The purchase option contract and its implications for capital gains tax

In the real estate, for decades, the conclusion of a Purchase Option Contract has been a very usual practice as a preliminary or preparatory step for a subsequent sale. The performance of an option contract gives the buyer the right, not the obligation, to buy. And both parties can generally get out of the transaction by paying to the other party a compensation equivalent to the amount of the premium, although it will depend on the agreements.

A few years ago, the tax authorities modified their tax position, considering that the mere granting of a purchase option implied a capital gain for the grantor, regardless of whether the option was finally executed, and the sale was carried out.

The Supreme Court in its Resolution 459/2020 of May 18, 2020 considers that the capital gain generated by the right of purchase option arises at the time of the granting (ex novo) and not at the time the grantor acquired the real estate. Therefore, as there’s no prior acquisition, the purchase option doesn’t have an acquisition cost.

According to the Supreme Court, we are talking about two possible capital gains: one for the granting of a purchase option with the collection of a premium and another for a possible future transfer of the property.

In our opinion, this legal position is definitely incorrect because it taxes the purchase option premium regardless of the degree of execution or performance of the contract and, furthermore, it taxes the same capital gain twice (in the option and in the sale), introducing a significant tax distortion in the legal and economic real nature of the transaction, considered as a whole.

We believe that, if this jurisprudential position is not modified, the Purchase Option Contract is a legal modality condemned to disappear since, in view of this situation, it seems logical to consider other legal alternatives such as the Deposit Agreement, that can achieve the same practical effects without the aforementioned tax disadvantages.

Both the Option Contract and the Deposit Agreement are contracts formalized prior to the deed of sale and will rarely be subjected to a tax review, but when we talk about taxes, any precaution is never enough, so we recommend that our clients take into account the tax implications of the chosen contractual modality. For questions related to this matter or any other, we invite you to contact Legal Steps.

The information contained in this note is of a general nature and it does not address the circumstances of the specific case nor does it contemplate all the nuances, so we invite you to consult your situation, if necessary.