The exemption from taxation of capital gains arising from the sale of a taxpayer’s principal residence remains one of the most significant tax benefits under the Portuguese Personal Income Tax Code (Código do IRS). However, its application is far from straightforward and continues to raise questions in less conventional situations.
One such situation was recently addressed by the Portuguese Tax Authority (Autoridade Tributária e Aduaneira – AT) in Binding Ruling No. 25960, dated 3 July 2026, in which it considered an increasingly common question: can the proceeds from the sale of a principal residence be reinvested in the acquisition of a derelict property intended for future reconstruction? The answer was negative.
The Facts
The taxpayer had sold his principal residence in 2023 and intended to benefit from the capital gains tax exemption available under the reinvestment regime.
To that end, he planned to acquire an urban property registered in the land registry as “Other (Derelict Property)”, although classified for residential use, with the intention of fully reconstructing it and subsequently establishing it as his principal residence.
It is important to note that the request submitted to the Tax Authority related solely to the acquisition of the derelict property. In other words, the taxpayer sought to treat only the purchase price of the property as qualifying reinvestment, irrespective of the future reconstruction works.
The Legal Framework
Under paragraph 5 of Article 10 of the Portuguese Personal Income Tax Code, capital gains arising from the sale of a taxpayer’s principal residence may qualify for exemption where the proceeds are reinvested, within the statutory time limits, in the acquisition of another property intended exclusively for the same purpose, in the acquisition of land for the construction of a dwelling, or in the construction, extension or improvement of another property intended to serve as the taxpayer’s principal residence.
The purpose of this regime is to ensure that taxation does not constitute an obstacle to changing one’s principal residence, allowing the proceeds from the sale of one home to be reinvested in another.
However, compliance with the statutory requirements is not always straightforward, particularly where the acquired property is not immediately fit for habitation.
The Position of the Portuguese Tax Authority
In the recently published Binding Ruling, the Portuguese Tax Authority concluded that a derelict property cannot, for these purposes, be regarded as a property intended to serve as a principal residence because it lacks the objective conditions necessary for habitation.
According to the Tax Authority, since the property cannot immediately be used as the taxpayer’s residence or serve as his tax domicile, the legal requirements set out in Article 10 of the Personal Income Tax Code are not satisfied for the acquisition to qualify as a valid reinvestment.
Consequently, the amount paid to acquire the derelict property does not qualify for the capital gains tax exemption, even if the taxpayer intends subsequently to reconstruct the property.
An Excessively Restrictive Interpretation?
Although the Portuguese Tax Authority’s conclusion finds some support in the wording of Article 10 of the Personal Income Tax Code, the adopted interpretation raises certain concerns.
First, it should be recalled that the reinvestment regime expressly allows the acquisition of land for construction purposes, even though, by definition, there is likewise no dwelling immediately capable of serving as the taxpayer’s principal residence.
If the legislature permits reinvestment through the acquisition of land on which a future residence will be built, it is legitimate to question why the acquisition of a derelict property intended to achieve precisely the same end result should be treated differently.
Furthermore, the purpose of the regime is to ensure continuity in the taxpayer’s residential property ownership by preventing capital gains taxation from becoming an obstacle to acquiring a new home. From this perspective, the complete reconstruction of a dilapidated property appears to pursue exactly the same economic and social objective as constructing a new house on vacant land.
Admittedly, in the case under consideration, the taxpayer’s request concerned only the acquisition cost of the derelict property and did not include the future reconstruction works. Nevertheless, it remains open to debate whether a purposive interpretation of the legislation should lead to a different outcome, particularly where it can be demonstrated that the property will, within the statutory deadlines, effectively become the taxpayer’s principal residence.
Accordingly, it cannot be ruled out that this issue may eventually be considered by the Portuguese courts.
What Are the Practical Consequences of This Decision?
This Binding Ruling serves as an important warning for taxpayers intending to sell their principal residence and reinvest the proceeds in properties requiring rehabilitation.
Before completing any such transaction, it is essential to ensure that the proposed investment satisfies all the statutory requirements, as an incorrect interpretation may result in the complete loss of the tax exemption and the taxation of the capital gains realised.
In transactions of this nature, advance tax planning is particularly important, especially where derelict properties, reconstruction projects or more complex real estate transactions are involved.
Conclusion
Binding Ruling No. 25960 reinforces the restrictive interpretation consistently adopted by the Portuguese Tax Authority regarding the reinvestment regime established under Article 10 of the Portuguese Personal Income Tax Code.
According to the position now adopted, the acquisition of a derelict property does not, in itself, constitute qualifying reinvestment, even where the taxpayer’s intention is to reconstruct it and use it as his future principal residence.
Nevertheless, this interpretation is not free from controversy. A comparison with the regime applicable to the acquisition of land for construction highlights certain inconsistencies that may ultimately justify judicial intervention.
Until such time, taxpayers considering transactions of this nature should carefully assess the structure of the transaction before selling their property in order to avoid unexpected tax consequences.
Belzuz Lawyers has a team of lawyers and tax advisers with extensive experience in real estate taxation, advising individuals, investors and domestic and international developers on the tax implications arising from the acquisition, disposal and restructuring of real estate assets. Our team regularly advises on transactions involving capital gains taxation, the reinvestment regime applicable to principal residences and other highly complex tax matters, providing rigorous legal advice tailored to the specific circumstances of each client.
Given the increasing complexity of tax legislation and the interpretations adopted by the Portuguese Tax Authority, advance tax planning has become a crucial element of any real estate transaction. If you are considering selling a property, reinvesting the sale proceeds or require advice on the tax implications of a particular transaction, the Tax Department of Belzuz Abogados, S.L.P. is fully available to assist you in identifying the most legally secure and tax-efficient solution.