Portugal is a lovely Mediterranean country with beautiful sceneries, lots of sun and sea. It is no doubt that many people are eager to own homes there since vacationing in this country can be a blissful experience. Purchasing a vacation home is the ideal thing that many expatriates do which makes it imperative to understand the tax laws that govern property ownership in this Mediterranean paradise. Property purchased can be a principle domicile for those who wish to move permanently to Portugal. It could also be a vacation home or an investment. Sometimes people rent out their vacation homes after the summer vacation while some people own homes that are solely for commercial purposes.
Expert advice is fine since it gives the potential property owner basic knowledge on the tax expectations in order not to get into problems of tax avoidance that could even lead to loss of property or heavy fines.
Property tax is paid by owners and it is derived from the fiscal value of the property as made manifest in the fiscal register. In general, there are four areas within which property is taxed in Portugal. There is the tax levied on rental property, capital gains tax, local and transfer tax, and inheritance tax. An overview of how these different taxes apply will be great information to have before embarking on purchasing that lovely vacation home in the sun.
Rental property is taxed by the law and it is the levy the property owner pays the commune from the rented property income. This tax varies for residents and non-residents; for property owners residing in Portugal, the tax rate amounts to 28% income from the rented property. There is an exception in the case wherein the property owner pays an estimated annual rate of about 14.5 %. In this case, he/she can add the rental income to the other taxable income for the year. This is not beneficial if tax margins are above the estimated lowest 14.5% quota. Non-residents have to pay the 28% rates which the realtor or lease officer must deduct from the gross income. It is imperative to document maintenance fees and municipal property taxes (IMI) because it guarantees a tax reduction.
The next taxable income for property owners in Portugal is the capital gains tax. This tax is levied on owners after they have sold their property. Those who reside in Portugal can benefit from a tax break since only 50% of the gains are taxed which are usually added to annual income and taxed at 48%. There is also another windfall for those who have owned the property for more than two years thanks to the inflation relief tax clause. Exemptions for this capital gains tax apply when the property owner reinvests the income into another home in Portugal or within the EU twenty four months before selling or thirty six months after. The home owner must take up resident within six months of purchase before this tax break can be applicable. The flat capital gains tax for non residents is 28% while EU citizens can opt to be taxed as a resident but worldwide income must be declared for this to apply.
Another tax of note is the local and transfer tax which varies depending on whether your property is in an urban area or in the rural countryside. The transfer segment (IMT) comes first and is equally taxable at different rates depending on whether it is your principle domicile, second home or rental property. The owner must pay a stamp duty of 0.8% which is mandated on all new structures. Residents that are worth from one million euro and above pay stamp duties of 1%. The annual municipal tax is the local duties paid by home owners to the commune by December 31st every year. The registered fiscal value of the property dictates this levy. It varies between 0.3% and 0.8% depending on the location, type and age of the building. For those who own property in blacklisted zones the local tax amounts to 7.5%.
Inherited property is also taxable under Portuguese tax laws and it is equally important to know. A property that is inherited by one means or another is taxable at 10%. It does not matter whether the benefactor is a resident of Portugal or not. Stamp duty is equally mandated within this tax segment. The only exemption to the 10% inheritance tax is when the benefactor is the spouse or child of the original property owner. In this case, only the Stamp levy is paid.
In relation to all these taxes, UK residents have different rates, the rental property tax for UK citizens is payable both in the UK and in Portugal. Since the tax levies vary for both countries the calculations are different. In this case, the advice is to counterbalance the Portuguese levy against the UK legal responsibility in order to avoid double taxation. This is great if the expected payments are the same in both countries; but in the instance when the UK tax is higher, the individual must pay the additional amount. Capital gains taxes are also rated differently for UK citizens since they are mandated to pay the same tax in the UK, this can equally be eliminated under the double levy clause. In terms of the inheritance tax, the UK citizens have to pay inheritance taxes along with other declared assets in Portugal under the home inheritance tax stipulations.
US citizens are mandated to declare their foreign assets in their IRS forms in order to avoid fines of tax evasion. It is important for US Portuguese property owners to make inquires with their local IRS office to ensure what the expectations are and meet them.
Tax laws are sometimes a pitfall for many individuals who sometimes out of ignorance or ill intend ignore some levies and get into trouble with the law. Tax evasion is a crime in all the countries of the world with severe consequences that range from heavy fines to prison terms and even loss of property. It is important to gain knowledge of the property tax expectations in any country before embarking on purchasing a new home. Portugal is an ideal location for many especially for vacation purposes. Purchasing and owning a home in this country comes with tax responsibilities that must be fulfilled. These apply in terms of rental levies, income gains taxes, local and transfer taxes as well as inheritance taxes. Learning about these taxes and paying them is imperative if you must keep your beautiful sunny property.