In this article, we explain in simple terms what capital gains on property are, how they're calculated, how they're taxed in Portugal, and in which situations you may be able to reduce the tax you pay.
What Are Capital Gains?
Capital gains are the profit you make when selling a property. In practice:
- You bought a property for a certain price
- You sold it for a higher price
- The difference may be considered a capital gain
However, the difference can also be negative. If you sell your property for less than you paid for it, you have a capital loss.
How Are Capital Gains Calculated?
In simple terms, capital gains are calculated using the following formula:
Sale Price - Purchase Price - Deductible Expenses = Capital Gain
For example, if you bought a property for €180,000, incurred €25,000 in deductible expenses, and later sold it for €260,000, your capital gain would be €55,000.
Some of the expenses that may be deducted include:
- Real estate agency commission
- Property Transfer Tax (IMT) and Stamp Duty paid when purchasing the property
- Deed and registration costs
- Energy Performance Certificate (EPC)
- Property improvement works (when legally eligible and properly documented)
Will I Always Have to Pay Tax?
Not necessarily. Even if you make a capital gain, it doesn't automatically mean you'll pay tax on the full amount.
As a general rule, for Portuguese tax residents, only 50% of the capital gain is subject to Personal Income Tax (IRS).
For example, if your capital gain is €10,000, only €5,000 will be taken into account for IRS purposes. This amount is then added to your other taxable income and taxed according to your applicable IRS tax bracket.
When Can You Pay Less Tax?
Portuguese law provides several situations where the tax on capital gains may be reduced or even eliminated:
- If the property was purchased before 1 January 1989, the capital gain is generally exempt from IRS, although the sale must still be declared.
- If you sell your primary residence and reinvest the proceeds in the purchase, construction, or mortgage repayment of another property that will also be your primary residence, you may qualify for a full or partial tax exemption, provided all legal requirements are met.
- The higher your eligible deductible expenses, the lower the taxable capital gain may be.
Which Documents Should You Keep?
Keeping all documents related to the purchase and sale of your property can make a significant difference when calculating your capital gains.
Make sure you keep:
- Invoices for property improvement works
- Real estate agency commission invoices
- Purchase and sale deeds
- Energy Performance Certificate (EPC)
- Proof of IMT, Stamp Duty, registration fees and other property-related expenses
These documents may help reduce your taxable capital gain and, consequently, the amount of tax you pay.
Why Is It Important to Run a Capital Gains Calculation?
Before selling your property, it's advisable to estimate your capital gains to understand the potential tax implications.
A calculation allows you to:
- Estimate how much tax you may have to pay
- Check whether you qualify for any tax exemptions
- Assess the impact of reinvesting the sale proceeds
- Make more informed financial decisions before selling.
Calculate Your Capital Gains
If you're planning to sell your property, calculate your capital gains first to understand the potential impact on your IRS.
Use our Capital Gains Calculator or complete our contact form to receive a personalised simulation from the Aprova team.
If you're planning to sell your current home and buy a new one, Aprova can also help you find the Mortgage solution that best suits your needs.