Calculation of Real Estate Capital Gains and Declaring Capital Gains

Calculation of Real Estate Capital Gains and how to declare them

When selling a property, one of the costs to take into account is the resulting Capital Gains. The calculation of Real Estate Capital Gains is obtained based on the sale value in relation to the acquisition value and will be taxed under Income Tax (IRS). Capital gains can arise from the sale of a property, whether acquired by purchase or by inheritance. How to calculate Capital Gains, what is the taxation process, how to declare them and, also, how you can be exempt from Capital Gains, is what we will cover.

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What they are and how to calculate the Gains or Losses in the sale of real estate

The added value is the profit obtained in the sale of a property, taking into account the value for which it was acquired.

The calculation of Capital Gains is as follows:

Real Estate Added Value = Sale Value - Purchase Value

As there is normally a more or less long period between acquisition and sale, that value is recalculated depending on the currency devaluation.

If the updated acquisition value, at the date of sale, is lower than the sale value, there will be a gain. If this value is higher, there will be a loss in value.

Whatever the result, this sale must be declared to the IRS.

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The capital gains tax process

The taxation process begins with the sale of the property. The sale must be declared in the IRS, referring to the year in which it was made.

If the acquisition was carried out before capital gains taxation came into force, that is, before January 1, 1989, the capital gains obtained will not be taxed under the IRS.

There are also some exceptions in this process and in the calculation of Capital Gains, as will be seen below.

Reinvesting in Permanent Own Housing

There is an exemption of capital gains if the sale was of a permanent home and if you want to reinvest in another permanent home, either through acquisition, construction, expansion or improvement.

Thus, there will be no tax on Capital Gains, at least on the part that was reinvested, when not all of the gains have been spent.

Reinvestment must take place between the previous 24 months and the 36 months after the sale.

Use capital gains to settle a loan

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It is a temporary measure, valid if the sale is made in the period 2015 to 2020, for loans taken out until the end of 2014.

More Details IRS Code / Capital Gains.

How to Calculate Capital Gains

The formula for calculating Capital Gains and the amount to be subject to taxation is:

Capital Gains Calculation = Sale Value or Realization Value – (Acquisition Value x Currency Devaluation Coefficient) – Acquisition and Sale Charges – Property Appreciation Expenses

If more than 24 months have elapsed between the acquisition and sale date of the property, there is an adjustment to the acquisition value, so that it is updated to current values, through the currency devaluation coefficient (article 50 CIRS).

Sales costs can be deducted, such as the commission paid to the real estate agency, energy certificate, deed and registration of a villa, for example, as well as works that were carried out in the last 12 years.

All these expenses, either with the sale or with the acquisition, as well as the costs with the valuation, to be accepted, they must be duly proven by invoices.

Calculation of Capital Gains to be taxed

For taxation purposes, only 50% of the value of the surplus value is taken into account. There is an exception if the property has been purchased or rehabilitated with public support.

The surplus value is included in the IRS and is therefore considered an income.

Not being taxed independently, the amount paid in IRS tax will depend on the level in which the income of the seller of the property is positioned.

The Tax Non-Resident Case

In the situation of non-tax resident taxation is levied on the totality (100%) of the capital gain obtained. In this case, a flat rate of 28% is applied.

Examples to calculate and declare surplus value

Case 1 - Acquisition in 2001 and sale in 2019

He purchased a house in 2001 for €150.000 and sold it in 2019 for €250.000. He incurred some costs in this transaction, such as a 5% commission to the real estate agency, €200 in energy certificates and €20.000 in works carried out in the last 12 years. Paid €300 on the acquisition deed and taxes (IMT and Stamp Duty) of $ 5.000.

To find out how to calculate Capital Gains, the following formula applies:

Real Estate Capital Gains Calculation = €250.000 – €150.000 x 1,33* – (5% x €250.000) – €200 – €20.000 – €300 – €5.000 = €12.800

*Currency devaluation coefficient for 2001 (year of acquisition) from the table applicable in 2019 (year of sale).

Case 1 Calculate Added Value

Case 2 – Acquisition in 1993 (escudo currency) and sale in 2019

Acquired a house in 1993 for 10.000 contos. Sold for €220.000. Energy certificate €200. Commission of 5% on the sale, deed of purchase €200 and taxes on the purchase €2.000.

The euro replaced the escudo on 1 January 2002, worth 200,482 escudos.

Converting the 10.000 contos into euros, that is €49.880 (10.000 contos x 1.000 escudos / 200,482)

Real Estate Capital Gains Calculation = €220.000 – (€49.880 x 1,73*) – €200 – €11.000 – €200 – €2.000 = €120.308

*Currency devaluation coefficient for 1993 (year of acquisition) from the table applicable in 2019 (year of sale).

