Building Your Dream Home in Madeira? An important ruling Portugal Capital Gains Tax was just published.
For expatriates living in Madeira and considering reinvestment opportunities in Portugal’s property market, a recent binding tax ruling by the Portuguese Tax Authority (Autoridade Tributária e Aduaneira, or AT) offers essential clarification. This development is particularly relevant for those looking to reinvest capital gains from the sale of their primary residence, avoiding Portugal’s capital gains tax.
Key Issue: Reinvestment into a Rustic Plot for New Home Construction
The case in question involved a taxpayer who sold their permanent home in September 2021 and subsequently purchased a rustic plot of land in December 2021, intending to build a new permanent residence. The taxpayer sought confirmation that this reinvestment, although initially in rustic land, would qualify for the capital gains tax exemption under Article 10(5) of the Portuguese Personal Income Tax Code (CIRS).
The AT’s Conclusion
The AT confirmed that the exemption may apply, even when the reinvestment initially involves land classified as “rustic,” provided that:
- The land is later reclassified as a “terrain for construction” under the Portuguese Real Estate Tax Code (Código do IMI);
- There is prior favourable municipal approval for construction or allotment (even if the land was rustic at acquisition);
- The property under construction is duly registered and allocated as the taxpayer’s permanent residence within the legal deadlines.
What Are the Legal Timeframes?
According to the ruling and taking into account transitional measures under Law No. 56/2023:
- The reinvestment must occur within 36 months from the date of sale (extended by a two-year suspension period, effectively until December 2024 in this case).
- The constructed home must be registered with the tax authorities by December 2025.
- The property must be the taxpayer’s principal residence by December 2026.
Practical Requirements
For the reinvestment exemption to be granted:
- All expenses related to the construction must be fully documented with valid invoices or receipts.
- The taxpayer must declare their intention to reinvest in their annual tax return for the year the original property was sold.
- The newly built property must be situated in Portugal or an EU/EEA country with which Portugal has a tax information exchange agreement.
What This Means for Expatriates in Madeira
This ruling offers valuable clarity for expatriates planning to build a new home in Madeira, especially in semi-rural or low-density areas where land is often still classified as rustic. As long as the legal requirements are met and the land is eligible for conversion to construction use, reinvestment relief on capital gains can be successfully claimed.
However, seeking local legal and tax advice early is crucial to ensure compliance with the evolving Portugal capital gains tax framework and to navigate deadlines and documentation correctly.
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