Capital gains on selling a property and reinvestment

Although property prices in Luxembourg have fallen between 2022 and 2024, investors who have owned their property since 2020 or earlier are still likely to realise capital gains on sale. There are two questions for investors: how to minimise any tax on the capital gain, and how to reinvest the proceeds. Temporary rules still applicable this year give property owners greater flexibility.

Sale of the main residence (non taxable) vs. sale of other property (taxable)

Capital gains do not apply to your main residence in Luxembourg. However, if you sell a buy-to-let property or a holiday home, you may be liable for tax on any gains you make. In general, a property counts as a main residence, in the context of a sale, if you lived in the property at the time of the sale, or the sale happens by December 31 of the year following your relocation to your new main residence, provided you lived in this property immediately after its initial purchase, or completion, or for at least 5 years prior to the sale.

Taxation of properties which are not the main residence

The gain is the difference between the sale price and the original purchase price plus any acquisition costs, which include estate agent, registration & transcription and notary’s fees.

However, the timing of the sale is important as it may impact the taxable basis and the applicable tax rate. If you have owned the property for five years or less, the profit is considered as “speculative”. However, the bill of Law n°8470* (the ”Bill”) proposes to reduce this five-year period to two years in case of a sale between 1 January 2025 and 30 June 2025.

In case of “speculative” gain, a higher tax rate applies: This is charged at the individual’s marginal rate of income tax, so could be as much as 42% for higher earners.

Conversely, for the “non-speculative” sale, the gain is classified as ‘extraordinary income’ and will be taxed at a favorable rate. For sales until 30 June 2025, the favorable tax rate has been reduced to a 1/4th of the marginal rate instead of the usual half tax rate, which will be applicable again for sale realized after 1st June 2025.

Furthermore, the sellers of “non-speculative” sale:

• • can claim an indexation allowance intended to mitigate the impact of inflation. A specific coefficient is applied to the purchase price, depending on when the property was acquired, and
  • are granted with an €50,000 allowance (doubled in case of joint taxation) reducing the taxable basis (the capital gain).

In addition, there are exemptions from capital gains tax in the case of sales by individuals of real estate to the State, local authorities, and to Luxembourg’s Housing Fund, the country’s public social housing organisation, as long as the property is not subject to a pre-emption right.

There are exemptions from capital gains tax in the case of sales by individuals of real estate to the State, local authorities, and to Luxembourg’s Housing Fund, as long as the property is not subject to a pre-emption right.

In a nutshell, here a summary on the taxation of capital gains of the properties which are not your main residence:

This leaves three main options open to homeowners who want to minimise their capital gains tax bill. The first is to sell by 30 June 2025 (with a holding period of more than two years). The second one is not to sell until you have passed the two-year threshold. The third one is to wait until your income is lower, such as in case of retirement, when then your marginal tax rate should be lower.

Reinvesting the proceeds

An initiative that came into effect in 2024 is intended to expand Luxembourg’s stock of affordable housing and ease pressure on the rental market. The legislation offers so-called ‘rollover relief’ from capital gains if a specific type of property is bought with funds obtained from the sale of a previous residence (main residence excluded) and not qualifying as speculative income. The new property, to be acquired by 2027 as per the Bill, must be a ‘social rental’, or to fall into the A+ class for energy performance, thermal insulation and environmental performance.

Social rentals are overseen by organisations designated by the Ministry of Housing and Spatial Planning. The rules governing social rentals came into effect in 2009 and aim to provide affordable housing for lower-income households. Rents must be lower than the market rate, which would be a consideration for landlords making a new investment. However, advantages include the fact that the rent is guaranteed by the State, the tenants are supervised, and there is assistance with property maintenance.

Owners also benefit from tax exemptions. The rules introduced in 2024 exempt rental income from social rental management organisations from tax by up to 90%, up from 75% previously.

Additionally, for properties purchased in future state of completion (“VEFA”) in 2024, or by 30 June 2025 as per the Bill, and intended for rental housing, there is a special yearly construction deduction of 4%, capped at €250,000.

The capital gains tax rollover relief means the gain is deferred rather than creating a permanent exemption. However, it can offer some flexibility on timing, providing a means to postpone recognising the capital gain until your tax rate is potentially more favourable.

The capital gains tax rollover relief means the gain is deferred rather than creating a permanent exemption.

In addition, to note that, as another incentive for (re-)investment in real estate market, there is a temporary (until 30 June 2025 as per the Bill) tax credit on registration and transcription fees of €20.000 per individual acquiring property in a future state of completion (“VEFA”) under the condition to rent it for at least two years.

Impact on the housing market

The new rules may also have an impact on the market. It is likely to make energy-efficient buildings more valuable and may depress the market for energy-intensive properties, making it more difficult to sell homes that do not meet energy efficiency standards and regulatory requirements.

This has already been seen in other countries – in France, for example, there is a ban on the least energy-efficient properties being rented out, and the efficiency requirements are expected to be raised progressively over the next decade. This may increase the value of investment required in the energy performance of a property that is to be rented or sold, with measures such as the enhancement of insulation and the modernisation of heating systems to save money in the longer term.

The new rules may also contribute to the revival of Luxembourg’s housing market by creating new incentives for investors. The market, which has been in decline since the fourth quarter of 2022 after a long period of expansion, seems to have recovered a little since the end of 2024. The rules on capital gains for social housing were introduced as part of a package of measures designed to stimulate the housing market, including rental allowances for under-30s.

For property owners, the new rules offer wider options when it comes to selling. This is particularly useful for people who have owned a property for some time and have built up significant potential capital gains. The incentives for deploying capital in social rental housing are attractive, but landlords also need to be comfortable with the risks. It may also have a broader impact on the property market that property owners will need to consider.

* Bill of Law n°8470, passed on 2 April 2024, proposes a 6-month prolongation of the temporary tax measures established by the Law of 22 May 2024