Case 2 Calculate Added Value

Case 3 - Non-tax resident

He is a non-tax resident and bought a house for €400.000 in 2010. He sold it for €500.000 in 2019. He paid €200 for the energy certificate and 5% commission to the real estate agency. Registration and purchase deed, €400, IMT and Stamp Tax (purchase) €18.000.

Real Estate Capital Gains Calculation = €500.000 – (€400.000 x 1,10*) – €400 – €18.000 – €200 – (5% x €500.000) = €16.400

*Currency devaluation coefficient for 2010 (year of acquisition) from the table applicable in 2019 (year of sale).

Case 3 Calculate Added Value

Taxation of capital gains and what tax to pay

For the taxation of Capital Gains, there is room for inclusion, together with other income, such as from work. The tax rate payable therefore depends on the overall value of the income.

If you normally pay a certain IRS fee, in the year you declare the surplus it is possible that the IRS bracket will increase and taxation will increase accordingly.

How to declare Capital Gains from the sale of the house in the IRS

To declare the Gains from the sale you must complete Annex G or G1. If the acquisition date is before January 1, 1989, Annex G1 – “Untaxed capital gains” must be completed and if it is later, Annex G – “Equity Increments” must be completed.

In Annex G, fill in the year to which this sale refers, the tax identification number (NIF) and in table 4 the purchase and sale values, as well as charges, if any.

Declare Capital Gains Annex G

In Table 5 - Reinvestment of the Realization Value of Property for Own and Permanent Housing, in the field that refers to “Intent to Reinvestment”, you must provide an estimate of the realization value you intend to reinvest, without recourse to credit.

Declare Capital Gains Annex G

In the case of successive inheritances, both annexes, G and G1, may have to be completed.

For example, a property acquired by inheritance, upon the death of the father in 1980. The widow receives 50% and the two children 25% each. In 2001 the mother dies and the remaining 50% that were her property are inherited by the two children. The house is sold in 2019.

Herdeiro Father's death 1980 Death of Mother 2001
Mother 50%  
Son 1 25% 25% + 25%
Son 2 25% 25% + 25%

In 2020, the year of submission of the 2019 IRS declaration, 25% of the inherited by the death of the father, are exempt from taxation, because the acquisition (inheritance) occurred before 1989.

Thus, in Annex G1,

  • date of acquisition – is the date of death of the father, 1980
  • date of completion – is the date the property was sold, 2019
  • realization value – is 25% of the sale value of the property
  • acquisition value – is 25% of the value of the property, when the inheritance and gift tax was paid upon the death of the father. This tax was in force until 2004. From then on it is considered for Stamp Duty purposes.

The remaining 25% acquired upon the mother's death is declared in Annex G:

  • Date of realization – is the date of sale
  • realization value – 25% of the sales value
  • Date of acquisition – is the date on which this 25% was acquired, that is, upon the death of the mother, 2001
  • Acquisition value – is the value of the property considered on this date (2001) and which is the value of the property considered for the purposes of settlement of stamp duty, upon the death of the mother.

See also:

These values ​​are for information only and do not dispense the consultation or support of specialized professionals.

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4 thoughts on “Calculation of Real Estate Capital Gains and how to declare them”

  1. Dear Mr Hidalgo

    I have read your article with interest and I was wondering if you are able to give us some guidance on a difficult capital gain situation?

    My father & mother in law bought a property in 1999 (50% share each).

    My father in law died in April 2005 and left 50% of his share of the property to my mother in law and 25% of his share to each of his daughters.

    As of April 2005 the ownership was mother in law 75%, each daughter 12.5%.

    In November 2016 my mother in law gifted her 75% share equally to her daughters.

    In March 2022 the property was sold and the capital gain position will arise.

    All parties are UK residents.

    I understand that the starting point for the calculation will be the proceeds from the sale in March 2022 but what will the acquisition value be? Will it be the original amount paid in 1999 (when the property was bought), the Land Registry value in April 2005 when my father in law died or the Land Registry value in November 2016 when the property was gifted?

    We realize that we will require representation in this matter before the 2022 Tax Return is filed and I was wondering if you can recommend anyone in the Algarve region?

    I apologise for troubling you if this is not the type of guidance you offer.

    Kindest regards.

  2. Good morning Mr. gentleman,

    Could you please explain to me how the added value of each child is calculated with the following data? Thanks

    Inheritance from home by 2 children:

    Father dies 1993; house value 10,000
    Mother dies 2004; house value 50,000

    House sold in 2021 for 100,000
    Expense of sale 5,000 for each child

    Respects

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