Understanding Property Taxes in Portugal
A Comprehensive Guide for Foreign Investors
Investing in Portugal's real estate market can be a lucrative decision, whether you're considering a primary residence, a secondary home, or a rental property. However, it's crucial to understand the tax implications involved in purchasing and maintaining property in Portugal. This guide will provide detailed information on the various taxes related to property ownership and rental income in Portugal.
Property Transfer Tax (IMT)
The IMT or Imposto Municipal sobre a Transmissão Onerosa de Imóveis is a transfer tax that is paid when purchasing property in Portugal. This tax can range from 0% to 10% and is levied over the purchase price of the property. The tax rate varies depending on the type and location of the property, and whether it's your primary residence or a second home.
The IMT is due before completing the property purchase, and the rates for residential properties as of 2023 are as follows:
For secondary residences or rental properties:
|Property Value||Tax Rate||Deduction|
|Up to €97,064||1%||€0|
|€97,064 - €132,774||2%||€970.64|
|€132,774 - €181,034||5%||€4,953.86|
|€181,034 - €301,688||7%||€8,574.54|
|€301,688 - €603,289||8%||€11,591.42|
|€603,289 - €1,050,400||6%||-|
For primary residences:
|Property Value||Tax Rate||Deduction|
|Up to €97,064||Exempt||€0|
|€97,064 - €132,774||2%||€1,941.28|
|€132,774 - €181,034||5%||€5,924.50|
|€181,034 - €301,688||7%||€9,545.18|
|€301,688 - €603,289||8%||€12,562.06|
|€603,289 - €1,050,400||6%||-|
Let's illustrate this with an example: If you're buying an apartment for €500,000 as a rental investment, the IMT would be calculated as follows: IMT = (€500,000 * 8%) - €11,591.42 = €28,408.58.
Stamp Duty (Imposto de Selo)
Stamp Duty or Imposto do Selo, is an additional transaction tax that needs to be paid during the process of purchasing a property in Portugal. The Stamp Tax is levied at a rate of 0.8% of the property's purchase price and is required to be paid at the time of purchase.
Continuing with our example, if the purchase price of the apartment is €500,000, the stamp duty would be €500,000 * 0.8% = €4,000.
Annual Property Tax (IMI)
The IMI or Imposto Municipal sobre Imóveis is an annual property tax. The IMI rate can vary depending on the municipality and the type of property. For urban properties, the rates typically range from 0.3% to 0.45%, while for rural properties, the rate is 0.8%.
However, there are some exceptions where the rate can be increased. For example, if a building is vacant for more than a yearor in ruins, the IMI rate can be tripled. The rate can also be increased for buildings located in urban pressure areas, such as (i) up to 100% for buildings used for local lodging, and (ii) up to 25% for residential buildings not rented or allocated to the taxpayer’s permanent abode. The increase can go up to 50% if the taxpayer is a collective person or other equivalent entity for tax purposes.
Income Tax on Rental Properties
If you're planning to rent out your property, you need to pay income tax on the rental income. As of 2023, the rates are as follows:
|Rental Period||Old Tax Rate||New Tax Rate|
|Less than 2 years||28%||25%|
|Between 2 and 5 years||26%||25%|
|Between 5 and 10 years||23%||15%|
|Between 10 and 20 years||14%||10%|
|More than 20 years||10%||5%|
These rates apply to the net rental income, which is the gross rental income minus allowable expenses. The expenses can include property taxes, maintenance and repair costs, and mortgage interest, among others.
Capital Gain Tax for Non Residents
Capital gains tax applies to the profit made from selling a property at a higher price than it was purchased. Until 2022, capital gains made by non-residents in Portugal were taxed at a special IRS rate of 28%. However, the amount subject to taxation was considered at 100% of the net capital gain. This was in contrast to residents, where only 50% of the net capital gain was taxable. This discrepancy was deemed as a breach of European law by Portuguese tax courts, leading to changes in the State Budget laws for 2022 and 2023.
As of January 1, 2023, the rules have changed: real estate capital gains need to be compulsorily aggregated with other income obtained by non-residents at 50% of their value and are subject to the corresponding progressive rates of IRS.
An important aspect to consider when calculating capital gains tax in Portugal is the "coeficiente de desvalorização" or depreciation coefficient. This coefficient is a value set by the Portuguese Tax Authorities that factors in the age of the property to adjust the acquisition cost, thereby reducing the capital gain subject to taxation. The coefficients for the most recent years are as follows (*):
- 2021: 1.00
- 2018 to 2020: 1.01
- 2017: 1.02
- 2016: 1.03
- 2012 to 2015: 1.04
(*) Please find the full table here.
