When selling a property, one of the costs to take into account is the one resulting from Added Value. The calculation of capital gains on real estate is obtained taking into account the value of the sale in relation to the value of the acquisition and will be taxed under the Income Tax (IRS). Mais Valia can be derived from the sale of a property, whether acquired by purchase or by inheritance. How to calculate Capital Gains, what is your taxation process, how to declare them and, also, how you can be exempt from Capital Gains, is what we will address.
Reading Time: 9 minutes
Table of Contents
- What they are and how to calculate the Gains or Losses in the sale of real estate
- The capital gains tax process
- Reinvesting in Permanent Own Housing
- Use capital gains to settle a loan
- How to Calculate Capital Gains
- Calculation of Capital Gains to be taxed
- The Tax Non-Resident Case
- Examples to calculate and declare surplus value
- Taxation of capital gains and what tax to pay
- How to declare Capital Gains from the sale of the house in the IRS
What they are and how to calculate the Gains or Losses in the sale of real estate
The surplus value is the profit that is 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 usually a more or less long period between the acquisition and the sale, that value is recalculated due to the currency devaluation.
If the updated purchase price, on the sale date, is lower than the sale price, there will be a gain. If this value is higher, there will be a loss.
Whatever the outcome, this sale must be declared in the IRS.
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 taxation of Capital Gains, at least on the part that was reinvested, if the entirety of the gains has not 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
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 to calculate Capital Gains and the amount to be taxed 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 capital gain 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 bought a house in 2001 for € 150.000 and sold it in 2019 for € 250.000. Supported some costs in this transaction, such as 5% commission to the real estate agent, 200 € of energy certificate and 20.000 € in works carried out in the last 12 years. You paid € 300 in the deed of acquisition 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 of 2001 (year of acquisition) of the table applicable in 2019 (year of sale)
Case 2 – Acquisition in 1993, escudo currency
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 of 1993 (year of acquisition) of the table applicable in 2019 (year of sale)
Case 3 - Non-tax resident
He is not a tax resident and bought a house for € 400.000 in 2010. He sold for € 500.000 in 2019. He paid € 200 for the energy certificate and a 5% commission to the real estate agent. Registration and deed of purchase, € 400, IMT and Stamp Duty (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 of 2010 (year of acquisition) of the table applicable in 2019 (year of sale)
Taxation of capital gains and what tax to pay
For the taxation of capital gains, these are included together with other income, such as work. Depends on the overall amount of income, the tax rate payable.
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 Capital 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” is filled in and if it is later, Annex G – “Equity Increments” must be filled in.
In Annex G, fill in the year to which this sale refers, the tax identification number (TIN) and in table 4 the purchase and sale values, as well as charges, if any.
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.
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|
|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 realization - 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 donation tax was paid on the death of the father. This was the tax in force until 2004. From then on it is considered for Stamp Duty purposes.
The remaining 25% acquired due to the mother's death, are declared in Annex G:
- Date of realization - is the date of sale
- realization value 25% of the sale value
- Date of acquisition - is the date on which these 25% were acquired, that is, on 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.
- How to Calculate the Tax Equity Value (VPT) of the Property
- How to Claim Reinvestment of Capital Gains in the IRS
These values are for information only and do not dispense the consultation or support of specialized professionals.
We wish that the article had been to your satisfaction.
Help us improve!
We will be very grateful if you give us your contribution to make it better.