Your Portuguese property has been sold. You’ve made a nice profit on it. But whether you can keep this profit entirely to yourself or if you have to pay tax on it, that depends 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. There are some costs that can be offset to reduce your capital gains and there are exemptions where no capital gains has to be paid at all.
If you are a resident in Portugal
If you are a tax resident in Portugal, you are exempt from paying capital gains tax if you have owned the property from before 1989. Any purchase after 1989 is eligable for capital gains tax.
Do you own the property for more than two years? Then you’ll be eligible for an inflation relief. There is an officially registered table which you can use to calculate the exact amount of deduction.
From the capital gains value, 50% is added to your regular income in the year of selling. So, suppose you have a surplus value of €20,000; In principle, €10,000 of that amount is taxable.
You’ll pay a minimum of 14.5% and a maximum of 48% tax (rates of 2023) on 50% of your capital gains. The highest rate applies to incomes above €78,834 per year. See below the tax scale for 2023.
Exemption through reinvestment
Portugal has a reinvestment scheme, which entails an exemption or reduction of capital gains tax.
- Option 1: Reinvesting in a new main home
The gain on the sale of your main home in Portugal is exempt from capital gains tax if the proceeds (net of any mortgage taken out to acquire it) are reinvested in another main home within the EU.
You can re-invest within 36 months after selling your main home. In that case you must declare the amount you intend to reinvest on your tax return. It is also possible to buy your new home 24 months before selling your main house.
It is important that the new home is located in the EU (including obviously Portugal) or a European Economic Area (EEA) country which exchanges tax information with Portugal.
Note: since Brexit, the United Kingdom is no longer part of the EEA. Buying a new main home in the UK will not have the exemption of capital gains tax on your main residence you sold in Portugal.
To be totally exempt from paying capital gains tax on selling your main home, it is also important that you re-invest the total proceeds of the sale of your main home (this includes real estate fees, notary and registration fees and other incidental costs).
If you decide to sell your main home, and buy a smaller/cheaper home than the one you are selling, you can choose to invest the unused balance in a life assurance policy and benefit from the exemption or to pay capital gains on the value that has not been re-invested and have the remaining on your bank account.
- Option 2: Reinvestment in a long-term savings plan/pension
Gains made on the sale of your property may also be tax free if you are of retirement age and re-invest the proceeds into an insurance contract or pension. It is important that you (or spouse/partner) is retired or over 65.
The sale proceeds should be invested in a pension fund, state pension system or insurance contract within six months.When reinvesting in a pension, you must receive a maximum annual payment of 7.5% of the value of the funds (speak to your accountant/lawyer to confirm you qualify).
Life assurance policies – where you can hold a wide range of investment assets within its tax efficient structure – are eligible for this relief.
If you are not eligible for capital gains exemption, you can look into the options below to reduce your capital gains liability.
Update: New Capital Gains rules for Non-Residents from January 1st, 2023
As from 1/1/2023 new rules apply for non-residents and the applicable capital gains tax when selling their property in Portugal.
Until the 1st of January of 2023 non-residents and residents were charged differently. Where residents paid a progressive income tax rate on 50% of their gains, non-residents paid a flat fee of 28% over the total of their gains.
Under these rules, non-residents paid more capital gain tax than residents which has led to various court cases over the last years.
With so many court cases, the situation has been evolving and both The Portuguese Constitutional Court and European Court of Justice have confirmed that this different treatment is discriminatory under EU law.
Although various cases and decisions from the court already date back from 2021, the legislation in Portugal, or the calculation of capital gains tax by the Portuguese tax authorities had not been changed. Until now….
The Portuguese law still needs to be changed, however the Portuguese tax authority informed that they will already treat residents and non-residents in the same way for all capital gains applicable to property sales from after the 31st of December 2022.
This means that from 1/1/2023 non-residents pay the same, progressive rate of tax (also called; IRS tax) over 50% of their real estate gain just like residents. This decision is made to be in line with EU-legislation.
Which tax rates are applicable under the new capital gain rules?
From 1/1/2023, for both Portuguese residents and non-residents, 50% of their real estate gains is added to their worldwide income from the year of selling. The total of their worldwide income + 50% of their capital gains determines which tax scale is applicable. See the tax scale above.
An example under the new rules:
A single, non-resident sells his property in Portugal in 2023 and has € 100.000 of capital gains. In the same year, he had an income from abroad of € 90.000.
The total income for that year is: € 90.000 + €50.000 (which is half of the capital gains) = € 140.000
On the capital gain, a tax rate is applicable of 48% (as €140.000 is higher than the highest scale of € 78,834 year income). This means the non-resident seller pays €24.000 of capital gains under the new rules (being 48% tax on €50.000 which is 50% of the total capital gains).
Under the old rules he would have paid a flat rate of 28% over the total gains of € 100.000, which totals at € 28.000 of tax to pay if the old rules would still be applicable.
Off-set Costs
Both residents and non-residents of Portugal can reduce their capital gains tax by offsetting costs. The applicable costs can be divided into two categories: costs related to the purchase and sale of the property; and costs relating to work or improvements made to the property.
The first category includes the transfer tax paid upon purchase, notary 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.
FAQ about Capital gains
- When is capital gains tax applicable? Capital gains tax (in Portugal called; Imposto sobre Mais-Valias) applies when selling any Portuguese property bought after 1988. If you acquired the property before 1st of January 1989 it is not liable for capital gains tax.
- Do I pay capital gains over the value of the furniture that I sell along with my property? When selling your property in Portugal with furniture, you can allocate a realistic value to the furniture. This value for furniture is not seen taken in consideration when looking at the sales price used for the calculation of the capital gains. The gain is calculated between the new sales price, exclusive of the value for furniture and the original purchase price, also exclusive of the furniture value.
- The exemption for re-investment does not apply to me, but how can I decrease my capital gains liability? When selling a property in Portugal you can decrease your capital gains by attributing a part of the sales price to the furniture that you sell along with the house (íf you sell furniture along with the house). You can also offset various costs to reduce the capital gains value, such as costs made for investment of the property in the 12 years prior to selling. But also the property purchase tax and legal fees from the time of buying the house are deductible costs. The real estate agent fees on selling the property are also deductible. It is necessary to have official invoices from all costs you want to offset. The invoices must have the name, NIF and address of both yourself and the party/supplier you have paid to.
- Is the reinvestment rule applicable for non-residents? No, the reinvestment rule is only applicable when you are a resident in Portugal, selling your main home.
- Is an inflation relief applied when calculating the capital gains? Yes, after owning the property for two years, you are eligible for inflation relief.