The Portuguese Government’s new housing tax package significantly changes the rules that apply to buying, building, renting out and selling property in Portugal.
With a reduced 6% VAT rate on building works, tax incentives for “moderate rent” leases, new IMT property transfer tax rules for non-residents and fresh incentives for investment, the decree creates a new framework for households, landlords, developers and investors.
Anyone buying a house with reduced VAT will have to use it as their primary residence or risk paying an additional IMT tax; capital gains tax benefits are contingent on reinvestment and rental rules; and homeowners will only have access to reduced IRS tax rates if they meet moderate income limits, for example.
- Buyers who purchase a home where the reduced VAT rate has been applied must use it as their main residence, otherwise they face an IMT surcharge.
- Capital gains relief depends on reinvestment and on the property being used for rental, and landlords only access reduced personal income tax (IRS) rates if they comply with the moderate rent limits, among other conditions.
In this Q&A guide prepared for idealista/news, tax lawyers André Areias and Beatriz Vale Rêgo of Cuatrecasas explain what changes with the housing package, who can benefit from the new rules and the main tax points to consider in real estate transactions.
What is the impact of the new 6% reduced VAT rate for developers, builders and buyers?
Decree-Law No. 97/2026 creates a new item (2.42.1) in List I annexed to the VAT Code, allowing a 6% reduced VAT rate on building or renovation works for properties that are intended either for sale as the buyer’s main and permanent home (HPP) or exclusively for residential rental. This is provided that the sale price or monthly rent does not exceed the “moderate price/rent” ceilings set out in the decree.
The key innovation lies in how tax risk is allocated. The preamble clarifies that the buyer actually designating the property as their HPP is not a condition for applying the reduced VAT rate. This means that if the buyer does not end up living in the property, the reduced VAT rate does not become retroactively invalid, the contractor does not have to repay the corresponding VAT, and is not exposed to penalties.
Instead, the burden shifts to the buyer, via IMT. Where a property purchased under these conditions is not designated as HPP within six months, or that designation does not last at least 12 months, a 10% IMT surcharge applies to the taxable value calculated under the IMT Code, unless the change of plans is due to exceptional circumstances.
In practice, this means that developers and promoters who comply with the formal conditions of item 2.42.1 – sale for HPP or for residential rental, within the moderate price/rent limits, sale or letting within 24 months of the use licence being issued, among others, will benefit from 6% VAT with a much lower risk of later adjustments.
Buyers, on the other hand, who choose a property built under this reduced rate may benefit from a lower final price, in return for committing to use it as their main home for at least one year, or they may face an additional IMT bill.
What changes for landlords, tenants and people building their own homes?
On the income side, the decree affects three main areas:
- taxation of rental income
- VAT incurred by individuals who build their own home
- the deduction of rents in IRS by tenants.
For landlords, the most significant change is the creation of a stand‑alone 10% IRS rate for rental income from leases used exclusively for housing, provided that the monthly rent does not exceed the “moderate rent” ceiling (set at EUR 2,300 per month for 2026) and that this income is earned up to 31 December 2029.
For companies and landlords with organised business activity (category B), the decree lays down another rule: rental income from residential leases with moderate rents will only be taken into account at 50% for corporate income tax (IRC) or IRS purposes, also until 2029, substantially reducing the effective tax burden on this type of investment.
In parallel, individuals who are building their own home outside any business activity now have access to a specific scheme for partial refund of the VAT paid on construction works.
Annex II to the decree-law sets out this regime for individuals who contract building works on properties that will be used as their own main and permanent home, provided the VAT becomes chargeable by 31 December 2032. There are several conditions:
- The property must fall within maximum value limits set in the decree and must, in fact, be designated as HPP within six months of the start‑of‑use documentation being issued, with that status maintained for at least 12 months, except in exceptional circumstances.
- In addition, only VAT on invoices for building works that have been properly communicated to the Tax Authority is eligible – the simple purchase of materials does not qualify. The request is submitted electronically within 12 months from the start of use, and the Tax Authority has 150 days to refund the approved amounts.
For tenants, the novelty is a gradual increase in the annual IRS deduction for rents on their main and permanent home: from EUR 700 under the previous rules to EUR 900 in 2026 and EUR 1,000 from 2027 onwards.
The overall ceiling on deductions against tax, however, is not changed, which may limit the impact of the measure.
