Introduction to Luxembourg’s Real Estate Capital Gains Tax Regime
Two Taxation Regimes Based on Holding Period
Luxembourg’s tax system distinguishes between two main regimes for taxing real estate capital gains realized by individuals. This distinction is based on the property’s holding period between acquisition and disposal. When the sale occurs within 5 years or less after acquisition, the gain is classified as speculative income and subject to the progressive income tax scale. Conversely, when the disposal occurs after a holding period exceeding 5 years, the gain constitutes a disposal profit, benefiting from a more favorable tax regime.
Exceptional Temporary Measure Until June 2025
It should be noted that a temporary measure, applicable until June 30, 2025, exceptionally reduces the speculation threshold to 2 years and applies one-quarter of the global rate to disposal profits. This tax opportunity window deserves particular attention for owners considering a short-term sale.
The Privileged Status of the Main Residence
The main residence holds a special place in this tax framework. It benefits from a total exemption from capital gains realized upon its sale, subject to strict conditions we will detail. However, this exemption does not relieve the seller from the declaration obligation, as the transaction must systematically be reported to the Luxembourg tax administration.
Methodology for Calculating Taxable Capital Gains
Determining the Acquisition Price
Components of the Acquisition Price
Determining the taxable capital gain requires precisely establishing the property’s acquisition price. The acquisition price includes not only the actual price paid at initial purchase but also all costs directly related to this acquisition. These costs encompass notarial deed fees, real estate agent commissions, as well as all improvement expenses subsequently incurred on the property.
Application of Indexation Coefficients
For disposals occurring after a holding period exceeding 5 years, the Luxembourg tax administration applies indexation coefficients to account for monetary evolution. These coefficients, detailed in the administration’s form 700, update the acquisition value to neutralize inflation effects. It’s important to note that since 1991, depreciation on real estate property is no longer considered in capital gains calculation.
Calculating Net Sale Price
The sale price corresponds to the amount actually received by the seller, minus costs directly related to the transaction. These selling costs notably include real estate agency commissions and other expenses necessary for completing the sale. A particular element deserves attention: Loan interest is not deducted from the capital gain. Only costs directly related to disposal (e.g., agency, notary for sale) and investment expenses included in the cost price are considered in form 700. Interest is deducted elsewhere (personal residence/rental), not from the capital gain.
The Privileged Regime for Main Residence
Main Residence Qualification Criteria
Occupancy Conditions
Main residence qualification follows precise criteria defined by Luxembourg legislation. A property is considered a main residence when it is actually occupied by the owner at the time of sale. Alternatively, the property may retain this qualification if sold no later than December 31 of the year following the owner’s relocation, subject to specific conditions.
Duration and Recognized Reasons
These conditions require either continuous occupancy since property acquisition, or occupancy for at least 5 consecutive years, or relocation justified by family or professional reasons recognized by the administration. This flexibility accounts for modern life realities while preserving the spirit of the exemption system.
Treatment of Outbuildings and Land
Favorable Presumption for Small Plots
The exemption granted to the main residence extends to normal property outbuildings, notably including the land on which the construction is built. The tax administration applies a favorable presumption for land not exceeding 10 ares (1,000 m²), which is deemed to constitute entirely normal housing outbuildings.
Limitations for Large Areas
Beyond this 10-are area, more restrictive rules apply. Thus excluded from exemption benefits are land portions exceeding 15 times the built-up area, as well as plots that constitute independent building land capable of being valued separately.
Architecture of Applicable Tax Rates
Speculation Gains Regime (Holding ≤ 5 Years)
The real estate capital gains tax regime presents a binary structure based on property holding duration. For speculation gains resulting from disposals within 5 years or less after acquisition, taxation follows the progressive income tax scale. This scale can reach a marginal rate of 42%, excluding additional social contributions. During the special period from January 1 to June 30, 2025, the temporal threshold distinguishing speculation from disposal is exceptionally reduced to 2 years.
Disposal Gains Regime (Holding > 5 Years)
Extraordinary Income Regime
Disposal gains, concerning sales after holding exceeding 5 years, constitute extraordinary income taxed at half the global rate, capped at 21% excluding contributions. Special periods were instituted, notably between 2016 and 2018, then from January 1, 2024 to June 30, 2025, during which one-quarter of the global rate applies, with the cap reduced to 10.5%.
These temporary measures are now completed or nearing completion. The tax amounts thus determined generally bear contributions to the Employment Fund and dependency insurance, increasing the effective tax rate.
Summary of Tax Regimes
| Regime | Holding Period | Tax Rate | Specifics |
|---|---|---|---|
| Speculation gain | ≤ 5 years (2 years until 30/06/2025) | Progressive scale up to 42% | Combined with other income |
| Disposal gain | > 5 years | Half global rate (max 21%) | Extraordinary income |
| Special period 2024-2025 | > 2 years | Quarter global rate (max 10.5%) | Temporary measure |
| Main residence | if occupied since acquisition or for at least 5 years before sale | Total exemption | Mandatory declaration |
Allowance Mechanisms and Special Situations
The Decennial Allowance
Amounts and Beneficiaries
Luxembourg’s tax system provides a substantial decennial allowance on real estate disposal gains. This allowance amounts to €50,000 per person, increased to €100,000 for couples subject to collective taxation.
Usage Modalities
This exemption can be freely distributed over a rolling 10-year period, thus offering appreciable flexibility in tax management of successive real estate disposals. The taxpayer can thus optimize the use of this allowance according to their asset plans.
Gratuitous Transfers
Holding Period Calculation for Inheritance
Gratuitous transfers receive specific treatment. For calculating the holding period determining the applicable tax regime, the administration goes back to the last onerous acquisition in case of succession, thus allowing the beneficiary to benefit from the holding period accumulated by the deceased.
