Understanding IRS on Property Sales

When you sell property, the income generated from the sale is classified under Category G, which refers to capital gains. The tax rate on this type of income can vary significantly, ranging from 0% to over 50%, depending on several factors.

- 0% Tax Rate: You will pay no tax if you sell property abroad and qualify for the Non-Habitual Resident (NHR) regime, or if you sell your primary residence in Portugal (or within the EU/EEA) and reinvest all the proceeds into purchasing a new home. We will cover the topic of reinvestment in future articles if there's interest.

Regular Property Sales: No NHR or Reinvestment

For now, let's focus on a regular property sale, without considering the NHR regime or reinvestment. What determines the tax rate and the taxable amount? Let's break it down.

Taxable Base Calculation

The taxable base is calculated as the difference between the purchase price and the sale price of the property. This difference can be either positive or negative:

Negative Difference: If you incur a loss (i.e., the sale price is lower than the purchase price), you can declare these losses to offset future taxable gains, reducing your tax burden in subsequent years.

Positive Difference: If you make a profit (i.e., the sale price is higher than the purchase price), the following costs can be deducted from the profit to determine the taxable base:

• Taxes paid during the original purchase, such as IMT and IS.

• Costs associated with obtaining an energy certificate.

• Documented expenses for maintenance and improvement works on the property, provided these works were carried out within the last 12 years before the sale.

• Documented fees are paid to notaries, lawyers, and real estate agencies, as long as these fees are directly related to the acquisition or sale of the property.

Inflation Adjustment: additionally, an inflation adjustment factor is applied to the deductible expenses, further increasing the amount that can be deducted if more than 24 months have passed between the purchase and sale.

Capital Gains Reduction

Here's an additional benefit for sellers: After determining the capital gain by deducting all the aforementioned expenses, the resulting amount is further reduced by 50%. This reduced amount becomes the taxable base (though there are exceptions to this rule). This reduction applies to both tax residents and non-residents.

Determining the Tax Rate

Now that we've established the taxable base, let's move on to the tax rate:
Contrary to popular belief, the tax rate is not a flat 28%. Unfortunately, capital gains from property sales are subject to a progressive tax rate. This means that the gains are aggregated with other income categories under the CIRS (Personal Income Tax Code) and taxed according to a progressive scale. However, there are ways to legally minimize your tax burden, such as filing a joint tax return and taking advantage of available tax deductions. So, there are always options to reduce the amount you owe.

Additional Considerations and Exemptions

In addition to the NHR regime and reinvestment in new property, there are other exemptions and benefits available:
For individuals aged 65 and over
For those using mortgage loans
For sales of property to the government
And in other specific cases