Real estate capital gain: what it is and how it is calculated

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Emma Potter

In the world of real estate investments, the buying and selling of properties represents one of the most popular routes for investors, driven by the desire to purchase at an advantageous price in order to resell at a higher value.

This practice, which results in a gain known as capital gain, is subject to specific tax regulations that regulate the taxation of such annuities. A detailed understanding of these laws is critical to successfully navigating the real estate market, maximizing profits and meeting tax obligations.

This article aims to explore in depth the concept of real estate capital gain, the conditions under which it is taxed, and strategies for optimizing your investment in light of current tax regulations.

What is capital gain?

In the real estate context, the term “capital gain” describes the positive difference between the sale price of a property and its original purchase cost. This difference represents the actual profit for the seller.

For example, by purchasing a property for 150,000 euros and reselling it for 180,000 euros, you realize a capital gain of 30,000 euros. This gain not only symbolizes the success of an investment but is also subject to specific tax regulations that regulate its taxation.

The conscious management of the capital gain and the understanding of the laws governing its taxation are essential to optimize the returns on real estate investments, avoiding possible tax pitfalls.

Taxation of capital gains: calculation, criteria and deductions

The taxation of real estate capital gains does not operate uniformly, but is activated only under certain conditions specified by Italian tax legislation. Taxation aims to regulate the market, ensuring that profits obtained from the sale of real estate contribute fairly to the tax system.

For to calculate the tax due on the capital gain, it is first necessary to deduct from the profit some expenses relating to the purchase and maintenance of the property, such as:

  • The taxes paid for the purchase of the property;
  • The notary fee for the deed of sale;
  • Documented expenses for extraordinary maintenance work.

After these deductions, the net gain realized is subject to taxation. The capital gain can be included in the seller's overall income and taxed according to IRPEF rates or he can opt for the substitute tax of 26% on the net gain, a choice available until 31 December 2019 with a previous rate of 20%.

It is important to note that not all capital gains fall within the scope of applicability of the substitute tax, but only those not attributable to capital gains, exercise of arts, professions, commercial enterprises, or employment relationships, as specified by article 67 , paragraph 1, of the TUIR.

Exceptions and specificities in the taxation of capital gains

Italian tax legislation provides specific exceptions regarding the taxation of real estate capital gains, clearly outlining the cases in which the gain obtained from the sale of a property is not subject to tax.

These exceptions aim to encourage investment in the real estate market and to recognize particular personal or temporal situations.

Among the main exceptions is the 5-year rule: the capital gain realized from the sale of a property is not subject to taxation if the property has been held for more than five years.

Furthermore, other criteria exclude the taxation of the capital gain, such as:

  • The building was not purchased in the five years preceding the sale;
  • The property was not obtained through inheritance;
  • The home was the primary residence of the owner or a family member for most of the period between purchase and sale.

This legislation also applies favorable tax treatment to capital gains deriving from donations, where the calculation of the gain considers the cost incurred by the donor for the purchase or construction of the property. A separate case is represented by buildings under construction: the Revenue Agency has specified that to determine the taxability of the capital gain it is necessary to evaluate the state of the property at the time of sale.

If at least the rustico with the perimeter walls and the roof have been built, the rules for buildings apply; otherwise, the property is treated as building land for tax purposes.