Ricardo Chaves, Author at All Finance Matters

Understanding the Changes in Real Estate Capital Gains Taxation under the “Mais Habitação” Program

April 26, 2024

By Ricardo Chaves

The Mais Habitação program, effective as of October 7th, 2023, brought significant changes to real estate capital gains taxation, particularly regarding eligibility criteria for tax exemption.

Capital Gains: Stricter Reinvestment Requirements

Under Mais Habitação, changes to the exclusion regime for capital gains taxation entail stricter reinvestment rules. Previously, gains from the sale of primary residences were exempt from taxation if reinvested in another property within a specific timeframe.

Now, to qualify for this exemption, two additional criteria have been introduced:

The property sold must have served as the taxpayer’s primary residence for at least 24 months preceding the sale, as evidenced by their tax domicile.
Taxpayers cannot have benefited from this exclusion regime in the year of sale or the preceding three years, except in cases of exceptional circumstances, which must be verified during the tax assessment process.

Second Home Sales for Loan Repayment Exempted:

Additionally, the Mais Habitação program includes a transitional provision exempting capital gains from the sale of land or second homes used to repay the mortgage on the taxpayer’s primary residence or their descendants’.

This exemption applies when the proceeds from the sale, minus any loan repayment, are directed towards reducing the outstanding mortgage balance. However, any surplus sale proceeds beyond the mortgage repayment remain subject to taxation under IRS regulations.

This provision covers sales made between January 1, 2022, and December 31, 2024. Taxpayers may be required to provide documentation of loan repayment after filing their IRS declarations for 2023 and 2024.

The loan repayment must occur within three months of the sale, with the three-month period commencing from October 7^th for sales made before the new law’s enactment.

Sales to the State Entitled to Exemption, with Exceptions:

Furthermore, the new law grants tax exemption on gains from property sales to specific entities, such as the State, Autonomous Regions, and local authorities. However, certain exceptions apply, including gains realized by residents in jurisdictions with favorable tax regimes and gains resulting from preferential alienation rights.

It’s important to note that exempted income under this measure is factored into the overall income tax calculation for determining applicable tax rates.

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Capital Gains: How much will you pay in 2024?

April 26, 2024

By Ricardo Chaves

If you sold a house in 2023, you may have to pay capital gains tax in 2024.

Anyone who sells a house must always declare the transaction to the Tax Authority. If you purchased the house after January 1, 1989, and sold it for more than the purchase price, you could be liable for taxes on the profit.

Capital gains refer to the profit you make from selling something for more than its purchase price. The government levies taxes on this profit. Here’s a breakdown of how it works:

Typically, only half of your capital gains are subject to taxation. For example, if you made €80,000 from selling your house, you’d only be taxed on €40,000 for tax purposes.

However, if your property received financial assistance from the government for acquisition, construction, or renovation, and you sell it within ten years, you might be required to pay taxes on the entire profit.

What is the tax rate?

There’s no fixed tax rate for property capital gains. They’re combined with your other income, and the total determines your tax liability.

Therefore, if you sold a house in 2023, you’ll settle taxes on your gains in 2024 when you reconcile your tax affairs.

How are they calculated?

To calculate your tax liability, you start by deducting the purchase price from the selling price. If it’s been more than two years since you bought the house, you’ll also adjust the purchase price for inflation.

Then, certain expenses are subtracted from that amount. These may include selling fees, maintenance costs, and taxes incurred during the purchase.

The expenses you can deduct are as follows:

Energy certificate;

Commissions paid to the real estate agency for the sale;

Maintenance and conservation works carried out in the last 12 years;

Stamp Duty (IS) at the time of purchase;

Municipal Property Transfer Tax (IMT);

Costs related to the purchase deed of the property;

Solicitor costs (if applicable);

Land registry fees.

