Using Capital Gains to Buy a Second Home? Exemption Will No Longer Apply
Hello Buyers! Profits from the sale of a property are exempt from capital gains tax if used to pay off the mortgage on a primary residence. However, this exemption does not apply if the gains are used as a down payment for the purchase of a new property.
This difference in the temporary measure under the “More Housing” law is highlighted in a recent statement by the Portuguese Tax and Customs Authority (AT).
One of the “More Housing” measures, available until the end of this year, allows individuals to exclude capital gains from the sale of a property (such as a second home or building land) from personal income tax (IRS), provided the proceeds are used to pay down the mortgage on their primary residence or that of their descendants.
According to tax regulations, this exemption is only applicable if the mortgage is paid off within three months of the sale, and only to the portion of the gain used for this purpose.
In the case that prompted the AT’s response, a taxpayer sold a property in March last year and used part of the proceeds (25%) to pay off the mortgage on their child’s primary residence.
The process didn’t end there. In September of the same year, the child sold their home and purchased a new property in December, with the taxpayer contributing another 25% of the March sale’s proceeds to help fund this new purchase.
The taxpayer wanted to know if both amounts used (25% + 25%) could benefit from the transitional capital gains tax exemption under the “More Housing” program.
The AT clarified that the portion used for purchasing the new home falls outside the scope of this exemption. The funds from the sale “were not used to pay off an existing mortgage on a primary residence, but instead went towards the price of a new property purchase.”
The tax authority’s response emphasized that this goes beyond “both the letter and the intent of the law.”
Only the amount used to reduce the mortgage on the child’s existing primary residence qualifies for the capital gains tax exemption under the “More Housing” law, provided this mortgage was in place at the time of the property sale in March.
This exemption has been applicable to sales made since January 1, 2022, requiring payment of the mortgage within three months following the enactment of the “More Housing” law.
If you would like some more explanations about this theme, feel free to contact us!
IN: idealista.pt
