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Capital Gain Tax on rental properties in Portugal

October 19, 2022

By Ricardo Chaves

Capital Gain Tax on rental properties in Portugal

Capital Gain Tax on rental properties: what has changed?

There are new rules applicable to the taxation of capital gains, on properties that are registered for Local Lodging activity. These new rules can be more beneficial for some but can also be more penalising for others. It’s important to understand what the implications are and what you intend to do with your property in the future, to make the most sensible choice.

Please note that the taxpayers must choose between the old and new regime and this choice can only be made in this year’s tax return (IRS).

What are the main changes?

When you register for a Rental License (AL) you also register your business activity with the tax office. As this activity is carried out in your property, it means that you are transferring the property from your personal sphere into your business sphere. This transfer is virtual and up until 2021 could trigger capital gain taxes.

For instance, if you wanted to stop the activity and there was a capital gain on the property, it meant that simply because you were stopping the activity and transferring back to your personal sphere, you could be liable for a capital gains tax.

Now this problem does not exist anymore, with the new regime there is no capital gain tax due when transferring the property from or into the personal sphere neither there is capital gain taxes when stopping the activity.

Does it mean that in the old regime I would pay capital gain tax twice?

Not necessary and that is why tax planning is critical. When registering the activity and reporting the value of the virtual transfer, this should be done in a way that if the activity stops, there is no capital gain tax liability (or at least would be minimal) and this would only exist when the property was sold. But not always was possible and this regime was more penalising for those that were resident and had for instance inherited a property.

Does this affect all the properties in AL?

No, all those that registered for the AL business after January 2021 will only be able to choose the new rules. Also, this is only applicable to those owners that explore the properties directly, in other words, when they are cumulative the property owners, the holders of the Rental License and the beneficiaries of the rental income. If for instance the license is owned by a third party, a rental agent, or a relative, etc this is not a problem. Also, if you are not renting as a business, but declare it as rental income (paying the higher 28% tax rate) then this problem also does not exist.

Is the new regime better for future CGT calculation?

If for instance you stop the rental activity for 3 years before selling the property, this regime is a lot easier. Because if the property is sold 3 years after the date of cancellation of activity, capital gain is calculated as if the property was never under a business and all rules of private sale of property apply.

However, if you decide to stop the activity this year and sell in 2023, then if you are resident, it should be better to do it under the old regime, because under the new regime the capital gain tax will be levied on 95% on the gain, even when you are resident. But with the old regime only 50% of the gain would be taxed in case you were resident.

So which regime should I chose?

The decision depends on your personal circumstances and what you intend to do with the property in the future. Are you planning to stop your activity and put your house in the market? Are you planning to become tax resident in Portugal and live in that property to later sell it? Did you made considerable refurbishments to the property, during your AL activity?
Depending on the answers to these and other questions, it may be better to choose one or the other regime.

Examples of the CGT in the new regime:

Robert had a property on the local lodging activity from 2018, until 2022. The property costed him 250.000€ and he stopped the activity so he can sell it in 2023 for 300.000€.

Normally his gain would be 50.000€, however as the property was in the AL business, he will have to add 1.5% of 250k for the 5 years that he had the property in the AL business. This means that the Capital Gain is calculated not on 50.000€, but 68.780€.

Robert decided that he wants to stop the activity in his name and register the activity in the name of his rental agent. He will now pay more rental tax, but then if he decides to sell the property in the future, providing he does it later than 3 years from now, then the normal CGT rules apply and he will pay tax on 50.000€ of gain.

It is important that you plan, as you can’t afford any tax surprises. Please feel free to ask us for assistance, but please allow some time for a reply, due to the high level of enquiries received and the tax season.

Capital Gain Tax on your property in Portugal

October 19, 2022

By Ricardo Chaves

Capital Gain Tax on your property in Portugal

Capital Gain Tax: what you should know before deciding to sell your property

A capital gain occurs when you sell something for more than you spent to acquire it. This happens a lot with investments, but it applies to personal property too. Are you planning to sell your home? Find out what tax you will have to pay and how to reduce this liability.

