How to declare the sale of an inherited property on Personal Income Tax in Portugal

How to declare the sale of an inherited property on Personal Income Tax (Portugal)

Understanding the inherited property value

When you inherit a property, you must declare its value on your Personal Income Tax. This value is based on an appraisal by the Portuguese Tax Authority at the time you inherit the property and will be the reference for sale value. The profit from the sale of an inherited property, which is the difference between the sale price and the inherited value, will be taxed, and this difference is what you must focus on when filing your Personal Income Tax. The tax isn’t immediate when you inherit a property but applies once you declare it as your own. The first step is to understand the property’s appraised value at the time of inheritance, as this will be used to calculate any capital gain when the sale occurs.

What is capital gain, and how do you calculate it?

Capital gain is the profit made from selling an asset at a higher value than its purchase price. In the case of inherited properties, the capital gain is calculated by the difference between the sale price and the property’s appraised value at the time of inheritance. The calculation also includes directly associated costs, such as deed and land registry certificate fees and the Municipal Property Transfer Tax (IMT) when applicable. Real estate agency commissions can also be deducted from the final sale value, reducing the taxable capital gain. Keep all receipts for these expenses to avoid issues during your Personal Income Tax filing.

Capital gains tax on Personal Income Tax

After calculating the capital gain, you must declare it on your Personal Income Tax. For the sale of inherited properties, the tax is applied to 50% of the capital gain, which is added to your other income and taxed according to your income bracket.

Capital gains tax exemptions

While the sale of an inherited property typically incurs capital gains tax, there are cases where partial or total exemptions may apply. One of the most common exemptions occurs if the sale proceeds are reinvested in the purchase of a new primary residence. You have 36 months to reinvest the sale amount from the date of sale. If you use the entire or partial amount for a new home, you may reduce or even eliminate the capital gains tax payable. Additionally, individuals over 65 may benefit from tax incentives if they invest the sale amount in specific savings products, such as life insurance or pension funds, to supplement their retirement.

How to declare the property sale on Personal Income Tax

Property sales must be declared in Annex G of the Personal Income Tax return. For an inherited property, include details such as the inheritance date, the appraised property value at that time, the sale price, and all expenses related to the transaction. In Annex G, input all data relevant to the sale, as well as the capital gain calculation. You can include deductions for expenses that reduce the taxable capital gain, such as real estate agency commissions or other documented sale expenses, as previously mentioned.

Impact on joint filing and income brackets

For individuals who file Personal Income Tax jointly (such as married couples), the capital gain from selling an inherited property will be split among household members. This can help spread the gain, resulting in lower individual tax rates. However, keep in mind that the total income—including 50% of the capital gain—may move you into a higher income bracket, resulting in a higher tax rate.

Key steps in the property sale process

During the sale of an inherited property, ensure all necessary documents are in order. These include an updated land registry certificate, the property tax record, occupancy permit, and energy certificate, which are essential for any property sale. At Engel & Völkers, we recommend consulting a tax advisor or accountant to ensure you are meeting all requirements and avoiding any potential issues with your Personal Income Tax declaration.

Planning the sale in advance

Planning an inherited or non-inherited property sale in advance can provide significant tax advantages. For example, by timing the sale strategically, an heir may benefit from tax exemptions or reinvest sale proceeds to reduce capital gains tax. Additionally, advance planning allows for thorough organization of documentation, preventing errors and ensuring that all expenses are correctly documented for tax purposes. Avoiding rushed decisions helps ensure a smooth process.

In conclusion, declaring the sale of inherited property on Personal Income Tax can seem complex, but with proper care and attention, you can ensure the process is done correctly. The main point to remember is that the capital gain from the sale will be taxed, but there are ways to reduce this tax through expense deductions or reinvestment in a new property.Completing the sale and filing it accurately on your Personal Income Tax can be a challenging process, but with the right knowledge, it can be done smoothly.Having the support of experienced professionals makes a substantial difference. By choosing to sell with the help of Engel & Völkers agents, you ensure expert guidance through every stage—from preparing the sale to the tax declaration process.Trust our team to make the experience easier and ensure everything is done with maximum efficiency.