Capital gains on rental properties

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For many years, owners have been renting out their Portuguese properties for short-term rentals, taking advantage of the high demand from tourists who want to vacation in our beautiful country.

Just a few years ago you could rent out your property without too much bureaucracy. Rental income had to be declared on an annual Portuguese tax return even if the funds were administered and received outside Portugal. In 2014 it became mandatory for properties to have an AL tourist license, then in 2015 owners had to be registered as self-employed with the tax and social security service, under what the it is called category B rental income, in order to operate. their “rental business”. Long-term rentals are category F income.

Registered individuals must submit a tax return in Portugal even if no rental income has been received and this situation is one of the few circumstances in which a zero tax return can and should be submitted.

Sovereign registers its clients for self-employment, provides them with the necessary accounting services and submits their tax returns.

However, there is one very important issue that landlords renting out their properties need to be aware of.

For individuals registered before January 2021, there is a capital gain requirement when individuals use their property as a tourism business under AL.

The tax law assumes that ownership transfers to the business and when clients cancel their self-employment or sell the property, there is a capital gain liability. This liability is in addition to the usual capital gain on the sale of property which would be calculated separately.

Due to changes in 2021 to the capital gains regime for buildings under AL companies, registrants now have to choose between the old and the new regime. This election can only be made on that year’s tax return.

The tax implications can be significant and should be assessed on a case-by-case basis.

The choice between the “old regime” and the “new regime” only applies to those who had their rental activity before January 2021. If you only started your activity in 2021, the “New Regime” will be applied, and no option is possible.

A brief explanation:

” Old regime “

Until January 2021, the rules were as follows:

a. There was a capital gain liability when the business was canceled even though the property was not sold to a third party.

b. The gain was calculated between the difference between the market value of the property when the activity was registered and the market value when the activity ceased.

vs. The tax authorities assume that the market value is the VPT (asset value) of the property, as can be seen on IMI property tax bills.

D. The initial value is updated according to the annual table of indexation coefficients.

e. Certain upgrades and costs may be deducted from the prize.

f. Wear damping is added to the gain.

g. Taxable income is 95% of the gain and the final rate for non-residents is 25%, while for residents taxation is at graduated rates.

Under this regime, even if the property was not sold, the taxpayer would be required to calculate and pay the capital gains within one year of ceasing business.

“New Diet”

From January 2021, the new regulations can benefit or negatively impact the taxpayer, depending on individual circumstances.

Under these new rules, the government changed the liability of the CGT upon cessation of activity at the time of the sale of the property.

There are two ways to calculate the gain:

1. If the property is sold 3 years after the date of cessation of activity, the capital gain is calculated as if the property had never been the subject of a professional activity. All rules of the private sale of property apply. Sovereign can provide more details in these cases.

2. If the property is sold within 3 years of the cessation of activity, the capital gain is calculated as goodwill. Rules similar to those of the “old regime” apply, but with some differences as below:

a. Capital gains liability is only with the sale.

b. The capital gain is calculated on the difference between the purchase price at the initial act of purchase of the property and the sale price.

vs. The market values ​​or VPT are no longer considered because the acquisition and sale values ​​are the actual prices according to the notarial deeds.

D. Upgrades and costs cannot be deducted from the prize.

e. The initial purchase is not updated according to the table of annual indexation coefficients.

f. Wear damping is added to the gain.

g. The taxable income is 95% of the gain and the final rate for non-residents is 25%, while for residents it is the progressive rates.

Before submitting your 2021 tax return, you need to decide which option you want.

Sovereign’s team of fully qualified accountants can help you make this decision by providing a simulation for each different scenario.

Since 1999, Sovereign’s office in Lagoa has responded to the growing demand for tax assistance from foreign investors, residents and retirees. With extensive experience dealing with Portuguese authorities, Sovereign knows how to keep its clients safe and in full compliance with their taxes in Portugal, offering services such as tax representation, submission of tax returns and accounting services. rental income for individuals or businesses.

Additional specialist services from the Sovereign Group include Residency and Immigration (Golden Visa and D7 Passive Income Visa), Wealth Management, Trust Management, Corporate Entity Structuring (CSP), Foreign Ownership, pensions, tailor-made insurance for companies and individuals, as well as the ownership and management of yacht and aircraft registration.

Sovereign Group prides itself on having global reach from a local delivery point, so speak to the experts today at serviceinfo@sovereigngroup.com

https://www.sovereigngroup.com/portugal/

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