If you sold a home in 2020, you'll need to report it to the IRS so that the tax authorities can determine whether your Capital gains are taxable.

In this article, you'll find out what you need to declare when selling your home in Portugal, how to reinvest any capital gains and which transactions to leave out.

How to declare the sale of your house in Portugal

You have just sold your primary or secondary residence in Portugal, and the profit from the sale of a property is, of course, taxable; it is up to the tax authorities to determine whether part of that amount constitutes capital gains.

As a general rule, half of the capital gains from the sale of real estate are subject to tax, but it all depends on how you reinvest that money. To avoid being caught off guard, make sure you know how to report the sale of your home in Portugal and plan ahead for any potential tax obligations.

How to Calculate Capital Gains

Any profit you made from the sale of your home must always be reported on your IRS tax return for the year in which the sale took place. You must also report the purchase price of your home and any expenses you incurred during the transaction (for example, commissions paid to real estate agencies).

If this sale involves inherited property, the «purchase price» to be reported is the net tax value of the property as recorded in the land registry for the year in which you inherited it. Generally, this amount is also listed in the stamp tax document that the heirs received when the transfer of ownership was registered with the tax authorities.

If the property was inherited before January 1, 1989, you will not owe any tax, but you must report the transaction on Schedule G1.

The purchase price you report on your tax return will be adjusted by the tax authorities, who apply a monetary adjustment to ensure that the values are accurate as of the filing date; this adjustment varies depending on the year of purchase. The remaining calculations are performed by the tax authorities.

In the field Fees and Charges (Despesas e encargos), you can list any expenses you may have incurred in connection with the sale of the property, such as commissions paid to the real estate agency (provided the agency issues you an invoice) or the energy performance certificate, or any energy-efficiency improvements, such as the installation of a heating system.

PLEASE NOTE: The work must have been completed within the last 12 years.

These expenses must be documented with invoices issued in the homeowner's name and including the taxpayer identification number. They will be deducted from the capital gains.

If you reinvest, you don't pay any taxes

Half of the capital gains from the sale of a property are subject to tax, unless all of the proceeds are reinvested in the purchase of another primary residence, which must be located at the owner’s tax address.

In that case, you are exempt from capital gains tax on the gains realized.But the exemption also depends on the time between the purchase of the new home and the sale of the old one.

If you sell your home first, you have 36 months to purchase another primary residence and reinvest the profit you made.

Until then, capital gains tax is suspended, since the owner notifies the tax authorities, via Schedule G, of his or her intention to claim the capital gain.

When the purchase of your new home becomes a reality, the tax authorities calculate the profit realized and confirm that this amount will be applied toward the purchase of the new property.

PLEASE NOTE: You must ensure that the new home has officially become your permanent residence and remains so for up to 48 months after the sale of the old home.

In the event that you Buy your new home first, you have 24 months to notify the tax authorities that the proceeds from the sale of your home were used to purchase the property.

You must report the sale and purchase prices only in the year during which you own the property.

At that time, it also indicates that a portion of the amounts was paid by credit (if applicable), so that the profit earned can be determined accurately.

When the sale of a house results in the purchase of land intended for the construction or expansion of a property, it is mandatory to file a registration application with the Predial du bâtiment.

You have 48 months to do so after the sale of your property, plus the current year (five years in total), in order for the new property to be declared your family’s permanent residence.

What happens if you don't reinvest all of your profits?

If the proceeds from the sale are not reinvested in full when purchasing a new home, this is considered a partial reinvestment.

In this case, the tax authorities will determine that a portion of the proceeds from the sale was indeed reinvested in the new permanent residence.

If you keep the entire profit from the sale of the property, the tax authorities will apply half of that amount to your remaining income, regardless of its category.

Let’s take, for example, an apartment purchased for 80,000 euros and later sold for 145,000 euros. The difference between the two values is 65,000 euros, so the maximum taxable gain is 32,500 euros. The tax is calculated on this amount, taking your taxable income into account, and the tax rate is applied in brackets.

When the sale price is less than the taxable value of the asset

If the property is sold for less than its net tax value, you can provide proof of this to the tax authorities. This proof is provided by submitting a request to the Director of Finance during the month of January of the year following the sale, if the net book value has already been definitively established, or within 30 days of the date on which the assessment became final.

The request must include all documents relevant to the analysis, such as a copy of the bill of sale, a copy of any advertisements used to market the property, banking information, etc.

If you do not provide proof, the taxable amount will be based on the tax equity value, which will be reflected in an increase in capital gains.

People over 65 are exempt from capital gains tax

Retirees or taxpayers who are over 65 years of age as of the date of the property’s sale may be exempt from paying capital gains tax. To qualify, they must reinvest the proceeds from the sale in a Ramo Vida financial insurance policy or in an open-ended pension fund that provides a regular periodic income.

This also applies if the reinvestment consists of contributions to a public funded pension plan, including retirement certificates, within six months of the transaction.

This rule applies not only to the taxpayer but also to the taxpayer’s spouse or domestic partner. It is also mandatory to maintain compliance for ten years.

With the exception of retirement certificates, the redemption of these products must always be based on periodic payments, with an annual limit of 7.5% of the total amount invested.