Capital gains reduction factors FR1 and FR2 explained

Where the formulas come from

Article 40 of Lei 11.196/2005 (published in the Official Gazette on 22 November 2005) requires reduction factors for the sale, “by any title”, of real estate by an individual resident in Brazil. The text defines:

• FR1 = 1 / 1.0060^m1, where m1 is the number of calendar months or fraction between the acquisition date and the month of publication of the law.
• FR2 = 1 / 1.0035^m2, where m2 is the number of calendar months or fraction between the month after publication, or the month of acquisition if later, and the sale.
• For property acquired up to 31 December 1995, FR1 is counted from 1 January 1996, without prejudice to the pre-1989 reduction of Lei 7.713/1988, article 18.

The tax base is the gain multiplied by the factors. Both factors are below 1, so each month counted lowers the base a little more, and a long holding period lowers it more than a short one.

The Receita’s reading

The Receita Q&A 2026 (question 656) restates the rules in practical terms:

Property bought after November 2005 therefore has no FR1, and FR2 runs from the purchase month. The Q&A says the reductions “apply successively, when applicable”, each on the gain already reduced by the previous one. For sales from 1 January 2017 the sequence is:

1. BC1 = sale value minus acquisition cost.
2. BC2 = BC1 minus the percentage reduction of Lei 7.713/1988.
3. BC3 = BC2 multiplied by FR1.
4. BC4 = BC3 multiplied by FR2.
5. Tax = BC4 multiplied by the progressive rates of 15% to 22.5%.

The rates and the rest of the chain are in capital gains tax on property. The Receita also notes that the acquisition cost of property bought from 1 January 1996 is not updated for inflation (Q&A 655).

The pre-1989 percentages

Article 18 of Lei 7.713/1988 provides a fixed percentage reduction according to the year of acquisition, for a resident selling property acquired up to 31 December 1988. The Q&A 656 table is:

There is no reduction for property acquired from 1 January 1989.

Property built or enlarged after the land was bought

If a building, extension or renovation was done after the purchase of the land, the Receita requires the acquisition cost to be split by date (Q&A 658), as the reduction depends on when each part was acquired. For land acquired up to 31 December 1988, works started up to that date and declared in the annual return take the date of the land for the whole property; works started after it get the reduction only for the land and the buildings existing at 31 December 1988. For land acquired up to 31 December 1995, works started up to that date take the land’s month for the factors, and works started later take the month in which they were done, provided they were declared. Building on someone else’s land also qualifies (Q&A 657).

What a reader can do

• Keep the purchase deed and the dates of the works, as the month of each counts.
• Use the GCAP program: the Receita states that it computes exemptions and reductions and generates the payment slip. The month-count convention for “calendar months or fraction” is built into it.
• Do not rely on a manual estimate for a tax return. This guide does not publish a worked month count because the counting convention is applied by the program and is not spelled out in the sources read.

Which professional to consult

An accountant familiar with GCAP can compute the factors for an older property. A lawyer registered with the OAB can help when the property history is unclear, for example when works were never declared. The reader checks professional registrations on the official registers.