You can’t hide from the tax department

Any property transaction performed in Portugal must be reported to the Tax Authorities by the notary that executes the deed. This means that when you declare the sale on your tax return, the tax authorities already know of it, so if you fail to include this on your declaration, the taxman will be after you.

It’s mandatory to file a tax return every time you sell a Portuguese property

Irrespective of your tax domicile, if you sold a property located in Portugal, this means that you need to declare it in your tax return in Portugal. Regardless if there was a gain or not, it’s mandatory to make this declaration, which happens normally in May of the year following to the sale, in case of individual ownership, or within 30 days after the sale, in case of corporate ownership (companies without activity).

Declaring the sale doesn’t mean you need to pay tax

You only pay tax, if you had a gain on the transaction. So if you sell something for more than the purchase price, then the difference is a capital gain and that is reported on your taxes. Please note that the value you paid for the property needs to be adjusted, according to the inflation coefficient, applicable to the year of purchase. This means that the purchase value will increase for the capital gains calculation. Also, some expenses will be included in the tax return and deducted from any gain obtained.

In which cases your sale is tax exempt

It is possible to be exempt from tax in certain situations. For example if the property was acquired prior to 1989, it’s not liable to any CGT. Nevertheless, taxpayers will still have to declare these operations. But this is not the only tax exemption on capital gains from the sale of a property. The law provides, for example, that if you use the full amount of the sale of a property to buy another home (only applicable to tax residents and only in the sale of their primary residence), to build a home or purchase of land intended for the construction, you don’t pay tax on capital gains. Please note that this reinvestment of the gains, needs to happen within 36 months and can be done in any EU country.

Expenses allowed to deduct your capital gains

From the sale of your property you can deduct, the costs incurred with the purchase operation and sale of the property (eg IMT and registers on the purchase, real estate commission on the sale, etc). Taxpayers can also deduct costs incurred in property over the past twelve years, such as property refurbishments or other money spent to increase the value of the asset, including the cost of the energy certification.

Residents vs Non-residents individual ownership

If you are non-resident for tax purposes, the tax applicable to your capital gain, will be 28%. If however you are resident, the tax will be levied only on 50% of the gain and you will be taxed according to the tax bracket applicable to your overall income.

However, please note that is possible to contest the tax bill and challenge the tax authorities, so that a non-resident can also be taxed only on 50% of the gain. This would mean paying 14%, but it requires some time and additional work to challenge the tax bill, which initially will be on the full gain. This is due to the fact that many taxpayers have taken the tax authorities to court and won their cases.

Please note even when a non-resident is taxed under the same rules as a resident, as this is not his primary residence, the gains cannot be rolled over if he buys another property, that will only be available for those residents, that sell their main residence and buy another property which will be their main residency.

How does the reinvestment work?

If you are resident and this is your primary residence, you can reinvest the proceedings of the sale on another purchase within the EU. This needs to be done on a purchase made between 24 months prior and 36 months after the sale. If the reinvestment in the new property is lower than the total sale, than the tax will be calculated pro-rata.

If you do not wish to reinvest into another property, please note that you can make the reinvestment in a financial product. Provided that the taxpayer is demonstrably in retirement, or has, 65 years of age, he can choose to purchase an insurance contract or an individual membership of an open pension fund or contribution to the public funded scheme. To make this possible the purchase of this product must be made within six months from the date of sale of the property.

There is no benefit for the exclusion of capital gains tax if the reinvestment is not made within the referred six-month period, or if, in any year, the value of the benefits received exceeds the limit of 7.5% of the invested amount. In our opinion it is possible for both reinvestment options to be done together, partially in a new property, part in an insurance contract.

Please note that if you fail to meet the reinvestment declared on your tax return or reinvest a lower amount, the tax will be re-assessed, and you will pay interest.

Even if you do not plan to sell your home for now, it is important that you keep all supporting charges and make sure the invoices include your name and fiscal number and very important: the correct address of the property. The repayment of mortgage loans, incurred to purchase the property, will also be taken into consideration, when calculating the tax return.

It is important that you plan ahead, as you can’t afford any tax surprises. Please feel free to ask us for a capital gain tax simulation on your property. If you fear that you may be liable for a big capital gain tax bill, then let’s study your case, we may encounter a way of substantially reduce this tax burden.