For instance, if a property was bought for 500,000€ in 2018 and sold in 2023 for 600,000€, the adjusted acquisition cost would be 500,000€ x 1.01 = 505,000€. The capital gain would then be 600,000€ - 505,000€ = 95,000€.
Expenses related to the purchase, sale, and enhancement of the property can also be deducted from the capital gain. These include:
- Energy certificate costs
- Real estate agency commission
- Solicitor costs
- Municipal Property Transfer Tax (IMT)
- Stamp Duty (IS)
- Notary and land registration fees
- Home improvement and maintenance costs incurred in the last 12 years
- Permanent appliances such as exhaust fans, air conditioning units, boilers, security alarms, or solar panels
All these expenses must be properly documented as they may be requested by tax authorities within a four-year period3.
In our example, if there were deductible expenses amounting to 5,000€, the capital gain to be taxed would be 95,000€ - 5,000€ = 90,000€.
Inheritance Tax on Real Estate
In Portugal, the government abolished inheritance tax several years ago, replacing it with a stamp duty known as Imposto do Selo, which applies at a flat rate of 10%. This tax, however, only applies to Portuguese assets and not those held in other countries. Interestingly, legitimate heirs, which include a spouse, children, grandchildren, parents, and grandparents, are exempt from paying this inheritance tax in Portugal.
When it comes to real estate inheritance, the same rules apply. If you inherit a property, Imposto do Selo may apply. For the property to qualify as part of an estate, it must be registered with the local land registry office (Portal do Cidadão). The 10% stamp duty, or Imposto de Selo, is calculated based on the Valor Patrimonial Tributário (VPT) of the property.
However, it's important to note that not all heirs are obliged to pay this tax. Since 2009, the spouse or unmarried partner, descendants (including children and grandchildren), and ascendants (parents and grandparents) have been exempt from stamp duty. While they don't have to pay inheritance tax, these family members are required to declare the assets they receive to the IRS.
An important aspect of Portuguese inheritance law is that it protects a certain portion of a deceased's personal property for their lawful spouse, biological and/or adopted descendants, even in the absence of a will. This portion, known as the unavailable (or legitimate) share, comprises at least 50% of the deceased's estate. The remaining estate can be distributed according to the deceased's will, but the aforementioned relatives cannot be disinherited.
Please note that additional administration fees may apply, particularly if the heirs are not Portuguese. This is because non-Portuguese documents must be translated and stamped. Moreover, any tax due on an inheritance in Portugal must be paid within three months from the date of death; otherwise, a fine and daily interest may apply.
As for expatriates living in Portugal, they can reduce their tax liabilities by applying to become non-habitual residents (NHR) in Portugal. Benefits include low tax on income earned in Portugal, and no wealth taxes, inheritance tax, or foreign income tax. NHR status is available for 10 years, but anyone who has been a tax resident of Portugal within the last five years is ineligible for NHR status.
Regrettably, despite extensive research, I couldn't find a specific example illustrating the exact amount of tax children would pay on inheriting a property from their parents in Portugal. However, given the information provided above, it's clear that if the children are legitimate heirs, they would generally be exempt from this tax. In cases where they are not exempt, the tax would be 10% of the VPT value of the property, assuming the property is located in Portugal.
Investing in Portuguese real estate can be an exciting venture, but it's important to be aware of the tax implications. Understanding these taxes and rates will help you make informed decisions and maximize your returns. As always, it's recommended to consult with a tax advisor or professional before making significant investment decisions.
If you have any further questions about property taxes in Portugal or if you need assistance with any aspect of your real estate investment journey, please do not hesitate to get in touch with us. Our team of experts is committed to providing personalized advice and solutions tailored to your specific needs and goals.
Contact us today and let's explore together how you can make the most out of your investment in Portugal. We look forward to helping you turn your Portuguese property dreams into reality.
The information provided in this article is intended as a general guide and does not constitute legal or tax advice. Each individual's circumstances can significantly affect the tax implications of property transactions, and it's crucial to discuss your situation with a qualified professional.
We have the privilege of collaborating with a reputable law office in Portugal. If you need legal advice or assistance, we would be pleased to introduce you to them. Working with professionals knowledgeable in the intricacies of Portuguese law can ensure that you understand all aspects of your property transaction and can navigate it with confidence.