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Capital gains tax on your property in Portugal: When and what will you pay?

 

Your Portuguese property has been sold. You’ve made a nice profit on it. But can you keep this profit entirely to yourself or will you have to pay tax on it? This will depend on a variety of factors which we will clearly list in this article.

 

In Portugal, you’ll pay capital gains tax (known as Mais Valias in Portugal) once you have sold your property. You’ll pay that tax on the difference between the purchase price and the selling price. Yet this amount will depend on whether you are a tax resident of Portugal, and there are also exceptions which could mean you won’t have to pay capital gains tax at all or that you may qualify for a reduction.

 

If you are a tax resident in Portugal

 

If you are a tax resident in Portugal, 50 percent of the total capital gain made on your property is taxable. So, suppose you have a surplus value of €20,000; In principle, €10,000 of that amount is taxable.

 

How much tax you’ll then pay on this amount depends on your total income. The added value is added to your regular income, for example from work or company ownership. You’ll pay a minimum of 14.5% and a maximum of 48% tax on this total amount in Portugal. The highest rate applies to income above €80,640 per year. If you fall under a lower tax bracket, you’ll pay a minimum of 14.5% and a maximum of 45%.

 

Exemptions or reductions on reinvestment

 

However, Portugal also has a reinvestment scheme, which entails an exemption or reduction in the payment of capital gains tax. This arrangement applies if you use the resale value of your old home to purchase a new home that you also use as a permanent residence. This can be a new home in Portugal but also a home in another country of the European Union.

 

You will be exempt from paying tax if you reinvest the entire amount of the sale value, and you’ll be eligible for a reduction if the new home has a purchase value lower than the sales value of your old home. This reinvestment scheme only applies if you purchased the new home in the two years prior to the sale of the old home or if you do so in the three years following the sale. An additional condition is that you move into the new house within six months of the purchase.

 

Exemption for a home that you have owned for a long time

 

The second exemption is a lot less complex. You’ll be exempt from paying capital gains tax if you have owned the property for a very long time. This arrangement applies if you purchased the property that you are selling before 1989.

 

Reduction on capital gains tax

 

Did you own the sold property for more than two years? Then you’ll be eligible for a reduction in capital gains tax. In this case, you may deduct inflation from the actual added value. There is an officially registered table which you can use to calculate the amount of deductions made.

 

Regulations for non-residents of Portugal

 

Perhaps you are not yet registered as a resident of Portugal. In this case, you’ll pay a 28% income tax on the total capital gain you make. If you believe everything would work out cheaper if you fell under the rules of residents of Portugal, you can consider registering in Portugal and declaring your worldwide income to the Portuguese tax authorities as a resident of the European Union in order to still qualify for the aforementioned regulations, exemptions and reductions.

 

Deductions

 

Both residents and non-residents of Portugal can reduce their capital gains tax contributions by increasing the amount of deductions applied. The applicable deductions can be divided into two categories: costs related to the purchase and sale of the property on one hand; and costs relating to work or improvements made to the property on the other.

 

The first category includes the transfer tax paid upon purchase, legal costs incurred and brokerage fees upon sale. Please note: your broker must be mentioned in the notary deed (Escritura in Portuguese) for these costs to be deducted. You can submit invoices for these costs in order to be eligible for a reduction in your capital gains tax.

 

You may deduct costs for improvements and renovations made to the property if you can submit an invoice for these costs that also states your tax number. These invoices must also not be older than 12 years from the time of signing the deed of sale.