Therefore, the formula for calculating capital gains is as follows:

Selling price (realization value) – (purchase price x currency depreciation coefficient) – (costs associated with acquisition and sale + expenses related to property appreciation)

Example of capital gains calculation

Let’s consider a house purchased in 2008 for 150 thousand euros and sold in 2023 for 250 thousand euros. The costs borne by the owner were 14 thousand euros. In this case, we have:

250,000 – (150,000 x 1.20) – 14,000 = 56,000

This sale generated capital gains of 56 thousand euros, of which only 28 thousand (50%) will be taxed.

Note: The Tax Authority always considers the highest value between the purchase/sale price and the TAV (Taxable Asset Value) at the time of purchase/sale.

How are capital gains calculated for a house built by the owner?

In these situations, the calculation formula is the same, but the acquisition value considers the highest between:

The TAV (Taxable Asset Value) The value of the land, plus the construction costs duly proven

What if it’s an inherited house?

If you sold a house you inherited, the acquisition value is the one used for stamp duty settlement at the time of inheritance. This is calculated based on the TAV listed in the property booklet up to two years before the inheritance.

Are there exemptions?

Before understanding the impact that capital gains taxation has on IRS, it is important to highlight some exemption scenarios. Examples include cases where the sold property is the main and permanent residence, and the realization value is used to buy another house for the same purpose in the 24 months prior to or 36 months after the transaction.

If there is a reinvestment of the entire amount, the exemption is total. However, if only a portion is reinvested, the exemption occurs in the same proportion. For example, if you reinvest 30%, the exemption will be 30% on the taxable amount.

Similarly, individuals over 65 years old or retired who reinvest the sale proceeds in an insurance contract (such as a PPR), a pension fund, or contribution to the public capitalization scheme are exempt.

Note: In reinvestment cases, the sale price of the house is taken into account, not the capital gains. That is, if you sell for 250 thousand euros, you are only fully exempt if you reinvest the entire amount.

What is the impact on IRS?

To illustrate how capital gains taxation affects IRS, let’s use the value calculated in the example above, that is 56 thousand euros. The seller has a gross salary of 1,700 euros per month (23,800 euros annually).

Without exemption

Taxable amount: 28,000 euros

Collectible income: 47,696 euros (23,800 + 28,000 – specific deductions of 4,104 euros)

Total tax: 14,937.51 euros (47,696 x 43.5% – 5,810.25 euros), of which 10,750.80 belong to capital gains

This will not be the amount of IRS due, as deductions from the total tax still need to be subtracted. Hence, the net tax is obtained. If this is less than the amounts withheld at source throughout the year, you receive a refund. If it is higher, you must pay additional tax.

However, with this example, you can already understand how capital gains affect your IRS.

With total exemption

Taxable amount: 0 euros

Collectible income: 19,696 euros (4th bracket)

Total tax: 4,186.71 euros (19,696 x 28.5% – 1,426.65 euros)

With partial exemption after reinvestment of 30%

Taxable amount: 19,600 euros (28,000 – 30%)

Collectible income: 39,296 euros (7th bracket)

Total tax: 11,283.51 euros (39,296 x 43.5% – 5,810.25 euros), of which 7,096.80 belong to capital gains

How to declare?

When completing your tax return, you’ll need to provide details of the sale if you purchased the house after January 1, 1989. If you reinvested any portion of the proceeds, that should also be disclosed.

If you purchased the house before January 1, 1989, you’re not liable for taxes on the sale, but you’re still required to report it.

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Transitioning from Local Lodging to Rental (AL) to Long Term Rentals: New Procedures

April 26, 2024

By Ricardo Chaves

Housing

The legislative package “Mais Habitação” (introduced by Law No. 56/2023, of October 6) brought new rules and limitations regarding the licensing, operation, and allocation of properties under the Local Lodging regime, making it less appealing.

Aiming to increase the number of properties available for long term rentals, this package has introduced benefits for property owners opting to switch their properties from Local Lodging to the residential rental market.

Changes in Local Lodging

The “Mais Habitação” legislative package introduced significant legislative changes across several areas, all aimed at revitalizing the real estate housing market.

