS?

The calculation of capital gains for real estate follows a specific formula that accounts for several factors:

Capital gain = (Sale price - Expenses related to the sale) - (Acquisition price + Other costs).

The sale price corresponds to the amount for which the property was sold, and this must be documented through official records such as the deed or purchase and sale contract. The acquisition price refers to the amount paid when buying the property, updated with the monetary devaluation coefficients published annually by the government.

Additionally, expenses directly related to the purchase and sale, such as deed costs, registration fees, Municipal Property Transfer Tax (IMT), verified renovation expenses, and real estate agent commissions, can be deducted from the taxable amount.

Taxation of capital gains in IRS

Not all capital gains are automatically subject to taxation. For residents in Portugal, only 50% of the capital gain is considered taxable income. This amount is added to the other income declared in the IRS and taxed at progressive rates.

For non-residents, the taxation process differs. The total capital gain is taxed at a flat rate of 28%.

When is the payment of capital gains exempt?

There are specific situations in which IRS taxation on real estate capital gains can be waived. One such scenario occurs when the profit from the sale is reinvested in purchasing, constructing, or renovating a new primary residence, provided the reinvestment is made within 36 months after or 24 months before the sale.

For this exemption to apply, both the sold property and the new property must be declared as primary residences.

Another exemption applies to properties acquired before January 1, 1989, as capital gains taxation was not included in the IRS code at that time.

Additionally, individuals aged 65 or older, or those who are retired, may be exempt if the capital gain is allocated to financial products such as retirement savings plans or insurance designed for retirement purposes.

How to declare capital gains in the IRS?

Declaring capital gains in the IRS is mandatory for all taxpayers who have sold properties subject to taxation. This process is carried out in Annex G of the annual IRS declaration.

To complete this step, specific fields must be filled in, including the sale price, the date of the transaction, the acquisition price, the acquisition date, and the applicable adjustment coefficient. Deductible expenses related to the purchase and sale, such as deed and registration costs, must also be indicated.

If the taxpayer has reinvested the profit from the sale in the purchase of a new primary residence, this information must also be provided in detail.

Impacts of capital gains for investors and heirs

Capital gains on real estate do not only affect individual property owners. For real estate investors, capital gains are an essential component of tax planning.

For heirs who sell inherited properties, capital gains taxation may apply. The acquisition price, in this case, is the value attributed during the inheritance process and adjusted according to monetary devaluation coefficients.

It is essential for heirs to seek professional advice to optimize their tax situation and ensure compliance.

How to reduce capital gains taxation?

Reducing taxation on capital gains can be achieved through proper planning and defined strategies. One of the most effective ways is to reinvest the profit from the sale of a property into the purchase, construction, or renovation of a new primary residence, as previously mentioned.

This reinvestment may allow for partial or total exemption from taxation.

Another important strategy is to keep all invoices related to property improvements, as these expenses can be deducted from the taxable profit, reducing the final amount subject to tax.

Additionally, consulting tax professionals or legal experts is crucial for a detailed analysis of your situation. They can identify applicable tax benefits and ensure that all available options are maximized.

The importance of efficient tax management

Proper management of real estate capital gains is essential to avoid issues with the Tax Authority. Errors or omissions in the IRS declaration can result in significant fines or tax investigations.

If you are planning to sell a property or have already completed a transaction, it is vital to seek the support of qualified professionals such as tax consultants or specialized lawyers.

Capital gains on real estate are a critical aspect of the Portuguese property market, directly impacting the income of property owners. Understanding the rules, correctly calculating the amounts, and exploring exemptions or reductions are key steps to optimizing profits and fulfilling tax obligations.

If you are considering selling a property, start by carefully planning the transaction and seeking professional support. The real estate market offers excellent opportunities but requires knowledge and caution to avoid unpleasant surprises.

Engel & Völkers team is available across Portugal to assist you at every stage of your property sale process. Let us help you achieve the best results confidently and efficiently.