Capital gains on property sales: how it works, taxation and calculating the profit

A capital gain on property is the financial profit realised when the sale price of a property exceeds the cost incurred for its purchase or construction. The tax treatment of such capital gains varies significantly depending on the nature of the property sold (a building or building land) and the circumstances of the purchase and sale. In Italy, this difference is taxed if the sale takes place within five years of purchase (or construction), as the law presumes a speculative intent in the transaction. However, tax is not due if the property has been used as a main residence for the majority of the period of ownership or if it was acquired through inheritance.

Translated with DeepL.com (free version)

Understanding how capital gains tax works, how taxable gains are calculated, and what exemptions are provided for by law is essential for planning a property sale or purchase properly and avoiding unexpected tax liabilities. The following sections will examine the criteria for determining capital gains, how tax is paid, and specific cases relating to gifts and land.

What is capital gain on property and when is it taxed?

Under Italian tax law, capital gains on property are classified as ‘other income’. The aim of the legislation is to tax profits arising from property transactions completed within a short period of time. In particular, the law governs the sale for consideration of property purchased or built no more than five years previously, on the assumption that the transaction is carried out with the intention of making a profit.

The five-year period begins on the date of purchase or construction of the property. If the property is sold after more than five years have elapsed, the capital gain is no longer taxable and the proceeds remain entirely at the seller’s disposal. Taxation does not apply, even before the five-year period has elapsed, if the property has been used as the taxpayer’s or their family members’ main residence for the majority of the time between purchase and sale. This requirement is usually verified through the registered address, provided that the actual use of the property as a habitual residence is taken into account. It is important to note that these rules apply to individuals and unincorporated partnerships, whilst general partnerships, limited partnerships and limited companies are excluded, as capital gains from such entities form part of business income or are subject to corporation tax (IRES).

How to calculate capital gains and determine the profit

The calculation of capital gains is not simply the difference between the purchase price and the sale price. To determine the taxable capital gain, the purchase price of the property, plus any documented ‘related costs’, may be deducted from the proceeds received upon sale.

The associated costs that increase the tax base (and therefore reduce the taxable capital gain) include:

• taxes paid at the time of purchase (registration tax, VAT, mortgage tax and land registry fees);
• notary fees and professional estate agent’s fees for the purchase and sale;
• Expenses incurred for renovation or major maintenance work that has increased the value of the building.

Standard taxation or substitute tax: the role of the notary

A taxpayer who realises a taxable capital gain may choose between two different tax regimes. Under the standard tax regime, the capital gain realised is declared in the tax return and taxed at the progressive IRPEF rates.

Alternatively, the law allows you to opt for a substitute tax in lieu of IRPEF at a fixed rate of 26%. This option must be expressly requested from the notary at the time the deed of sale is signed. In this case, the notary acts as an agent for the payment of tax: they calculate the amount due, receive the funds from the seller and arrange for the payment to be made directly to the tax authorities. Choosing to have the capital gains tax handled by the notary allows all tax obligations to be settled at the time of the deed of sale, and may result in tax savings for the taxpayer.

Special cases: gifts, inheritance and land

The title to the property has a decisive influence on the tax regime applicable to the sale. Understanding how the property came to be owned by the seller is the first step in determining how the capital gain will be treated.

• Property acquired through inheritance: the sale of property inherited never gives rise to a taxable capital gain, regardless of how much time has elapsed, with the exception of building land. Even if the deceased had purchased the property only very recently, the transfer by inheritance negates the tax liability.
• Property received as a gift: in this case, to verify compliance with the five-year period, the calculation does not start from the date of the deed of gift, but from the date of the original purchase made by the donor.
• Buildings and agricultural land: if sold more than five years after purchase, there is no capital gain for tax purposes. In the case of building land, however, capital gains are always taxed, regardless of how long the property has been held since purchase.
• Urban property units and appurtenances: the sale of appurtenances carried out separately from the main dwelling within five years may be subject to taxation.

FAQ – Selling property for a profit