While Local Lodging was previously encouraged by the government and various public entities as a valuable tool for property rehabilitation, the new legislation significantly affects the viability of Local Lodging operations, particularly those in autonomous fractions within horizontally owned buildings. “Mais Habitação” has suspended new Local Lodging licenses in the mainland, except in specific rural areas and urban centers without housing pressure, listed in a regulation (Order No. 208/2017, of July 13).

This new regime sets a five-year validity period for existing licenses, renewable for the same period, with renewal requiring explicit approval from the competent municipal chamber. Additionally, the non-transferability rule for Local Lodging licenses has been established, meaning holders cannot transfer the license even when selling the property.

Apart from the expiration of inactive registrations and those failing to provide “proof of activity”, the new regime reassesses Local Lodging registrations issued upon its entry into force during the year 2030, potentially renewing them for five years after the first reassessment.

Furthermore, the government has introduced an Extraordinary Contribution tax on apartments and establishments under Local Lodging (“CEAL”), set at 15%. CEAL applies to residential properties allocated to Local Lodging on December 31 of each year, payable by the establishment’s operators. Property owners where Local Lodging operates, even if not operators, are subsidiarily responsible for this contribution.

Transition of Properties Previously Dedicated to Local Lodging to Long-Term Rentals:

Despite acknowledging the constraints on the Local Lodging regime, and to encourage properties previously allocated to Local Lodging into the long-term rental market, “Mais Habitação” offers tax benefits to property owners and Local Lodging license holders transitioning to long-term residential rentals.

Accordingly, properties transferred from Local Lodging to long-term rentals for permanent housing until December 31, 2024, benefit from IRS (Personal Income Tax) and IRC (Corporate Income Tax) exemptions on rental income. Conditions for exemption include:

a) Rental income originates from properties previously allocated to Local Lodging;
b) Local Lodging establishments were registered and allocated for this purpose until December 31, 2022;
c) Rental contracts and registrations with the Tax Authority are completed until December 31, 2024.

This exemption applies to rental income until December 31, 2029.

To benefit from this exemption, property owners must declare the cessation of Local Lodging activity by year-end and notify the Tax Office at the start of the long-term rental. The communication must be made through the Balcão Único eletrónico (Single Electronic Counter) under “Local Lodging”, selecting “Communication of Change of Activity”, and submitting the form provided there.

For further information and assistance, please don’t hesitate to contact us at info@afm.tax

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IRS Personal Income Tax 2023: what you need to know about it this year

April 10, 2024

By Ricardo Chaves

The IRS delivery time begins on the 1^st of April and will run until the 30^th of June. So now it’s that time of the year when we need to clarify some of your questions concerning this important task.

In which form can I submit my IRS tax return in Portugal?

All IRS tax declarations are exclusively submitted online, so if you don’t yet have a password to access the tax portal, it’s important to request one per taxpayer. As the tax website is only in Portuguese, this may be a difficult task if you don’t understand the language; ask your accountant to get this for you.

When do I need to submit my IRS tax return in Portugal?

All IRS tax returns, independent of the income earned, must be submitted from the 1^st of April until the 30^th of June.

What is the period covered in my Portuguese IRS tax return?

The tax year in Portugal is the same as the civil year, so you declare the income from the 1^st of January 2023, until the 31^st of December 2023.

I arrived in Portugal last year. Do I need to submit a return? I don’t have my residency card yet, and I am still waiting for the appointment with AIMA.

In the first year of residency, you must submit a tax return for the period you were in Portugal (from … to 31-12-2023). The same happens to all those who stopped being Portuguese residents in 2023; they need to submit a tax return from 01-01-2023 until the date they left. However, if you have not yet got your residency permit, you are not yet a tax resident as you can only apply for tax residency, once you have the residency permit.

What happens if I must submit tax returns in more than one country and the information is not ready before the end of June?

If, for any reason, you don’t have all the information required to submit the tax return in Portugal by the end of June, you may submit a request in the tax portal to allow you to submit the tax return until the end of December of the current year.

