Tax Reform: Impact on the Brazilian Real Estate Market

Brazil has a complex tax system that generates a lot of litigation, and the real estate sector is no different. Taxes are divided between municipal, state and federal levels, resulting in different tax burdens between municipalities.

What are the main taxes levied on the sale of real estate?

Property transfer tax: The Property Transfer Tax (ITBI) is a municipal tax levied on all property sales. The rate varies from municipality to municipality, but is usually between 2% and 3% of the value of the deal or offer made by the city, whichever is higher. When ITBI should be paid is currently the subject of much litigation, but as a rule it must be paid by the buyer when the deed transferring the property is obtained. With the Tax Reform (PLP 108/2024) the moment when the tax is levied will be more clearly defined.

• Nature: Municipal tax.

• Incidence: All property sales.

• Rate: Varies from municipality to municipality, usually between 2% and 3% of the value of the deal or offer made by the city, whichever is higher.

• Payment: Must be paid by the buyer when the deed transferring the property is obtained. The Tax Reform (PLP 108/2024) will clarify when ITBI is levied.

Urban Land Tax (IPTU): Urban Land Tax is one of the best known taxes. Once a year, the municipality collects IPTU from property owners. In the case of a lease, the contract may stipulate that the tax will be collected from the tenant, but the authority to pay it remains with the owner.

The municipality collects IPTU based on two factors: the sale value, which is an assessment of the value of the property, and the rate established by law, a percentage that increases progressively according to the value of the property. IPTU is therefore calculated by multiplying the market value of the property and the corresponding percentage.

• Nature: Municipal tax.

• Incidence: Annual, on property owners.

• Calculation Factors: Market value of the property and the rate established by law, which increases progressively according to the value of the property.

Income Tax on Real Estate Profits: Federally levied, Income Tax on Real Estate Profits is levied whenever the IRS determines that the seller has made a profit on the deal. So, if the value of the first purchase is less than the resale value, the tax will be levied. The income tax rate (percentage) on real estate gains is 15% for individuals, taking into account the gains on the deal. If the seller is a legal entity, the rate varies according to the tax regime adopted by the company.

It is worth noting that if you sell a property and buy another within 6 months, there is a deduction from the amount due in income tax on the gain from the property.

• Nature: Federal tax.

• Incidence: When the seller makes a profit on the deal (sale value greater than purchase value).

• Rate: 15% for individuals on the capital gain. For legal entities, the rate varies according to the tax regime adopted.

• Exemption: The sale of one property and the purchase of another within 6 months allows for an income tax deduction on the gain from the property.

Causa Mortis Transfer and Donation Tax (ITCMD): Like ITBI, Causa Mortis Transfer and Donation Tax is also levied on the transfer of property, but only in cases of donation or inheritance - in other words, in these two situations, the tax to be levied is not ITBI, but ITCMD.

ITCMD generally has a progressive table with differentiated rates depending on the value of the property and the type of transfer (inheritance or donation). However, each state has its own rules and you need to know the local legislation.

• Nature: State tax.

• Incidence: In cases of donation or inheritance.

• Rate: Progressive table with differentiated rates depending on the value of the property and the type of transfer.

Changes in the Real Estate Market due to the Tax Reform

Real Estate Transfer Tax (ITBI):

• The rate of ITBI, a tax under municipal jurisdiction, will not be changed by the Tax Reform. PLP 108/2024, part of the reform's regulations, clarifies when the ITBI taxable event occurs and its calculation basis.

Sales by individuals:

• Any sales of real estate by individuals will not be taxed by the new VAT. Nothing changes for those who wish to sell one or a few properties.

Sales by Companies (Incorporation):

• Taxation: Levy only on the difference between the cost of sale and the value of the land.

• Social Reduction: Deduction of R$100,000 from the taxable amount, making taxation progressive and reducing the cost of low-cost properties.

• Reduced Rate: Tax reduced by 40%, resulting in a rate of approximately 15.9%.

• Credit Recovery: Deduction of tax paid on the purchase of building materials and services, something not currently allowed.

Impact on prices:

• New Popular Property (R$200,000): Price is expected to fall by around 3.5%.

• New high-end property (R$2 million): Price could rise by around 3.5%. However, efficiency gains should reduce costs.

Real Estate Buying and Selling Companies:

• Margin Tax: Only levied on the difference between the sale price and the purchase price (as is currently the case for individuals).

• Example: Purchase for R$1 million and sale for R$1.1 million: Tax of R$15.9 thousand on the R$100 thousand margin.

• Recovery of Credits: Companies can recover credits on all administrative expenses.

Efficiency Gains: The Tax Reform will increase the efficiency of the construction and development sector, with greater simplification of all taxation and a forecast reduction in litigation costs, allowing for the adoption of more efficient construction methods. This productivity tends to reduce the price of new real estate, including high-end properties, benefiting the entire market.

Although the final analysis depends on the complete implementation and definition of the new rules, the forecast is that the Tax Reform will have a positive impact on the Brazilian real estate sector, promoting greater efficiency and justice.

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