Tiago Aparecido da Silva
Lawyer at Marcos Martins Advogados
Buying a property, whether for residential or investment purposes, always requires a lot of attention and analysis of a range of information and documents before it can be completed.
One important point, which ends up going unnoticed at the time of purchase, is how to register the property, whether in a company’s accounts or in an individual’s income tax return, because what is done at this point is decisive for tax purposes at the time of sale, when the income tax to be paid in the event of a capital gain will be calculated.
The proper accounting record of the property is linked to its destination and when not observed can result in income tax being paid twelve times higher than what is actually due on a sale transaction, which can change depending on the company’s tax regime.
In this context, the sale of a property, for tax purposes, cannot be carried out by applying the same understanding to all cases, as if it were a mathematical formula, and must be analyzed on a case-by-case basis.
In addition, the fact that the property’s destination is duly reflected in the accounts becomes even more important considering the Federal Revenue Service ‘s understanding that the purpose for which the property was acquired overrides the accounting framework.
In other words, the accounting records are disregarded and the transaction is taxed as it actually was, with the imposition of fines and interest.
This is why it is so important to carry out an effective and complete tax analysis when purchasing a property, as this is the best way to achieve tax efficiency with the greatest possible legal certainty when selling it.
Turning to individuals, the point of attention is different, as care is taken with the information provided directly to the Internal Revenue Service, more specifically that transmitted in the Income Tax Return.
It is common, albeit improper, for adjustments to be made between buyer and seller so that the transaction is recorded at a lower value than was actually practiced.
If the reduced value is reported in the Income Tax Return, what you have, in the future, is an increase in the Income Tax to be paid, since in this case the tax is calculated based on the difference between the acquisition value, reported to the IRS, and the sale value.
It is worth noting that this practice, registering the purchase and sale with a reduced value, can also generate an infraction notice for ITBI or ITCMD, depending on the operation that was carried out (purchase and sale, donation, inheritance), demonstrating that something done without due analysis can generate unpleasant consequences.
Returning to the subject under analysis, specifically with regard to individuals, when it comes to income tax on real estate, an important benefit available to all should be noted: the exemption from income tax on the profit made on the sale of residential property.
This is an exemption from paying income tax on the capital gain obtained from the sale of a residential property, provided that, within 180 (one hundred and eighty) days of signing the contract, the taxpayer uses the amount received to purchase another residential property.
It is worth noting that in 2018, the First Panel of the Superior Court of Justice (REsp no. 1.668.268)recognized that this exemption is maintained even when the amount is used to pay off, in whole or in part, the financing of another residential property in Brazil, even if the purchase took place before the sale, overturning the position of the Federal Revenue Service, which insisted on charging the tax in these cases.
Now, in a decision handed down by the Federal Regional Court of the 3rd Region, the same understanding has been adopted, stating in the decision that “the income tax exemption for the gain earned by an individual resident in the country on the sale of residential property, provided that the seller, within 180 days from the conclusion of the contract, applies the proceeds of the sale in the acquisition of residential property located in the country, regardless of whether the purchase contract was made previously, as long as there are still amounts to be paid as a result of it” (TRF 3rd Region, 4th Panel, Case no. 0023141-37.2015.4.03.6100).
There is no doubt that real estate transactions must be carefully analyzed from a tax perspective, as this is the only way to ensure that income tax is properly paid, avoiding unnecessary and undue disbursements by companies or individuals.