I need to submit my taxes in the US in April. Where should I file first?

Your Portuguese accountant must give you an estimate of the tax you pay in Portugal, so you can include in your US tax declaration, the amount of tax you will spend in Portugal. Or you can file for an extension for your US taxes, as you are now a non-resident in the US.

Who needs to fill out an IRS tax return in Portugal?

All the tax residents must submit to declare their worldwide income in Portugal. The non-residents who earned income from Portuguese sources must also submit the IRS tax return. There are exceptions for residents who have earned only salaries or pensions from Portuguese sources lower than 8.500€ per year, and when there wasn’t any tax deducted on the source, and in case they received alimony income up to 4.104€. Also, if you earned income from category B (sole trader) from a unique transaction (ato isolado), this income is lower than 1.921,72€.

Do I fill a joint return with my partner or one each?

The general rule is that married couples are taxed separately, and the personal income tax due will be assessed individually. However, both married couples and living-together couples have the option to be taxed jointly. It’s essential to ask your accountant to simulate the two scenarios and see what is more advantageous.

What happens if I forget to file a return or do it incorrectly?

It’s important to be aware that the fines for non-compliance with the dates can be very high. Fines can go from 37.50€ to 112,50€ for a delay of 30 days. However, depending on the type of misconduct, mainly fraud, fines go from 375€ to 22.500€.

I’m a non-resident. Do I need to submit a return?

Are you sure that you are a non-resident? Do you have a fiscal representative? If not, where do you receive your IMI council tax bills? If you receive them at your property in Portugal, then most likely you are a resident for tax purposes in Portugal. If you are a non-resident, you will only submit an IRS return in Portugal if you have income from a Portuguese source (including property rental or property sale, even if you haven’t made a capital gain).

I sold my property in Portugal last year, but I’m a non-resident. Do I need to submit a tax declaration?

All property transactions in Portugal need to be declared, irrespective of your residency or if you made a gain or not.

What are the tax deductions in Portugal?

Tax deductions are the amount that can be “deducted” from the IRS calculated annually for each household. These deductions are made in relation to the dependents of the household and ascendants who live in common housing with the taxpayer and on the collection of invoices related to General family expenses, Health and health insurance expenses, Education and training expenses, and Property charges. Other deductions relate to alimony pensions paid, International double taxation, and disabilities of any of the members of the household.

Although all these categories fall under tax deductions, there are some categories that largely depend on the requirement for an invoice with each taxpayer’s NIF. However, please note that if you are tax-exempt due to the NHR, for instance, or if your income is taxed at a flat rate (also common with the NHR status), these deductions will not be applicable. Most of these are only applicable to incomes that are taxed at progressive tax rates.

When do I need to pay my IRS?

After submitting your tax return, the tax authorities will validate your declaration, and you will receive a tax bill in July or August by post, giving you 30 days to pay. Please note that if you intend to be away during the warmer months and don’t have a fiscal representative to receive your bills, you will incur monthly interest charges and penalties if paying out of date.

Some suggestions to make your IRS this year a stress-free task

We strongly advise our customers to prepare everything with time, to complete this process smoothly:

PASSWORD: Make sure you and your partner have a password to access the Tax Portal. If you do not have one, request a new one immediately;

COPY OF ID AND NIF: for you, your partner, and any dependents you may have;

DECLARATIONS OF INCOME: gather the statements of income and withholding taxes;

BANK ACCOUNT: your IBAN will be necessary to include on your IRS return and will make any tax refund much quicker. This also includes the IBANs from any foreign bank accounts opened in your name.

CGT: if you have sold a property in 2023, make copies of the deeds (for purchase and for sale) and gather invoices for the real estate commission and home improvements in the last 12 years. These can be deducted against any capital gain tax.

