Taxation of real estate capital gains
(Updated on 16/12/2020 by LPG)
The sale of a property
In principle, sales of real estate give rise to taxation of the capital gains realised, according to procedures that depend essentially on the length of time the property is held.
However, there are certain exceptions to the taxation of capital gains.
The principal residence
The capital gain realised on the sale of the principal residence is in principle tax-free¹. There are two possible cases.
THE DWELLING IS OCCUPIED BY THE TAXPAYER AT THE TIME OF THE SALE
For the dwelling to be considered as a principal residence, it is sufficient to meet one of the following conditions:
– occupancy must have taken place immediately after the acquisition or completion ;
– the dwelling has been occupied for at least 5 years prior to the sale;
– the sale is made for imperative family or professional reasons.
If one of these conditions is met, the qualification of principal residence is maintained if the sale takes place at the latest on 31 December of the year following the year of the move.
THE DWELLING IS UNOCCUPIED BY THE TAXPAYER AT THE TIME OF THE SALE
For the dwelling to be considered as a principal residence, the following three conditions must be met simultaneously
– the occupation must have taken place immediately after the acquisition or completion;
– the seller does not own another dwelling (including a secondary residence or pied-à-terre);
– the sale is made for imperative family or professional reasons (birth of twins, etc.).
If these three conditions are simultaneously met, the notion of principal residence is maintained even if the sale takes place after 31 December of the year following the year of the move.
IN BOTH CASES
It should also be borne in mind that a principal residence is not necessarily a tax residence. For example, it is possible to have a principal residence in Luxembourg while having a tax domicile abroad.
Real estate other than the main residence
In all other cases of sale of a property in Luxembourg other than the main residence, the capital gain is taxable (unless the sale is made to the Luxembourg State or a municipality in the context of the housing pact2) and the taxation regime differs according to whether it is a speculative profit or a profit on disposal.
BUILDINGS SOLD LESS THAN 2 YEARS AFTER THEIR ACQUISITION
The taxation of the capital gain arising from the sale of a property acquired less than 2 years ago for valuable consideration is subject to the provisions of article 99 bis of the LIR (speculative profit). The profit is equal to the difference between the sale price and the acquisition price plus the costs of obtaining the property. This means that the costs of the transfer in direct relation to the sale, such as commissions paid to a real estate agent, reduce the taxable capital gain. This profit is not subject to any deduction and is treated as ordinary income and taxed at the standard rate.
Profit = sale price – (purchase price + acquisition costs)
The acquisition costs are essentially the real estate agent's commission and the costs of issuing the energy certificate.
Only the holding period should be taken into account to qualify the speculative profit, regardless of the taxpayer's intention at the time of purchase. It is the period between two transactions for valuable consideration that is to be taken into account and any inheritance or donation transactions that may have taken place are to be disregarded.
BUILDINGS SOLD MORE THAN 2 YEARS AFTER THEIR ACQUISITION
The taxation of the capital gain arising from the sale for valuable consideration of a property acquired more than 2 years ago is subject to the provisions of article 99 ter of the LIR (profit on sale). For acquisitions free of charge (inheritance), there are special procedures for determining the acquisition price.
For an acquisition for valuable consideration
The income is equal to the difference between the transfer price and the acquisition price plus the investment expenses. These expenses include all the major expenses incurred on the building and which have the effect of significantly increasing its value (conversion of attic space, etc.) or changing its nature (conversion of an office into a dwelling). The purchase price is also revalued by applying a coefficient corresponding to the year in which the expenditure was incurred3. This income is subject to deductions and is classified as extraordinary income, taxed at half the overall rate (and even at a quarter of the rate until the end of 2018).
Income = transfer price – (revalued acquisition price + acquisition costs)
It is the revaluation of the acquisition price that differs from the tax rate.
It is the revaluation of the purchase price that differs significantly here from the determination of the speculation profit.
For a free acquisition
The income generated on the disposal of a property acquired free of charge (i.e. by inheritance) is calculated as described above for acquisition for valuable consideration and benefits from the same deductions and taxation at half the overall rate (or a quarter of the rate until the end of 2018). In this particular case, the acquisition price used is the one paid by the previous holder. This acquisition price is revalued under the conditions described in the previous paragraph. It should be noted that any inheritance tax paid (inheritance tax being uncommon in Luxembourg) is not included in the determination of the acquisition price4.
Allowances
Each taxpayer is entitled to an allowance of 50,000 euros which can be used over a period of 10 years. This allowance is doubled in the case of collective taxation. In addition, in the event of the sale of a property acquired by direct succession, the taxpayer is entitled to an allowance of 75,000 euros. The property sold must be the last principal residence of the parents in order to benefit from this allowance.
Taxation year
In all the cases examined above, and in derogation from the general regime, the year of taxation (and therefore of declaration of the capital gain) is that of the year of sale, regardless of the date of payment of the price5 . Thus, the declaration and taxation of the capital gain are to be attached to year N, in the case of a deed of sale carried out by the notary in year N, even if the payment does not occur until year N+1.
Capital losses may be offset against income in the same category, but they may not be carried forward or offset against income in another category.