Donation Specifics
In case of gratuitous acquisition, the price paid by the last holder who acquired for consideration is retained and the duration goes back to this last onerous acquisition. A unique and exceptional allowance of €75,000 applies when a child sells their parents’ former main residence, thus recognizing the particularity of these family situations.
Absence of General Tax Deferral and Exceptional Measures
General Principle: No Automatic Deferral
Unlike certain foreign tax systems, Luxembourg offers no general tax deferral mechanism when reinvesting disposal proceeds in acquiring a new main residence. This absence of automatic deferral constitutes an important characteristic of the Luxembourg regime that should be considered in any asset strategy.
Exceptional Temporary Mechanism (Article 102quater LIR)
Temporary Tax Deferral Mechanism (Article 102quater LIR)
An exceptional tax deferral mechanism was instituted by Article 102quater of the income tax law. This mechanism, applicable to disposals made between January 1, 2024 and June 30, 2025, allows tax deferral under strict conditions. Two reinvestment paths are expressly eligible: first, investment in new housing meeting energy class A+, and second, acquisition of housing intended for social rental management. Implementation of this deferral requires filing a formal request via form 700 accompanied by its annex 700 with the tax administration. This temporary mechanism is now nearing closure.
Tax Treatment of Rental and Depreciation
Deductibility of Depreciation from Rental Income
Landlords can deduct depreciation on their real estate properties from their rental income, in accordance with general rules applicable to property income. This depreciation, calculated according to rates and methods defined by the tax administration, reduces the taxable base of rental income during the rental period.
No Recapture Upon Resale
A fundamental point deserves emphasis concerning the articulation between depreciation and capital gains. Contrary to certain misconceptions, depreciation deducted from rental income is not subject to any recapture when calculating capital gains upon resale. In other words, depreciation taken does not affect the acquisition price retained for determining taxable capital gains, thus offering a significant tax advantage to real estate investors.
Luxembourg Real Estate Investment Company Regime
Tax Transparency Principle
Luxembourg civil real estate companies benefit from the tax transparency principle. This transparency means that taxation occurs directly at the partner level, proportionally to their share in the company, and not at the entity level itself.
Application to Real Estate Capital Gains
Capital gains realized by the real estate investment company upon disposal of its real estate assets are thus taxed for each partner according to rules applicable to individuals detailed previously. This tax transparency offers the advantage of allowing partners to benefit, where applicable, from favorable regimes applicable to individuals, notably main residence exemption or decennial allowances, subject to meeting required conditions.
Specific Situation of Non-Residents
Territorial Taxation Principle
Non-residents in Luxembourg remain taxable on gains from disposal of real estate located in Luxembourg territory. This territorial taxation applies regardless of the seller’s tax residence, thus ensuring taxation of Luxembourg real estate capital gains.
Practical Modalities and Possible Assimilation
No Withholding Tax
Unlike certain practices observed in other jurisdictions, Luxembourg applies no withholding tax on the sale price of real estate disposed of by non-residents. However, they must respect their declaration obligations by filing a tax return with the Luxembourg administration.
Possibility of Assimilation to Residents
Under certain strict conditions, non-residents may request to benefit from assimilation to residents, thus allowing them access to certain tax advantages normally reserved for resident taxpayers.
Declaration Obligations and Practical Modalities
Systematic Nature of Declaration Obligation
The declaration obligation constitutes an essential element of the Luxembourg tax system. Any real estate disposal, including that concerning the main residence although exempt, must be declared to the tax administration.
Documents and Deadlines
This declaration is made using form 700, a document specifically designed to detail disposal elements, which must be attached to the general income declaration form 100. The date retained for disposal completion is that of the notarial deed signature, the legal moment marking effective property transfer.
Practical Illustration Through a Numerical Example
Transaction Context
To concretize these principles, consider the situation of a couple who acquired a secondary residence in 2018. The acquisition price was €500,000, to which were added €40,000 in acquisition costs and €60,000 in improvement works, bringing the total acquisition price to €600,000 before indexation application.
Calculating Taxable Capital Gain
Determining Gross Capital Gain
The sale occurs in 2025 for €750,000. After deducting €30,000 in selling costs, the net disposal price is €720,000. The gross capital gain before indexation thus amounts to €120,000.
Application of Allowances and Tax Calculation
After possible application of indexation coefficients on acquisition price elements, the couple can benefit from the decennial allowance of €100,000, reducing the taxable base to €20,000. If the deed is signed between 01/01/2025 and 30/06/2025: taxation will be at 1/4 of the global rate for disposal gains. After 30/06/2025, return to half-rate.
Important Corrections and Essential Clarifications
Key Points on Deadlines
Several points deserve particular clarification to avoid any confusion. The standard speculation threshold remains set at 5 years, the temporary reduction to 2 years being applicable only until June 30, 2025.
Clarifications on Tax Rates
Reference tax rates are established at 42% for speculation gains and 21% for disposal gains, excluding social contributions, and not at the sometimes mentioned rates of 45.78% and 22.89%.
Clarifications on Deferral Mechanisms and Obligations
Absence of Standard Deferral
There is no standard tax deferral mechanism to a new main residence, the temporary mechanism instituted for the period 2024 to first half 2025 being strictly targeted and now closed.
Essential Points to Remember
Disposal declaration remains mandatory even for the main residence benefiting from exemption. No 10% withholding is practiced on the sale price for non-residents, contrary to certain misconceptions. Depreciation on rented properties is not subject to any recapture in capital gains calculation. Finally, concerning main residence land, the 10-are limit constitutes a normality presumption, with a ceiling set at 15 times the built-up area for larger plots.