Taken together, these three strands make residential letting at moderate rent levels more attractive for owners, reduce the tax cost of building one’s own main home and return some budgetary breathing space to households that rent.
What is the impact of the fixed ITBI (Property Transfer Tax) rate of 7.5% for non-residents ?
On the IMT front, the decree introduces a new rule aimed in particular at home purchases by non‑residents.
It provides that, without prejudice to existing special situations, a 7.5% rate will apply on the purchase of an urban property or unit intended exclusively for housing where the buyer is not tax resident in Portugal, “with no exemption or reduction” that would normally be available for the purchase of a main and permanent home.
This rate applies immediately to anyone buying a home as a non‑resident, but the decree still offers two routes:
- (i) if the buyer becomes a Portuguese tax resident within two years of the purchase; or
- (ii) if the property is used for residential rental at a moderate rent and remains rented for at least 36 months (continuous or not).
In these cases, within the first five years after purchase, the Tax Authority may, at the buyer’s request, cancel the difference between the IMT paid at 7.5% and the amount that would have been due under the standard resident rates.
This measure makes buying housing as a non‑resident for own use or speculative investment significantly more expensive at the outset, while at the same time signalling a tax‑favoured route: those who actually move to Portugal or use the property for residential letting at moderate prices may have their IMT recalculated down to the “normal” resident levels.
How will capital gains exemptions on reinvestment work?
On capital gains, a logic similar to the existing regime for reinvestment in a main and permanent home is extended to residential letting.
Capital gains from the sale of an HPP reinvested in another HPP will remain exempt. In addition, gains from the sale of other residential properties can also be excluded from tax, provided that the sale proceeds, minus any outstanding loan, are reinvested in the acquisition of properties located in Portugal and used for residential rental, with monthly rents that do not exceed the maximum moderate rent limits (EUR 2,300 per month for 2026).
This reinvestment must take place between 24 months before and 36 months after the sale. The taxpayer must state, in the tax return for the year of the sale, the intention to reinvest and the amount to be reinvested.
However, the capital gains exemption is subject over several years to strict conditions. The property acquired with the reinvested amount:
- (i) must be subject to a residential lease at a moderate rent within six months of the reinvestment (or of the date the gain arises, if later), unless there is a justified delay due to urgent works;
- (ii) must be rented out, under one or more contracts, for at least 36 months, continuous or not, during the first five years;
- (iii) must not be rented above the moderate rent ceilings during that period; and
- (iv) must not be transferred, whether for consideration or free of charge, before five years have elapsed.
If any of these conditions is breached, the previously excluded gain “reappears”: the capital gain will be treated as arising in the year in which the breach occurs (end of the six months without an eligible lease, rent going above the cap, failure to meet the minimum rental period or early transfer) and will then be taxed by the IRS, with compensatory interest added.
What are investment contracts for rental?
Investment contracts for rental (contratos de investimento para arrendamento, CIA) are a new instrument designed for large‑scale housing projects, broadly similar to a public‑private partnership model.
An institutional investor (fund, company or investment vehicle) enters into a contract with the IHRU (the national housing institute) for up to 25 years, undertaking to build, renovate or acquire urban or mixed‑use buildings to be used for residential rental or for rental with onward residential subletting, within moderate rent limits.
The contract identifies the properties covered, the area to be built and the rent ceilings, and is subject to ongoing oversight by the IHRU.
The investor is required to report annually, keep the properties in the rental market, fully comply with tax and social security obligations, and is prohibited from selling the assets without also transferring the contractual position.
n exchange for this long‑term commitment, the State offers a very substantial tax package:
- (i) IMT exemption on the purchase of land and buildings for construction or renovation for rental, as well as on the acquisition of existing buildings or units for that purpose;
- (ii) exemption from stamp duty on these transfers;
- (iii) IMI (municipal property tax) exemption for up to eight years from the year of acquisition and, thereafter, a 50% reduction in the IMI rate for the rest of the contract term, within the limits set by each municipality;
- (iv) construction or renovation works benefit from the reduced VAT rate set out in the new item 2.42.2 of List I annexed to the VAT Code;
- (v) the additional municipal property tax (AIMI) does not apply; and
- (vi) the investor can also recover 50% of the equivalent of the VAT incurred on architectural, engineering, design and study services linked to the construction or renovation (excluding urban development projects).
Stay in the know about living in Portugal as a foreigner—get our weekly newsletter for the latest travel, legal, and lifestyle news.
