The government has made changes to the way capital gains on real estate are taxed. These changes are effective from October 2023 and relate to the conditions for tax exemption. In this article, we will explain the main changes to the law and the transitional rule that will be effective until the end of 2024.

Capital Gains: Reinvestment with Tighter Rules

One important change pertains to the exclusion of capital gains from selling a primary residence. This exclusion applies if the money is reinvested in another property for the same purpose. However, two new requirements have been added to benefit from this exemption, making fewer cases eligible.

If you sell a property that you intend to live in permanently, you don’t have to pay taxes on the profit you make from the sale, as long as you use the money you make to buy another property or land within 36 months of the sale.

The two new requirements are that you now have to buy the new property within 24 months before or after the sale, and the new property or land has to be used for the same purpose. Additionally, the property sold must have been the permanent home of the taxable person or their family for at least 24 months before the date of sale, as proven by their tax address.

Individuals who are subject to tax may not have taken advantage of this exemption program in the year when the profits were made or in the previous three years. However, if the taxable person can provide evidence during the liquidation process that non-compliance with this requirement was due to unusual circumstances, this rule will not apply.

Sale of Second Home to Amortize Credit Gives Right to Exemption

The program called Mais Habitação has a special rule that exempts people from paying taxes when they sell a building plot or a second home, as long as the money they get from the sale is used to pay off a loan for their permanent home or their descendants’ home.

If the value of the sale is more than what you still owe on your mortgage loan, you may need to pay taxes on the remaining amount. The IRS Code has specific rules for this.

This rule applies to sales made between January 1st, 2022 and December 31st, 2024. Please note that the tax authorities may require you to submit supporting documents after filing your 2023 and 2024 IRS tax returns for the repayment of the outstanding capital on a mortgage loan for your permanent residence.

If you sell a piece of land or a second home, you have a maximum of three months to repay the loan. If you sold the property before October 7th, the three-month repayment period starts from that date.

Capital Gains: Sales to the State Also Entitle You to Exemption

The new law also establishes that gains from the sale of residential property to the State, the Autonomous Regions, public housing companies, or local authorities are exempt from IRS and IRC taxation. However, there are exceptions:

– Residents who live in a country, territory, or region subject to a more favourable tax regime, included in a list approved by the member of the Government responsible for finance, are allowed to keep any gains.
– Additionally, gains resulting from the exercise of pre-emption rights due to onerous disposals are exempted from tax.

This measure excludes certain income from taxation. However, such income is still taken into account when determining the tax rate for other income.

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