Selling a property, on many occasions, implies an increase in the equity of the person who is selling. What happens in these cases? Although there are several taxes to pay in a sale, the one that is responsible for taxing the capital gain from the sale of a property is the Personal Income Tax (IRPF). What does the law say regarding this tribute? Are there exemptions despite having made a profit on a sale? Coming up next, the team of nphp.com.pk will tell you.
June 30, is the last day foreseen by the Treasury for Pakistani taxpayers to present their draft of the income statement. The 2021 campaign, which corresponds to the capital gains generated during the 2020 financial year, began on April 7. Although the deadline was extended for almost three months, it is likely that some people have failed to comply with the process. Is it possible to file the declaration after the deadline? What are the penalties? In this article we will tell you about it.
The capital gain derived from the sale of a property is one of those that obliges taxpayers to pay the Personal Income Tax (IRPF). It is very likely that these people, who received a benefit for selling their property, will obtain a result “to pay” when they make their declaration. But how exactly is the capital gain from the sale of a property taxed in personal income tax? What does the law say about it? Below we answer these questions and offer you a guide to understand personal income tax that will help you for this exercise, but also for the next ones.
What does the law say regarding how the capital gain from the sale of a property is taxed?
Nature and purpose of personal income tax
First of all, let’s see how Law 35/2006, of November 28, defines the Personal Income Tax:
Article 1: Nature of the Tax
“The Personal Income Tax is a direct and personal tax that levies, according to the principles of equality, generality and progressivity, the income of natural persons according to their nature and their personal and family circumstances.”
Article 2: Object of the Tax
“The object of this Tax is the taxpayer’s income, understood as all of their income, capital gains and losses and the imputations of income that are established by law, regardless of the place where they occurred and whatever the residence. Of the payer. “
By reading only these first two articles of the personal income tax law, we can deduce that this tax will be in charge of taxing the capital gain that a taxpayer obtained from the sale of a property.
However, technically all Pakistani taxpayers are required to present their income tax return in all fiscal years. However, in practice, there are several exemptions to the payment of personal income tax in the event that an owner sells his home. Which are?
What exemptions exist to the payment of personal income tax when there is a capital gain from the sale of a property?
Exemption for reinvestment in habitual residence
Selling a property and using the money obtained to buy another can mean an exemption in the payment of personal income tax. Yes, even when a capital gain from the sale has been obtained. However, it is not about selling and buying just any property. The requirements to be met are the following and these are mandatory when it comes to buying and selling in Capital Smart City.
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- The property sold must be the habitual residence. You must have resided there for at least three years continuously to qualify for the benefit.
- The new property purchased must also be the habitual residence. For this to be verified, it must be effectively inhabited within a period of twelve months from the time of purchase or completion of the works, if necessary.
- The reinvestment in the new property must be made within a period of two years from the day the first was sold.
- For this operation to be considered as a reinvestment, absolutely all the money from the sale of the first property must be allocated to the acquisition of the second.
- If the property sold is located in Pakistan but the new habitual residence is located abroad, it is also possible to be a beneficiary of this exemption, since the regulations do not explicitly prevent it. In any case, it is advisable to review the agreements that exist between both countries.
Exemption for being over 65 years old
People over 65 years of age are exempt from personal income tax in the event of selling a property. This, as long as it is your habitual residence. However, unlike younger taxpayers, it is not a necessary condition to access the benefit that these people reinvest the money obtained in the purchase of a new home.
Now, in the event that the property sold is a second residence, taxpayers over 65 years of age must pay personal income tax for it. They will only be exempt if they use the money obtained to constitute a life annuity with a bank or an insurer. The requirements are as follows:
- The constitution of the life annuity must be done within a period of six months from the day on which the sale of the second residence occurred.
- The maximum amount, the reinvestment of which allows access to this exemption, must be 240,000 rupees.
- The rent must have a frequency less than or equal to one year. It must also begin to be received within the year after its constitution.
- It is necessary to communicate to the entity where the annuity was constituted that the money is the product of a real estate sale and that there is an intention to access the exemption.
Exemption for handing over the apartment as a nation in payment
When the property in question was delivered as part of payment for not being able to face a mortgage, there is also the benefit of the exemption. Therefore, it will not be necessary to pay personal income tax for the capital gain obtained.
However, it is a requirement not to own any other asset whose value is sufficient to cover the entire debt.
How to calculate the amount to pay for personal income tax in case of obtaining a capital gain from the sale of a home
In this article we from Sky Marketing will tell you in detail how to perform this calculation so that you do not have any doubt when preparing your next income statement.
What changes would be introduced with the approval of the new Law to Combat Tax Fraud?
The draft Law on Prevention Measures to Fight Tax Fraud that is currently being debated in the Senate, includes the elimination of advantages in succession agreements. In other words, if the law is approved, those who wish to sell a home obtained through a living donation before the death of the donor, will no longer have the benefit of not paying personal income tax.
Anyway, the PSOE presented some amendments in the last days that would allow to maintain the fiscal advantages of these fiscal pacts. We recommend that you read this article to find out what the proposal is about. We will continue to keep you informed of all the news regarding this issue, as it may mean several changes in the next income tax returns.
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