Selling a house can be a complex process, especially when it comes to understanding and calculating real estate capital gains. This article aims to explain in simple terms what capital gains are, how they are calculated, and what you should consider when selling your property.
What Are Capital Gains?
Capital gains are the profits obtained from the sale of an asset, such as a property. In the real estate context, capital gains refer to the positive difference between the selling price of the property and its acquisition value, adjusted for certain factors.
How to Calculate Capital Gains
Calculating capital gains involves several steps and the consideration of different elements. Here’s a step-by-step guide:
1. Selling Price
This is the price at which you sold the property. It should be the value stated in the sales deed.
2. Acquisition Value
This is the price at which you bought the property, also stated in the purchase deed. If the property was received through inheritance or donation, the acquisition value is the taxable asset value (VPT) on the date the property was inherited or donated.
3. Acquisition and Sale Costs
Include the costs associated with the purchase and sale of the property, such as notary fees, real estate mediation commissions, and expenses related to obtaining energy certificates.
4. Improvements and Renovations
Add expenses for value-adding renovations carried out in the last 12 years, provided they are properly documented with invoices.
5. Monetary Correction
Apply the monetary correction coefficient to the acquisition value to adjust for inflation. These coefficients are updated annually and can be consulted on the Finance Portal.
Formula of Calculation
The basic formula to calculate capital gains is:
Capital Gains = (Selling Price − Selling Costs) − (Acquisition Value × Monetary Correction Coefficient + Acquisition Costs + Improvements and Renovations)
Practical Example
Let’s go through a practical example to clarify:
- Selling Price: €200,000
- Selling Costs: €5,000 (commissions and fees)
- Acquisition Value: €120,000
- Acquisition Costs: €3,000 (notary fees, etc.)
- Improvements and Renovations: €10,000
- Monetary Correction Coefficient: 1.10 (assumption)
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Adjust the acquisition value:
120.000€×1.10=132.000€120.000€ \times 1.10 = 132.000€
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Add the acquisition and improvement costs:
132.000€+3.000€+10.000€=145.000€132.000€ + 3.000€ + 10.000€ = 145.000€
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Calculate the capital gains:
200.000€−5.000€−145.000€=50.000€200.000€ – 5.000€ – 145.000€ = 50.000€
In this example, the capital gains would be €50,000.
Taxation of Capital Gains
Real estate capital gains are subject to taxation in Portugal. Taxation varies depending on the seller’s situation:
- Residents in Portugal: Capital gains are included with other income and taxed at the progressive IRS rate. However, only 50% of the capital gains value is considered for taxation purposes.
- Non-Residents: They are taxed at a fixed rate of 28% on the total amount of capital gains.
Reduction and Exemptions
There are some situations that allow for a reduction or exemption from taxation on capital gains:
- Reinvestment in Permanent Residence: If you reinvest the selling amount in the purchase of another property for permanent residence, you may be exempt from capital gains taxation.
- Exemption for Properties Acquired Before 1989: Properties acquired before January 1, 1989, are exempt from capital gains taxation.
Conclusion
Calculating capital gains on the sale of your property may seem complicated, but by following the steps above, you can get a clear idea of how the process works. Always remember to maintain good documentation of all expenses related to the property, and if necessary, consult an accountant or specialized lawyer to ensure that everything is correct.
Understanding and correctly calculating capital gains can help you better plan the sale of your property and avoid unpleasant surprises when it comes time to pay taxes.
