Portugal Faces a Real Estate Paradox
Despite a decline in purchasing power, property prices continue to rise in Portugal, stalling the dreams of thousands of families wishing to move house. Selling in order to buy has become an obstacle course, often dependent on difficult financing conditions. In this context, an alternative is gaining traction—one that many are unaware of, but which may be the most tax-efficient move in today’s market: property exchange.
More than a simple swap of properties, an exchange is a solution that can unlock transactions, avoid high taxes, and navigate some of the market’s uncertainties. When properly structured, it can lead to real and immediate savings in Municipal Property Transfer Tax (IMT), Stamp Duty (IS), and even capital gains tax. But caution is advised: as with all tax matters, the devil is in the details—and in the fine print of the law.
What Exactly Is a Property Exchange?
A property exchange is an onerous contract in which both parties simultaneously assume the roles of seller and buyer—each transfers ownership of a property, receiving another in return. When the properties are of unequal value, the party receiving the lower-valued asset may receive a monetary adjustment to compensate for the difference. Legally, this operation is treated as a purchase and sale, but with fiscal and operational nuances that can make it especially advantageous when properly executed.
Unlike traditional buying and selling, a property exchange can circumvent some of the typical tax burdens in the sector. This is not a loophole—the law itself provides the pathway.
IMT and IS: The Difference That Counts
IMT and IS are significant fiscal burdens in property acquisition. However, in exchange transactions, the tax incidence framework includes provisions that mitigate the overall tax burden.
According to current legislation, in property exchanges, IMT and IS are due only on the difference in value between the exchanged properties. These taxes are paid exclusively by the party receiving the higher-valued property.
Example:
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João’s property: declared value or tax asset value (VPT) of €150,000.
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Maria’s property: declared value or VPT of €200,000.
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Both exchange properties, with João receiving the higher-valued property (intended as his primary and permanent residence).
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Declared difference: €50,000.
IMT and IS apply only to the €50,000 difference, payable solely by João. However, acquisitions of property intended as a primary and permanent residence are subject to an IMT rate of 0% (i.e., exempt) up to €104,261.00, and the taxable differential in this case falls below that threshold. Therefore, João would be exempt from IMT but not from IS.
Maria is exempt from both IMT and IS.
If there were no difference in value between the properties, both owners could benefit from exemption from IMT and IS.
VPT vs. Declared Value: Which One Counts?
The IMT tax base will be the higher of either the declared difference in value or the difference in VPT between the properties.
Why does this matter? Because the VPT often falls below market value. If the declared difference is greater, that amount becomes the IMT tax base. But there’s a catch.
⚠️ Beware the “Resale Within One Year” Rule
The 2023 State Budget introduced an anti-abuse provision: if one of the exchanged properties is resold within one year of the exchange, the benefit is revoked, and IMT is calculated on the full value of the property—as in a standard sale.
In such a case, the exchanging party who transferred the property must notify the tax authorities within 30 days of the transaction using an official declaration form.
Reinvestment and Capital Gains: Strategic Synergies with Exchange
There can also be tax advantages under the Personal Income Tax (IRS) regime when a property exchange contract is concluded.
If a profit arises from the exchange (i.e., if the value of the property received exceeds that of the property exchanged), that gain constitutes a capital gain and is taxable for IRS purposes.
However, if the proceeds from a property sale are reinvested in the purchase of another property for use as a primary and permanent residence, IRS on capital gains may be waived, provided the following conditions are met:
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The sale proceeds, net of any mortgage repayment, must be reinvested between 24 months before and 36 months after the date of sale.
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Both the sold and acquired properties must be (or become, within 12 months of reinvestment) primary and permanent residences. Any other use—of either property—nullifies eligibility for the exemption, and the capital gain becomes taxable.
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The taxpayer must declare their intention to reinvest and indicate the reinvested amount in the tax return for the year of the sale.
Conclusion: Play Strategically, Not by Chance
Understanding the rules of the game—IMT, IS, capital gains, reinvestment, and timing—can turn your next real estate deal into a winning move.
The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.