Revenue exempt from income tax sale of property to pay off financing

The Federal Revenue has published a rule that expands the possibilities for individuals to sell properties with the right to exemption from Income Tax.

With the change, it is expressly provided that the sale that has the objective of paying off the installment of another property that is being purchased through financing is exempt.

The conditions are that the funds are used within six months after the sale, that the two assets are residential and located in Brazil and that the new property is already owned by the seller of the first.

According to the IRS, the regulation (published on March 16) removes the prohibition previously provided for in this case. The jurisprudence of the STJ (Superior Court of Justice) already considered the impediment to be illegal.

“The previous understanding was that there would be no exemption in cases where the value resulting from the sale of residential property(ies) was used to pay off financing, but only when used for the purchase of other property(ies) residential property(s), located in Brazil, within 180 days of entering into the contract”, states the Revenue.

“The new instruction revoked the prohibition of the exemption and included the express provision of the exemption on the gain on the sale of residential property(s) to pay off financing(s)”, adds a note sent by the tax authorities.

The information about the regulation was published this Monday (4) by the newspaper O Estado de S. Paulo.

Bianca Xavier, professor of tax law at FGV (Fundação Getulio Vargas), says that since 2005, Brazilian legislation has been relaxed to give exemption from income tax to real estate sales operations in certain circumstances. The objective is to reduce the cost of transactions and, thus, move the real estate market.

She says that the understanding being modified by the Revenue was already provided for by the Justice, but that, even so, the tax norm will contribute to bringing more legal certainty and less litigation between the Union and taxpayers. “Nothing better than the Revenue recognizing this and preventing judicialization”, she says.

Daniel de Paula, a specialist at the accounting consultancy IOB, states that the law on the subject did not prohibit the benefit in the case of exemption for financing and that, therefore, the Judiciary understood that the infralegal rule of the Revenue had no power to this prohibition.

Despite this, he says, the understanding ends up benefiting only those who go to court. “The IRS published this normative instruction more to give security to taxpayers”, he says.

Income tax on capital gains has rates between 15% and 22.5% applied to the “profit” of the operation (ie, the difference between the sale price and the purchase price previously made). The percentages vary according to the value (the higher the gain, the higher the rate).

The measure was a request from the real estate sector, which ends up benefiting from lower transaction costs in the market. “It always helps”, says José Carlos Martins, president of the CBIC (Brazilian Chamber of the Construction Industry).

The new exemption is added to other cases already provided for by law. The regulations already provide, for example, that the capital gain of a property is exempt if the seller, within six months after signing the contract, invests the funds in the purchase of another residential property in the country.

There is also a progressive percentage of exemption for property sold the older the asset. Those purchased before 1969, for example, are exempt.