Although the general rule is exemption from capital gains taxation, if there is an investment in a new home, there are exceptions and ways to minimize the payment of capital gains. Get to know them and remember that their payment does not occur only after the sale of a property, according to Caixa Geral de Depósitos.

 

 

According to the IRS Code, the following cases are exempt from the payment of capital gains

• The property sold is one's own and permanent home and the capital gains (the sale value less the amortization of any loan taken out to acquire the property) are fully reinvested in the purchase, construction or rehabilitation of another dwelling intended for one's own and permanent home within 24 months prior to or 36 months after the sale of the house;
• Taxpayers who are retired or over 65 years of age who invest the capital gains in an insurance contract, in an open pension fund that guarantees a regular periodic income or in the public capitalization system (retirement certificates), within six months after the sale of the property;
• From real estate acquired before 1989.

 

 

At the moment the property is inherited, the IRS assigns it a value. This value corresponds to the amount subject to Stamp Duty (even if you are exempt from paying this tax) and will serve as a reference for the calculation of capital gains when the heirs decide to sell the property. In case you have inherited a property, it is very important that you inform yourself about the value that the tax authorities have attributed to it.

 

Besides the value of the property, the date of acquisition of the property is important. In the case of inherited property, the date of acquisition to be considered is the date of death of the owner and not the date of the division of property.

 

In other words, if the property was inherited by the death of an ascendant in 1986, but the division of assets took place in 1995, the date of acquisition to be considered is 1986 and, because it is prior to 1989, the capital gain obtained is not subject to IRS taxation, but should still be declared in annex G1 of model 3.

 

But beware, this is only valid if you inherited the entire property on a single date. If you have obtained portions of the property on different dates, the situation will be different. If the property was owned by an ascendant, when inheriting in its entirety, there will only be one date of acquisition. But if the property was owned by two ascendants, upon the death of one, you will inherit a portion of the property, and upon the death of the other, the remaining portion. You therefore have separate dates of acquisition before the IRS.

 

In this case, each of these dates corresponds to a distinct acquisition value and a proportion of the sale value, to be broken down in the IRS declaration, in box 4 of annex G of model 3, and there may be portions that should be entered in box 5 of annex G1.

 

 

 

If you do not qualify for exemption, then you can try to adopt some strategies to reduce your tax. To do so, on your IRS return, you should deduct the invoices (up to 12 years) of the following expenses when calculating capital gains:

• Home improvement and maintenance works, such as home improvements, painting, insulation, among others;
• Fixed appliances, such as exhaust fans, air conditioning, among others;
• Expenses inherent to the purchase and sale, such as IMT (or SISA), notary and land registry fees, expenses incurred with energy certification, and the brokerage commission;
• Proven compensation paid for the onerous renunciation of contractual positions or other rights inherent to contracts related to those assets.

 

 

 

Taking into account all the exceptions and mechanisms to minimize the payment of capital gains, calculating taxation may not be an easy task.

 

If someone, with no exemption from its payment, bought a property for 100 thousand Euros and is now going to sell it for 150 thousand Euros, he/she will obtain 50 thousand Euros in capital gains. That is, 50% of the profit obtained in this hypothetical scenario, 25 thousand euros, will be taxable income.

 

The Tax Authority will aggregate this value to the remaining income, regardless of its category. The tax is calculated on this amount, taking into account your taxable income, and the rate is applied by brackets. In a simplistic way, we can say that you will pay tax on 25% of the value of capital gains, which, in this example case, corresponds to 12,500 euros.

 

However, there are some other aspects to consider in this equation. When doing the calculations, pay attention to the Patrimonial Value of the Property (VPT), especially if it is different from the value for which you bought the property. You should bear in mind that the value at which you bought the property refers to the value that is explicitly stated in the deed of the house and the sale value corresponds to the evaluation made by the Tax Department.