Capital gain on real estate sales: learn more about taxation, exemptions and statements

Taxpayers mindful of the rules may benefit from tax deductions or exemptions

Whenever a new income tax season comes around, people often find themselves wondering how to declare capital gain on real estate sales.

As a general rule, individuals who have made a profit from the sale of their assets must calculate and pay Income Tax on the corresponding income, which amounts to the difference between the sale value (e.g.: property sale) and the acquisition cost.

However, it is worth pointing out that this issue warrants close attention, because some taxpayers may benefit from a deduction in the amount payable or even be exempt from paying the tax altogether as per the rules currently in force.

Case-by-case analysis may lead to income tax exemptions

Capital gains on home sales are not subject to the income tax if the owner purchases another residential property within 180 days of selling their former home and the earnings from the sale are entirely spent in this latter acquisition.

Read more: Federal Revenue Office expands Income Tax exemption on capital gains with real residential property

The way through which the new property was purchased can also play a role towards total or partial tax exemption, as aspects such as the total real estate value and the acquisition date of the property sold tend to be factored in. Therefore, a case-by-case analysis of the specifics of each situation should be carried out.

Taxation on capital gains

At any rate, taxpayers who profited from selling real estate, such as houses, apartments or land, must:

• pay the tax on real estate income (at rates varying from 15% to 22.5% depending on the realized capital gains); and
• file their capital gains statement together with their income tax returns.

Even when capital gains are tax-exempt, taxpayers are still required to file their Income Tax Return in the following year, irrespective of any other mandatory condition they may be subject to.

Loss or no-profit from property sales

Taxes are not levied whenever real estate is sold at a price equal to or less than the purchase price, as there is no capital gain from such transactions.

Possibility of tax reduction

Whenever an individual taxpayer can demonstrate that they made improvements to the property put up for sale, it is possible to deduct such amounts from the profit made from the transfer. The lower the profit margin, the lower the tax rate will be. Hence, taxpayers should keep their documents for up to five years after the property has been sold.

Reporting sales on income tax returns

Anyone who has sold real estate must update their Annual Income Tax Return with information corresponding to the year in which the sale was carried out.

Those who made a capital gain from such transactions must also file the corresponding statement alongside their tax return, even if the profit is deemed non-taxable.

Tax optimization for individuals

DPC has a department that specializes in assisting individual taxpayers with tax planning and compliance with one-off or recurrent requirements. You can count on us to put the best practices in place to help you with your tax demands: dpc@dpc.com.br.