Remember if you have a resident status but your income was earned abroad, you have to deliver along with the tax return the ‘J’ Annex which discriminates the values received abroad. There are taxation agreements between Portugal and several countries to avoid double taxation, so the impact this will have on your IRS will depend on several factors. If you are registered as a non-habitual resident, don’t forget you must fill in Annex L and include the IBAN information on all your bank accounts abroad.

And remember, we can assist you with all this bureaucracy and avoid late submission fines.

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CAN YOU STILL MAKE IT ON TIME TO NHR?

November 17, 2023

By Ricardo Chaves

The Portuguese government has made recently a change to their State Budget proposal, concerning the NHR status. The State Budget Proposal will be voted on the 29-11-2023, but as the government has the majority, is likely to be approved.

According to this proposal, all those who started their emigration process to Portugal before the end of 2023, can still apply for the NHR, provided they complete their residency process and become tax residents, before 31-12-2024.

The proof of starting the emigration process can be done through a rental contract, promissory contract, matriculation of children in Portuguese school, employment or self-employment in Portugal, etc.

This alteration aims to protect those who were already in the process of moving but could not complete the residency process before the end of 2023.

Therefore this opens more possibilities for clients to continue the emigration process, or initiate it now and become residents in 2024, it also means that the NHR status will be valid from 2024 until 2033.

At AFM we‘ve created a fast-track residency process to help you. If you wish to move to Portugal, please contact us at: info@allfinance.pt

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NHR – Urgent Update

October 10, 2023

By Ricardo Chaves

⚠ 𝐍𝐇𝐑 𝐋𝐀𝐓𝐄𝐒𝐓 𝐔𝐏𝐃𝐀𝐓𝐄 ⚠

Please be aware that the Portuguese Government has filed today the proposal for the State Budget 2024.

This proposal will be voted by the end of November and when approved it announces that the NHR programme finishes at the end of 2023.

Anyone who is registered as a tax resident or has a residency visa on 31-12-2023 will be able to apply for the NHR, providing they submit their request before 31-03-2024.

Please contact us if you require further information.

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NHR Regime in Portugal – Update

October 6, 2023

By Ricardo Chaves

The Portuguese Prime Minister announced the termination of the Non-Habitual Tax Resident regime in 2024, grandfathering prior entrants (apparently those that enter the regime until the end of 2023).

The Portuguese Government will deliver the State Budget proposal to the Parliament on October 10th. We will have further information about the Government’s intentions at that point. However, it is also possible that the Government only regulates this at a later stage rather than as part of the state budget.

It is impossible to predict when this regime will finish; we will let you know as soon as there are more developments on this subject.

Our advice at this stage is:

1) If you are already in Portugal and have received your residency permit, consider accelerating your tax residency process to apply to the NHR before 31st December.

2) If you are waiting for your SEF appointment, you need to get the appointment before the end of the year to ensure that you are a resident of Portugal before 31st December.

3) If you are not yet in Portugal but an EU citizen, consider moving before the end of the year to ensure you can still apply for this regime.

4) If you are a non-EU citizen or cannot move to Portugal before the end of 2023, you should remain calm and wait for the Government to release more information on the regime’s termination date. The date may be the end of 2024 and not the beginning.

Always remember that Portugal is still one of the best places to live, with no wealth or inheritance tax. Portugal has signed DTAs (Double Tax Agreements) with more than 70 countries and jurisdictions that provide tax relief from international double taxation.

Are there any further details beyond the Primer Minister statement?

No. It was a mere sentence during an interview, and no other comments were made from any official source.

Will they change the NHR, or will they end it?

There needs to be further information on whether the intention is to close only the 10% tax rate applicable to pensions and keep the 20% rate for active income or to change or close the NHR regime altogether.

What would be the timeline if a new law is presented to change the NHR?

The Budget Law will be delivered on the 10th of October, and then there will be more clarity about this government’s intentions. Please note that even if this is on the State Budget proposal, it will still need to be voted and published and usually, it will only be effective after the 1st of January 2024.

Will they keep the rights of those already in the NHR scheme?

