Undivided estates: the reform aiming to unlock property assets

Sofia Thibaut Trocado, Real Estate Partner, and Lénia Carolina de Sousa, Tax Associate, analyse the proposed legislation that seeks to fundamentally reshape the legal framework governing undivided estates.

In an opinion article published in Jornal de Negócios, the lawyers note that “the underlying rationale of the initiative is straightforward: to prevent a lack of agreement between heirs from leaving properties in a state of deadlock and inalienability for years, often without economic use, without adequate maintenance, and effectively outside the real estate market. The proposal would allow a single heir to initiate the sale of an undivided property, provided that two years have elapsed since the opening of the succession, without prejudice to the participation and pre-emption rights of the remaining heirs and other rights holders, such as secured creditors.”

The proposal forms part of a broader package of measures aimed at addressing the shortage of housing supply and seeks to tackle a structural issue: reducing asset inertia and releasing properties for sale, leasing, or redevelopment. Simplifying succession procedures may also help reduce family disputes, shorten timelines, and lower the costs associated with lengthy court proceedings. At the same time, the reform aims to prevent the deterioration of properties that, due to the difficulty of achieving unanimity, often lose value over time.

However, the reform is not without complexities. Allowing a single heir to proceed with the sale of an undivided asset may give rise to perceptions of imbalance among stakeholders with potentially diverging interests, particularly where there are differing expectations regarding price, timing of the sale, or the preservation of the property within the family.

It will be necessary to clarify the role of the courts, the criteria for selecting the method of disposal, the involvement of valuation experts, and the level of protection afforded to more vulnerable heirs. Further clarification is also required regarding the initial valuation of the property, specific mechanisms for leased, vacant or encumbered properties, and the interaction between this mechanism and ongoing probate proceedings, especially where multiple properties with different characteristics and levels of liquidity are involved.

It is also essential to ensure that the new framework does not create perverse incentives for rushed sales, nor favour asymmetrical negotiations between financially stronger heirs and those wishing to preserve the property.

Additionally, it will be important to assess how the proposal aligns with the current tax rules applicable to capital gains arising from real estate assets held within undivided estates. Outside this specific framework, the limited clarity and density of existing personal income tax (IRS) rules regarding the disposal of such assets have resulted in significant legal uncertainty and substantial litigation before the tax courts.

While it is generally accepted that capital gains arising from the direct sale of property by the estate are subject to taxation—each heir being responsible for declaring and taxing their proportional share—the same cannot be said where the transfer occurs through the sale of inheritance shares.

Although the Portuguese Tax Authority considers that the disposal of an inheritance share may give rise to taxable capital gains, the majority of legal doctrine and case law has challenged this position. Notably, the recent Supreme Administrative Court ruling No. 7/2025, of 4 June, has standardised case law in the opposite direction, concluding that even where the estate consists solely of real estate, such disposal does not qualify as an “onerous transfer of real rights over immovable property” and is therefore not subject to personal income tax. In essence, until the estate is divided, heirs hold only an abstract right to the inheritance, rather than individual rights over each asset.

In this context, it will be necessary to clarify the tax treatment applicable to the sale of an undivided property initiated by a single heir, as well as the corresponding reporting obligations—namely whether the general regime applies and whether, in the case of judicial sale, the possibility of disposing of the inheritance share as a whole is excluded.

It is equally important to define who, in practice, assumes the tax representation of the estate—such as the executor or estate administrator—and how this is reflected in the relevant reporting obligations under personal income tax.

Furthermore, in cases involving the substitution of the sale proceeds for the assets disposed of, it must be clarified whether the capital gain should still be deemed realised at the time of sale, even where heirs do not yet have actual individual access to the funds. It should be recalled that personal income tax is intrinsically linked to the principle of ability to pay, which could potentially be affected in such circumstances.

Accordingly, it is essential to provide clarity on these aspects and, where applicable, to establish that the subsequent division of the estate does not give rise to any additional taxable event.