Have you ever heard about capital gains from the sale of a property? And of capital losses? If you are in the process of selling your house, you should find out about capital gains before putting it on the market. It is essential to know that not everything is profit and that you should consider this when determining the sale value of your property. Read this article and find point by point some answers to important questions on this topic.

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What is capital gain tax?

We're sure you have heard of the capital gains tax, but you may not have looked into what they are until you had to sell your house. We try to simplify the answer to the question - What is capital gains tax? We answer that capital gains tax is the difference between the value at which you bought the property and the value at which you sold the property. It is always important to keep in mind that the gain on the sale of a house must be treated for tax purposes.

Capital gains apply to both real estate and financial products. As the Diário da Republica description states, capital gains tax refers to tangible assets (real estate) and intangible assets (shares), so the term is not exclusive to real estate. Even though this is a short definition of the term "capital gains", you should know that there are other essential criteria that you should know before you sell your house.

How can I calculate the capital gains tax from the sale of my house?

To begin, you should be aware that the taxable amount for capital gains from the sale of your home will be determined later based on your income tax bracket (IRS - Imposto Sobre o Rendimento de Pessoas Singulares). Second, the tax treatment applies only to half (50%) of the capital gain, not the entire capital gain. So, if you realise a capital gain of 40,000 € when you sell your house, you have to pay tax on 20,000 € of it.

To calculate the capital gain from the sale of your house, you need some data such as the acquisition value, the house sale value, the acquisition date and the sale date.

To calculate, subtract the property sale value from the acquisition value (using an updated money coefficient). Some costs, such as construction work, taxes, and even some appliances, such as air conditioners, can be deducted as long as they remain in the house at the time of sale. To deduct these expenses, you need to submit the bill with your tax number (NIF - Número de Identificação Fiscal) and provide the address of the house in question. You can submit the expenses for the last 12 years. You can also deduct the agent's commission and the cost of the energy certificate if you submit the IRS with the duly filled Annex G (model 3) with the details of the sale and the expenses already mentioned. If you purchased the property before 1989, you should complete Annex G1.

To ensure that the procedure goes smoothly, we advise you to consult an accountant or a lawyer and provide them with all the details of the sale of the property.

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When are capital gains taxes paid?

Capital gains are taxed when you file your tax return. You already know that the return always relates to the previous year. So, if you sold a house in 2022, you must declare the sale in 2023 IRS.

This is the step in which the capital gain is calculated and taxed. To qualify for tax benefits, include all relevant information, such as the dates of purchase and sale, as well as the values and costs associated with the property.

In what situation am I exempt from paying capital gains tax?

As mentioned, capital gains tax may be payable if the sale value of a house is higher than its acquisition value. However, there are cases where no tax has to be paid because it falls under one of the exemptions provided for in the law.

Since the 2021 national budget, capital gains exemptions have been getting shorter and shorter. Find out which ones remain and whether this applies to your case.

• A person who disposes of his/her residential property and uses the entire profits for the acquisition, construction or renovation of another permanent dwelling is exempt from the payment of capital gains tax. To be eligible for this exemption, you must invest the funds within 36 months (3 years). If you have already purchased a new property two years before selling the house, you must inform the IRS that you will use the capital gains to pay for the new property.

• People who are already retired or over the age of 65 who pay this amount into an insurance contract (such as PPR), a contribution to the public capitalisation system (e.g., pension certificates), or an open pension fund are also tax exempt if they do so within six months of the sale of the property.

• Owners of real estate acquired before 1989 also benefit from the exemption from the payment of capital gains. However, they must declare the sale of the house to the IRS. This exemption is because the code IRS only came into force in 1989 and is therefore exempt from this payment.

• The owners of a building plot were acquired before June 9, 1965.

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How much do I have to reinvest to be exempt from capital gains tax?

Although the tax is only levied on a portion of the capital gains (50% of the total gain), you must reinvest the entire amount to be exempt from the tax. In other words, if you sell your house for 100,000 euros and, according to the calculations, make a capital gain of 20,000 euros, the tax exemption will only take effect if you reinvest the 100,000 euros. If you choose to reinvest only part of the money, you will not be exempt from tax, but you will receive a tax reduction.

How to reduce capital gains tax?

We have already mentioned some measures to reduce capital gains tax, but we want to reinforce the possibility of getting more money together after selling your house. Some expenses can be deducted when calculating taxes, so be cautious if you want to see the amount reduced. Do not forget to include the bills with the NIF and the house address in the declaration IRS attached to your case (Annex G or Annex G1).

• The value of conservation and maintenance work, such as insulation, painting and others, is included.

• The value of permanently installed equipment such as exhaust fans and air conditioners, if they remain in the house, also serves to reduce the tax.

• The costs associated with the purchase and sale, such as IMT (Municipal Tax on Property Transfer), energy certificate, stamp duty, notary fees, land registration and the commission paid to the real estate agent or the costs paid to a lawyer, if any, can be indicated on the IRS.

Add up the amounts of these costs and enter them in Annex G in Table 4 headed Costs and charges.

How do capital gains work in the case of an inheritance?

As with the sale of a property you have acquired, you will have to pay capital gains on the sale of inherited property. In this particular case, there is no acquisition value as the property was inherited and not acquired, but there is a way to determine an amount to make the calculation.

We already know that in normal circumstances, we have to deduct the acquisition value from the sale value. In the case of an inheritance, the acquisition value is replaced by the taxable inheritance value (VPT) to determine the correct value of the property gains.

Even if your inheritance is divided, if you eventually become willing to sell your share, the inheritance tax value of the acquisition will be taken into account, and the taxed value of the increase in value will be applied to your share.

The above-mentioned options for exemption from capital gains tax also apply in this case.

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Are there also capital losses?

The answer is yes. You can assume a capital loss whenever the sale process is a loss. If you have sold a property and suffered a loss in a given year, you can deduct this value from the capital gains you make in the following five years.

How can you determine this value? Imagine you have bought a property for 100,000 euros and later sold it for 70,000 euros, and the deductible costs are 30,000 euros.

Then you have to calculate as follows: Sales value (70,000 euros) - Purchase value (100,000 euros) - Deductible costs (30,000 euros) = Capital loss (- 60,000 euros)

As with capital gains, the tax base is always 50%, so in this particular case, the capital loss of -30,000 euros is taken into account. Let us imagine that in the following year (or within five years of making the loss by selling a property) you make a capital gain of 80,000 euros and that 50% of this value, i.e., 40,000 euros, has to be taxed. You can deduct the capital losses from the 40,000 euros, i.e., 10,000 euros. This means that only €10,000 is taxed.

I want to sell my house - How do I determine the value?

The property value should always be on the table when a property goes on the market. If you do not include taxes in the property's final value, you will lose money. Talk to an accountant or real estate agent to determine a fair value for selling your home.

In addition to capital gains taxes, there are other issues that should be considered. A fair starting price for both seller and buyer will ensure a quicker sale. To determine this value, a real estate agent who knows the area can immediately answer what needs to be considered for the property's final value. The location, the typology of the property, the housing conditions, and the amenities in the area, i.e., whether there are schools, transport or shopping facilities, are some factors that will affect the value of your home.

These factors also include the sales values of neighbouring houses, which will affect the final value of your property. For this reason, it is always important to consult a real estate agent who is familiar with the area of your home. Only he will be able to determine a fair value for both parties and facilitate a quick sale.

Real estate can be confusing and requires knowledge to make profitable sales. If you have a house for sale in the Western Algarve, do not hesitate to contact Casas do Barlavento. We would be delighted to guide you through this stage of your life.