Yes. During the interview, the prime minister mentioned that it was only for new applications. At the last significant change to the NHR regime in 2019, a transitory regime was created whereby the existing registered residents would maintain the regime until the end of the ten years. Therefore, any changes should safeguard the rights of those already in the scheme.

I have NHR do I need to do anything?

You don’t need to do anything for now. There will be much news in the press, but we will keep you informed of any changes that matter to your circumstances.

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“Mais Habitação” approved!

July 21, 2023

By Ricardo Chaves

⚠ 𝐈𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐭 𝐧𝐨𝐭𝐢𝐜𝐞: ⚠
The Mais Habitação programme launched by the Portuguese government, was approved in the final vote in Parliament on July 19th 2023.

The President of the Republic has now 20 days to decide to do one of 3 things:
➡ Approve the law;
➡ Veto it, in which case the law is sent back to Parliament for full justification or changes;
➡ Send it to the Constitutional Court, which can veto the law if considered unconstitutional.

𝐍𝐄𝐖 𝐀𝐋 𝐌𝐄𝐀𝐒𝐔𝐑𝐄𝐒 𝐀𝐏𝐏𝐑𝐎𝐕𝐄𝐃 𝐁𝐘 𝐏𝐀𝐑𝐋𝐈𝐀𝐌𝐄𝐍𝐓:
➡ suspension of new AL registrations in the Apartamento and Estabelecimento de Hospedagem categories when implemented in a horizontal property (condominium building), except in low-density areas defined in the Annex of this ordinance: Portaria n.º 208/2017 de 13 de julho;

➡ new AL registrations in condominium buildings require unanimous approval of the condominium or that the habitation license already allows for the AL;

➡ existing ALs in condominium buildings can be closed with a 2/3rds majority vote of the condominium;

➡ existing ALs are not transferable, in case the ownership of the property in a condominium belongs to a company, it’s not allowed to transfer any share capital of the company unless in case of inheritance, without losing the AL license;

➡ existing AL registrations become temporary and must be renewed every 5 years starting in 2030.

➡ existing AL registrations need to demonstrate, within 2 months after the start of the new law, they are active, by showing tax evidence of the activity;

➡ if owners of properties with an AL registration from before 31st December 2022 cancel the AL before the end of 2024, and put the property on the long-term rental market, they will be exempt from tax on such rentals (IRS in the case of individuals, IRC for companies) until the end of 2029;

➡ the new CEAL tax was approved, and this will be taxed at 15%. The CEAL will be published each year and it’s an additional coefficient and applies only to autonomous residential units (not detached houses in the Moradia category or complete buildings). It also doesn’t apply to AL in the permanent residence of the owner, if not active for more than 120 days per year. This means that a property that was not rented may still have to pay 15% of the CEAL as it is not related to the rental income.

𝐂𝐇𝐀𝐍𝐆𝐄𝐒 𝐎𝐍 𝐋𝐎𝐍𝐆-𝐓𝐄𝐑𝐌 𝐑𝐄𝐍𝐓𝐀𝐋𝐒:
➡ The standard rate is now 25% instead of 28%. Al the other rates for longer periods of the contract were also adjusted.

𝐂𝐇𝐀𝐍𝐆𝐄𝐒 𝐈𝐍 𝐂𝐀𝐏𝐈𝐓𝐀𝐋 𝐆𝐀𝐈𝐍𝐒 𝐎𝐍 𝐓𝐇𝐄 𝐒𝐀𝐋𝐄 𝐎𝐅 𝐏𝐑𝐎𝐏𝐄𝐑𝐓𝐘:
➡ Reinvestment of the sale of the property deemed for main residency is valid if the taxpayer has lived in the property (address at the tax office/NIF) in the previous 24 months prior to the sale;

➡ Reinvestment is not allowed if, in the previous 3 tax years, the taxpayer already benefited from this tax exemption/deduction. The taxpayer can still benefit from the reinvestment if he can prove that the previous sale was due to exceptional conditions.

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