Opinion – From Grain to Grain: The IR on the sale of property is lower than you might think; understand

As I mention at the end of the articles, I always try to answer readers’ questions sent to me by e-mail or Instagram. The questions are interesting to turn into future articles. A recurring question is about tax on capital gains from the sale of property. Although I replied to e-mails, I realized that I never addressed it in this column.

On January 2nd, Mr Gerson wrote me with this question and he put a purpose for the sale that I believe is also interesting, so I will transcribe:

My wife is going to sell a property. He wants to exchange his rent for Real Estate funds.

When selling, it will have to pay income tax on the gain between the sale price and the acquisition cost.

She bought this property, the only owner is about 20 years old.

I read on the internet that “there is a discount on the income tax rate that will apply to the sale of the property according to the time the declarant has owned the property”

Questions:

1) Is there really such a discount?

2) If yes, do you have a table such as “time of ownership and discount rate”?

I have already answered Mr. Gerson privately that same day. But, I will take advantage of your very well-posed question to explain.

The answer is yes to both questions. There is a discount and there is a way to simulate what this value is.

This discount can reach up to 100%, that is, you would not have any IR to pay. However, it would only be for properties purchased before 1969.

For later purchases, there are three formulas to use. The three conditions are related to the year of acquisition.

The calculation is not very complicated, but it would make the text very tiring. So, I will explain the simplest way to simulate.

The easiest and most accurate way to find out what the discount is is to use the IRS program itself to calculate it for you. It’s quick and simple. The steps are as follows:
1 – Go to the Federal Revenue website: Receita Federal;
2 – Download the IR calculation system for property capital gain;
3 – Fill in the data to do any simulation.

For example, I downloaded the program and simulated the sale of a property supposedly acquired on 01/01/2011 for R$ 500 thousand and sold on 12/30/2021 for R$ 830 thousand.

I considered in the simulation that there was a brokerage cost of R$ 30 thousand. Therefore, the net value of the sale was R$800 thousand and the capital gain was R$300 thousand.

We know that the income tax rate on capital gains is 15%. Therefore, we could think that the IR payable would be R$ 45 thousand.

However, he is smaller. This is because there is a reduction in capital gain over time, as questioned by Mr. Gerson.

As in my simulation, I had the property for 11 years, that is, 132 months, the discount is 36.95%. In other words, the capital gain is reduced by R$ 110.8 thousand.

Therefore, the capital gain on which the 15% IR will apply is only R$ 189.2 thousand. Therefore, instead of paying R$ 45 thousand in IR, I would pay only R$ 28.4 thousand.

In this case, for properties acquired after 2005, the discount is calculated using the formula (1 – 1/ 1.0035^m), Where m is the number of months between acquisition and sale. In our example (1 – 1/ 1.0035^132 = 36.95%).

In the case of Mr. Gerson’s wife, the discount will be even greater.

But, let’s understand if in my example where the discount is smaller, Mr. Gerson’s decision to switch the investment to real estate funds would already pay off.

According to the FipeZap portal, the average rent in Brazil, gross of costs and taxes, is 4.64% per year or 0.39% per month on the value of the property. This rate called rent gain is calculated by dividing the rent amount by the price of the property. If we remove all costs, this gain drops to close to 0.3% per month.

So, in my case, if I kept the rental property, I would receive R$ 2,400.00 per month in rent.

In the sale, the net amount that will be left in my pocket will be R$ 771.6 thousand. If I buy all this amount in real estate funds, my net monthly gain would be 0.7% per month, that is, R$ 5,400.00 per month.

The rental income received on real estate funds can be twice as much as the rent received on real estate. Therefore, I believe that Mr. Gerson’s wife’s decision is a good deal.

Michael Viriato is an investment advisor and founding partner of Investor’s House

(Follow and like De Grão em Grão on social networks. Instagram.) ​ ​

If you have questions or suggestions for topics that you would like to see commented on here, please feel free to send them by e-mail.