Portugal Implements Sweeping Rental Tax Cuts to Formalize Housing Market

Portugal Addresses Housing Crisis with New Tax Incentives

Portugal has introduced a comprehensive package of measures, including significant rental tax reductions, designed to formalize a substantial portion of the country's informal housing leases and address a persistent housing crisis. The initiative, part of the broader 'Mais Habitação' (More Housing) program, seeks to increase the supply of rental properties and improve affordability for residents.

Estimates suggest that up to 60% of rental agreements in Portugal operate informally, leading to a loss of public revenue and a lack of protection for tenants. The government's strategy aims to bring these 'ghost' leases into the formal market through a series of fiscal incentives for landlords and property owners.

Key Tax Reductions and Incentives

The core of the new legislation focuses on reducing the tax burden on rental income and encouraging investment in the long-term rental market:

• Personal Income Tax (IRS) Reduction: The autonomous IRS rate on rental income has been cut from 25% to 10% for both new and existing contracts with monthly rents up to €2,300. Landlords who agree to charge rents at least 20% below the local median may even benefit from a 0% IRS rate.
• Corporate Income Tax (IRC) Benefits: Companies leasing residential properties within the €2,300 rent bracket will see a 50% reduction in their IRC on rental income.
• VAT Reduction for Construction: The Value Added Tax (VAT) rate for the construction of homes for sale (up to €648,000) or for rentals (up to €2,300 per month) has been lowered from 23% to 6%, a measure in effect until 2029.
• Capital Gains Tax Exemption: Homeowners who reinvest the proceeds from a property sale into rental housing offered at government-defined 'moderate' rents (up to €2,300 per month) can qualify for a capital gains tax exemption. Additionally, the residency period required for capital gains IRS exemption has been reduced from two years to one, with some exceptions allowing for immediate exemption in cases of household changes.
• AIMI Exemption: Properties rented out for up to €2,300 per month are now exempt from the Additional Municipal Property Tax (AIMI) until 2029.
• Transition from Short-Term to Long-Term Rentals: Property owners who convert their short-term rental (Alojamento Local - AL) properties to long-term residential leases by the end of 2024 may be eligible for an exemption from IRS or IRC on rental income until the end of 2029, provided the AL registration predates December 31, 2022. The extraordinary 15% contribution on Local Accommodation was also eliminated, with retroactive effect from December 31, 2023.

Broader Housing Strategy and Impact

The 'Mais Habitação' program, which saw some of its measures come into force on October 7, 2023, also includes other provisions aimed at stabilizing the real estate market. These include increased income tax deductions for tenants, rising to €900 in 2026 and €1,000 in 2027 for moderate rents, and simplified licensing procedures for new housing projects. The government also increased the Municipal Tax on Property Sales (IMT) for non-resident buyers, excluding emigrants, to curb external pressure on the domestic market.

Finance Minister Joaquim Miranda Sarmento estimated the fiscal cost of these housing measures to be between €200 and €300 million. Minister for Infrastructure and Housing, Miguel Pinto Luz, emphasized that the IRS reduction applies universally to all eligible contracts. The government's objective is to stimulate housing supply, encourage affordability, and reward landlords who commit to long-term or moderate-rent housing, thereby fostering a more stable and accessible rental market across Portugal.