When selling a property one of the costs to be taken into account is the result of the capital gains. These are 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). The added value can be derived from the sale of a property, whether acquired through purchase or inheritance. Calculating capital gains, what the capital gains taxation process is, how to declare capital gains and, also, how one can be exempt, is what we will address.
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Table of Contents
- What are the Gains and Gains in the sale of real estate
- The capital gains tax process
- Reinvesting in Permanent Own Housing
- Use capital gains to settle a loan
- Calculate Gains
- Calculate 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 the added value of selling the house on the IRS
What are the Gains and Gains in the sale of real estate
The added value is the profit obtained from the sale of a property, taking into account the value for which it was acquired.
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 to the IRS.
The capital gains tax process
The process begins with the sale of the property. The sale must be declared to the IRS for the year in which the sale was made.
If the acquisition was made before the capital gains tax came into effect, before January 1, 1989, the capital gains obtained will not be taxed under the IRS.
There are also some exceptions to this capital gains tax process, as will be seen below.
Reinvesting in Permanent Own Housing
There is an exemption from 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 on capital gains, at least on the part that was reinvested, if the total gains have 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.
The formula for calculating capital gains and the amount to be subject to taxation is:
Capital Gains = Sale Value or Realization Value - (Acquisition Value x Currency Devaluation Coefficient) - Acquisition and Sale Charges - Property Valuation Expenses
If more than 24 months have elapsed between the date of acquisition and the sale of the property, there is an adjustment of the acquisition value, so that it is updated to current values, through the currency devaluation coefficient (article 50 CIRS).
Sale costs can be deducted, such as the commission paid to the real estate agency, energy certificate, deed and registration of a house, for example, as well as works that have been carried out in the last 12 years.
All these expenses, both with the sale and the acquisition, as well as the charges for the valuation, to be accepted must be duly evidenced by invoices.
Calculate capital gains to be taxed
For tax purposes, only 50% of the value of the capital gain is taxed. There is an exception, if the property has been purchased or rehabilitated with public support.
The surplus value is included in the IRS, being therefore considered an income. Not being taxed autonomously, the amount paid of the IRS tax will depend on the step 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
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 calculate capital gains, the formula applies:
Value Added = € 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)
He acquired a house in 1993 for 10.000 contos. Sold for € 220.000. Energy certificate 200 €. 5% commission on the sale, € 200 purchase deed and € 2.000 purchase tax.
The euro replaced the escudo on 1 January 2002, worth 200,482 escudos.
Converting 10.000 contos into euros is 49.880 euros (10.000 contos x 1.000 escudos / 200,482)
Capital gains = € 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)
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.
Capital gains = € 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 the remaining income, such as labor income. It depends on the overall value of the 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 the added value of selling the house on the IRS
To declare the value of the sale, you must complete Annex G or G1. If the acquisition date is prior to January 1, 1989, Attachment G1 - “Untaxed capital gains” is completed and if later, Attachment G - “Equity Increments” must be completed.
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||Mother's Death 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 - it's the father's death date, 1980,
- realization date - is the date the property was sold, 2019,
- realization value - is 25% of the sale price of the property,
- acquisition value - it is 25% of the value of the property when the inheritance and donation tax was paid for the death of the father. This was the tax in effect until 2004. From then on it is considered for the purpose of Stamp Duty.
The remaining 25% acquired due to the mother's death, are declared in Annex G:
- Date of realization - is the sale date,
- Realization value 25% of the sale price,
- Date of acquisition - is the date on which this 25% was acquired, that is, on the death of the mother, 2001,
- Acquisition value - is the value of the property considered on this date (2001) and that is the value of the property considered for the purpose of settling the stamp duty, upon the death of the mother.
These values are for information only and do not dispense the consultation or support of specialized professionals.
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