How to Prevent a Tax Hit When Selling a Rental Property in Portugal?

Investing in rental properties in Portugal has become very attractive over the last few years. The country's popularity as a tourist destination has soared, leading to significant economic benefits. In 2024, Portugal welcomed over 30 million foreign tourists, generating revenues exceeding 27 billion euros. This impressive milestone placed Portugal 5th in Europe in terms of bookings through internet platforms.

Credits: My Guide Algarve.

As always, while the Local Accommodation (AL) sector saw a boom over the past decade, the government has changed some of the tax rules over the years. This means that when these rental properties are finally sold, they can trigger significant capital gains tax liabilities.

Capital gains tax (CGT) is an important consideration for property investors in Portugal. Currently, the CGT is levied on 50% of the gain for properties that were never in the rental business or that have at least stopped the activity for more than 36 months prior to the sale. But when the property is still on the local lodging (AL) or was within the last 36 months prior to the sale, the capital gains can be levied on 95% of the gain. This means that careful planning is essential to minimize tax exposure and maximize profits.

Below you can find some effective methods to help you reduce your capital gains tax burden.

Study the rules that applied to your CGT calculations in 2020.

The new rules for calculating capital gains tax for rental properties came into effect in 2021. One option is to analyze the previous tax returns, if the rental property started before 2021, and check with an accountant if the old taxation regime was chosen. In that case, provided all the values ​​are correct, the sale can be made in a shorter period and the capital gains will be taxed at 50% of the profit, as per the standard rules.

However, although this strategy may allow you to sell the asset in a shorter period, it also requires an exhaustive tax study, as, depending on the circumstances, it can be challenged by the tax authorities.

Use a rental agent or a third party to hold the AL license:

This can be a tax planning strategy if an investor is planning to sell the property. The main options are normally to transfer the license to the rental agent and rent the property long-term to the agent. This way, the investor receives a rental income, instead of a business income, while minimizing the capital gains tax exposure on the sale of the property.

Alternatively, if the client wishes to rent through a rental agency, the contract can be made with a spouse or descendant if that person does not own the property.

It is important to check if this rental or lease agreement has VAT implications, as it may not be a solution for all customers.

Use the real estate company to mitigate the CGT:

This strategy can be useful for investors who are in the process of selling their property but face a potentially large tax liability.

In Portugal, it is possible to create a real estate company under the simplified regime, provided the yearly turnover is less than 200,000 euros. This means that one of the household members (the person holding the short-term rental license) can sell their share of the property to this newly created real estate company. The sale price would be lower to ensure that it does not generate a capital gain for the owner.

This immediately mitigates capital gains in your personal sphere and transfers the capital gains exposure to the company.The advantage is that this company will be in the simplified regime, and therefore, it will be taxed on turnover and not on profit. The coefficient in this case is 4% of the sale value, with a 50% reduction in the first year of trading. This means that if this property is sold for €150,000 in the first year of trading, the taxable gain would be 2% of €150,000, which is €3,000. This will lead to an effective tax rate lower than 1%.

Please note that there are several limits to using this strategy. The main one is that the company's assets cannot exceed €500,000 and its annual turnover cannot exceed €200,000. This is particularly relevant under the Portuguese tax regime, as otherwise, the normal rules would apply, and the tax is applicable on the profit (capital gains made) instead of the sale value.

Avoid making mistakes that could cost you money:

Always study the tax implications of the sale before placing the property on the market, especially if it was in the AL activity within the last 36 months prior to the sale.

Portuguese tax laws provide some deductions and allowances that can help reduce the taxable gains from the sale of a property. These include deductions for property improvements, maintenance, and other qualifying expenses incurred during the ownership period. As always, these are not permitted if the property was in the AL company within the last 36 months prior to sale. By thoroughly understanding these rules, investors can adapt their strategy to minimize the capital gains tax exposure.

In conclusion, while capital gains tax on rental property sales in Portugal can be significant, there are strategic methods to manage and reduce this tax burden.

If you have any questions, please feel free to contact our office to discuss your individual circumstances and schedule a tax planning meeting: info@afm.tax