When selling real estate property in Portugal, including Madeira Island, it is possible to avoid capital gains tax, provided some conditions are met.
The most common route to avoid capital-gains tax
Gains arising from the transfer of real estate destined for the taxable person’s own and permanent residence or that of his family are excluded from taxation, in Portugal, provided that the following conditions are cumulatively verified.
- The realisation value, less the amortisation of any loan taken out for the acquisition of the property, is reinvested in the acquisition of ownership of another property, of land for the construction of a property and or the construction thereof, or in the extension or improvement of another property exclusively for the same purpose ( permanent residence) situated in Portuguese territory or in the territory of another member state of the European Union or the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters;
- The reinvestment foreseen in the previous sub-paragraph is made 24 months before or 36 months after the date of the transfer.
- The taxpayer manifests the intention to reinvest, even partially, mentioning the respective amount in the tax return of the year of the transfer.
Please note that the tax benefit referred to above shall not apply when the real estate has benefited from non-refundable support granted by the State or other public entities for the acquisition, construction, reconstruction, or conservation works worth more than 30% of the property’s taxable patrimonial value for IMI purposes, is sold before ten years have elapsed since the date of its acquisition, the signing of the declaration of receipt of the works or the payment of the last expense related to the non-refundable public support, which, under the terms of the law or regulations, is not subject to any onus or special regimes that limit or condition the respective alienation.
Alternatives to the reinvestment in another permanent residence:
To apply the results of the sale, less the amortisation of any loan taken out for the acquisition of the property, when applicable, in the acquisition of one or more of the following products:
- A financial life insurance contract.
- Individual membership of an open pension fund.
- Contribution to the public capitalization regime. There are no legal age limits for taxpayers to join the public capitalization regime. However, members cannot be pensioners or old-age pensioners and must be affiliated to a compulsory social protection system, i.e. they must be actively employed.
According to the information that we have of your husband he would not quality to this investment as he is not actively employed and is not contributing to the Portuguese social security.
Conditions to be able to use the alternatives
- The taxpayer or his spouse or unmarried partner, on the date of transfer of the property, is demonstrably in a situation of retirement or is at least 65 years of age.
- The acquisition of a life insurance contract, the individual membership of an open pension fund or the contribution to the public capitalization regime must be made within six months from the date of the transfer of the property.
- The benefit referred to in the preceding paragraph shall not apply if the reinvestment is not made within the period referred to in the above paragraph or if, in any year, the value of the benefits received exceeds the limit set in paragraph 4 below, or if the regular payment of contributions is interrupted, such gain being subject to taxation in the year in which the reinvestment period ends, or if the said limit is exceeded or in the year in which the regular payment of benefits is interrupted, respectively.
- If the investment is made by acquiring a life insurance contract or by individual membership of an open pension fund, these are exclusively aimed at providing the purchaser or his spouse or unmarried partner with a regular periodic payment for a period equal to or greater than 10 years of a maximum annual amount equal to 7.5% of the amount invested.
- The taxpayer manifests the intention to reinvest, even partially, mentioning the respective amount in the income tax return for the year of the transfer of the property.
For more information information on how to avoid capital-gains tax regarding other types of assets please refer to the following article.
This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind.
Rosana Rodrigues is a co-founder and partner of TFRA Law Firm. Her work mainly involves advising foreign investors in Portugal, particularly in areas of Corporate and Tax law. She has also worked extensively in Shipping law… Read more