As a rule, houses are sold at a higher price than the purchase price, which generates the so-called capital gains. As a rule, those gains are taxed in irs at the general rates (encompassing). However, the law provides for tax exclusions, and there are also ways to reduce the amount of tax payable.
If you are thinking of selling, or recently sold a property, then we present you a guide with essential information about the capital gains in IRS generated by transaction type (for your comfort, contact a real estate professional who can help you).
Irs capital gains on home sales
Is it mandatory to declare the sale of a house?
The first rule you should keep in mind is that any house sale should be declared in the IRS. That's even if there's no tax payment. The transaction is mentioned in the IRS statement for the income for the year in which it took place. One example: whoever sold a house in 2020 has to declare it in the IRS in 2020, to be delivered in 2021.
How do you plead?
The sale of a house is declared in Annexes G or G1 (or both). If the date of purchase of the house sold is earlier than 1 January 1989, Annex G1 (Table 5) must be completed. If it is later, Annex G (Table 4) must be completed.
If the house sold has been purchased in parcels, on separate dates (before and after 1 January 1989), as in the case of an inheritance, both annexes must be completed.
In 1988, Francis, an only child, acquired by inheritance, by death of his father, 25% of a house. A few years later, in 2010, his mother died and Francisco inherited the remaining 75% of the house. However, in 2020, he decided to sell the house.
In 2021, at the time of delivery of the IRS 2020 (year of sale), 25% of the value of the house should be placed in Annex G1 and 75% in Annex G.
In what situation is tax paid?
The sale of house only implies the payment of IRS if capital gains are calculated. That is, if a profit is made from the transaction.
How do you calculate capital gains?
The capital gains are calculated by making the difference between the purchase value (purchase price) and the realization value (sales price), minus the deductible expenses with the purchase and sale and the charges with the valuation of the property (works, for example).
If more than 24 months elapse between the purchase date and the date of sale, the acquisition value is updated by applying 75% of a currency devaluation coefficient.
Capital gains = Realization value - Acquisition value - (Charges with realization and acquisition + Expenses with the appreciation of the house)
For the clearance of capital gains, the TA always considers the largest of two values: acquisition/realization value or Tax Equity Value (VPT) of the house at the time of the transaction.
In 2010, Manuel bought a house for 80 000 euros (booked value), and at the time of purchase, the VPT was 115 000 euros. Manuel also had expenses of 1 300 euros (registration and taxes) on the deed.
However, in 2020, the house was sold for 140 000 euros (booked value). That year, the property had a VPT of 130 000 euros, the result of periodic updates made by AT. For real estate mediation, Manuel paid a commission of 10,000 euros.
For the calculation of capital gains, AT will consider the VPT at the time of purchase as the acquisition value at the time of purchase, i.e. EUR 115 000, because this value is higher than the carrying value. As a realization value will take into account the carrying value, that is, 140 000 euros, because this value is higher than the VPT of the house at the time of sale, of 130 000 euros.
As between the purchase and sale of the house took more than 24 months, the acquisition value (which, in this case, corresponds to the VPT) will be adjusted to the current reality by applying 75% of the coefficient of devaluation of the applicable currency.
Acquisition value: 120 000 €
Currency devaluation coefficient: 1,075
Acquisition value with application of 75% of the currency devaluation coefficient: 123 626 €* (120 000 € x 1,075)
Realization Value: 140 000 €
Expenses with the purchase and sale: 11 300 € (10 000 € + 1 300 €)
Capital gains: (140 000€ - 123 626 € - 11 300 €) = 5 074€
Manuel thus obtained an added value of 5 074 euros with the sale of his house.
* The calculation was based on the table with the devaluation coefficients of the currency to be applied to the goods and rights sold in 2020 (year of sale of the house).
What expenses can be presented to reduce capital gains?
As mentioned above, expenses with the sale and acquisition of the house sold are accepted. The sale expenses include the energy certificate and the commission paid to the real estate agency, among other expenses that are necessary to make the sale.
For the purpose of expenses with the acquisition of the house sold are considered the costs with the deed, the land register and the applicable taxes, such as the Municipal Tax on Onerous Transmission of Real Estate (IMT) and the Stamp Duty (IS).
Expenses may also be presented with the recovery of the house. Here, enter the amounts spent on maintenance and conservation works carried out in the last 12 years.
The costs submitted must be duly proven, as proof may be required within five years. In the case of the real estate mediation commission, it must be mentioned in the deed of sale of the house.
What share of capital gains is taxed?
As a rule, only 50% of the capital gains generated in the sale of the house are subject to tax if the seller is a tax resident in Portugal. An example: if capital gains of EUR 50 000 are cleared, only EUR 25 000 is taxed.
There is, however, an exception to the 50% rule. If the house has benefited from non-reimbursable public support for the acquisition, reconstruction or performance of conservation works of more than 30% of the VPT for IMI purposes and is sold before 10 years, the capital gains are taxed at 100%.
How do you calculate the tax?
Capital gains subject to tax (half of the total) are compulsorily included. What does that mean? This means that they must be added to the remaining income earned during the year (with the exception of those taxed separately, by option or obligation, at a special or liberatory rate). The tax rate to be applied is that of the IRS tier resulting from the sum of all income (salaries and capital gains, for example), after deductions and expected rebates have been made. In the worst case scenario, capital gains will be taxed at a rate of 53% (for a tax return of more than EUR 250 000).
Maria sold her house in 2020 and obtained capital gains of €50,000, of which only 50%, or €25,000, are subject to taxation. Imagine that, after the inclusion of capital gains in the remaining income, Maria is positioned in the sixth tier of IRS (from a collectible income of more than 36 967 euros to 80 882 euros), which has a rate of 45%. In this way, capital gains will be taxed at this rate. After all, Maria will pay 11 250 euros (25 000 euros x 45%) of IRS for capital gains.
In what situations are capital gains excluded from taxation?
Some cases are in which the capital gains resulting from the sale of a house are excluded from taxation, i.e.:
Acquisition prior to 1989
The capital gains generated by the sale of a house purchased before January 1, 1989, the date on which it entered into force of the IRS Code, are automatically tax-free.
Sale of house intended for own and permanent housing
The capital gains from the sale of a house intended for permanent own housing are also excluded from taxation, provided that:
In order to take advantage of this exclusion from taxation, it is necessary that, at the time of sale, the owner or his/her spouse/partner is in a retirement situation or is at least 65 years of age.
Reinvestment is also required within six months of the sale.
Finally, in the case of a life financial insurance contract or individual pension fund, it should be intended solely to provide the buyer or spouse or de facto partner with a regular periodic benefit for a period of 10 years or more, of a maximum annual amount equal to 7.5% of the amount invested.
If only part of the realization value is used, the exclusion of taxation is partial, and the realization value is proportionally reinvested. Exemplifying, if only 50% of the realization value is reinvested, the exclusion of taxation also corresponds to 50%.
Homes which have benefited from non-reimbursable public support for the acquisition, reconstruction or performance of conservation works of more than 30% of the VPT for IMI purposes and which are sold before 10 years have elapsed may not benefit from the exclusion of taxation.