Decree-Law No. 97/2026, of May 20, implemented a new fiscal package to incentivize housing, with a direct impact on the construction, rehabilitation, purchase, sale, and rental of properties in Portugal.
The stated objective is to increase the supply of housing, especially housing for sale or rent at moderate prices, through a set of tax benefits in VAT, IRS, IRC, IMT, Stamp Duty, IMI and AIMI.
In practice, the legislation creates significant opportunities for families, landlords, real estate developers, institutional investors, and public or municipal entities. However, these opportunities depend on meeting objective conditions, price and income limits, allocation periods, and documentary obligations. Failure to meet these requirements may result in the forfeiture of benefits, additional tax assessments, and compensatory interest.
Moderate Price and Moderate Income: The Concept that Defines Tax Benefits
Most of the new tax benefits depend on one key concept: the property must fall within the legal limits for moderate price or income.
In general terms, the diploma uses the following as a reference:
- moderate monthly income;
- moderate selling price;
- properties intended for primary and permanent residence;
- Properties intended for residential rental or subletting.
For 2026, the moderate monthly income limit is €2,300.00, corresponding to 2.5 times the guaranteed minimum monthly wage projected for that year.
Regarding the sale price, the reference is €330,539.00, corresponding to the upper limit of the second IMT tax bracket applicable to the acquisition of a primary and permanent residence.
This point is essential: the benefits do not apply to any property or any transaction. They only apply when the property, the income, the price, the purpose, and the terms meet the requirements set out in the legislation.
To determine these limits, the total amount paid under the transaction or lease agreement must be considered, including amounts associated with movable property, equipment, accessories materially attached to the property with a permanent character, and services that contribute to its appreciation, even if covered by separate contracts.
In the case of acquisition through joint ownership or co-ownership, or when there are multiple tenants, the limits are determined by the total value of the acquisition or the rent, and not just by the individual share or portion of each purchaser or tenant.
VAT at 6% on Housing Construction and Rehabilitation
One of the most relevant changes is the creation of a new item in List I of the VAT Code, allowing the application of the reduced rate of 6% to certain construction or rehabilitation projects.
The reduced rate may apply to properties intended for:
- for sale as the buyer's own permanent residence; or
- exclusively for residential rentals.
In both cases, the sale price or monthly income cannot exceed the moderate price or income limits.
In the case of properties intended for residential rental, specific time requirements must also be met: the first lease agreement must come into effect within a maximum period of 24 months after the issuance of the documentation relating to the commencement of use, and the property must be rented for at least 36 months, consecutive or intermittent, within the first 5 years.
Lease agreements must be reported to the Tax Authority, in accordance with applicable law.
This measure is especially relevant for developers and builders because it can significantly reduce the tax cost of construction or rehabilitation, increasing the economic viability of projects aimed at the middle class and residential rentals.
However, the reduced rate applies to eligible construction or rehabilitation projects, not to simple one-off purchases of materials, furniture, or equipment.
Primary and Permanent Housing: Obligations and Risks for Buyers
The legislation seeks to protect the developer from some of the tax risk associated with the buyer's future behavior.
The fact that the property is intended for the buyer's own permanent residence is not a condition for the contractor to apply the reduced VAT rate, provided that the other formal requirements are met.
However, the buyer is subject to a specific obligation: they must use the property as their own permanent residence within 6 months of purchase, proving this use through their tax domicile, and must maintain this use for the following 12 months.
Otherwise, an additional IMT (Property Transfer Tax) corresponding to 10% may be applied to the taxable value, except in exceptional circumstances legally permitted.
This means that the buyer must exercise particular caution before acquiring a property benefiting from this regime. The initial tax savings can turn into an additional cost if the property is not designated as a primary and permanent residence.
Building Your Own Home: How Partial VAT Refunds Work
The package also creates a system for the partial reimbursement of VAT paid by individuals on construction contracts for properties intended for their own permanent residence.
This system requires, among other things, that:
- the construction is carried out outside the scope of a business or professional activity;
- The property is intended for primary and permanent residence;
- The property falls within the legal value limits;
- the property must be used as a primary and permanent residence within the required timeframe;
- this impact should be maintained for the minimum period stipulated.
To determine the value limit, the taxable property value registered in the land registry is considered or, if higher, the acquisition value of the land plus construction costs, excluding VAT. In 2026, this limit corresponds to the moderate selling price, i.e., €330,539.00.
The property must be designated as the owner's permanent residence within 6 months of the issuance of the documentation relating to the commencement of use, proven through the tax domicile, and this designation must be maintained for at least 12 months, except in exceptional circumstances.
The refund request must be submitted to the Tax Authority within 12 months of the issuance of the documentation relating to the commencement of use, accompanied by the construction contracts, title or documentation of use, proof of the land value and invoices for construction costs.
In simple terms, the refund corresponds to the difference between the VAT paid at the standard rate and the VAT that would result from applying the reduced rate to the eligible expenses.
Simple purchases of materials are not eligible. The scheme focuses on construction contracts that are properly documented, invoiced, and reported.
This is a significant opportunity for families building their own home, but it requires meticulous attention to documentation from the start.
Housing Rental with Moderate Rent: Taxation of 10% in IRS
For individual landlords, one of the most attractive measures is the creation of a reduced autonomous tax rate of 10% in IRS (Personal Income Tax) for certain property income derived from residential lease agreements with moderate rent.
In practical terms, this measure could make long-term residential rentals more competitive.
The tax advantage depends on compliance with legal and temporal conditions:
- The contract must be exclusively for residential purposes;
- Monthly income cannot exceed the moderate income limit — in 2026, €2,300.00/month;
- The income must be earned by December 31, 2029.;
- The contract must comply with the general rules of residential leasing.
Decree-Law No. 97/2026 does not establish a special minimum duration for this benefit. Therefore, the general rule for residential leases applies: in fixed-term contracts, the minimum term is, as a rule, 1 year, except in legally permitted situations of non-permanent housing or special temporary purposes.
The opportunity is clear: those who place properties on the residential rental market within the moderate income limits may benefit from more favorable taxation, unless an even more advantageous tax regime applies.
Tax Benefits for Companies and Investors with Organized Activity
The package also provides an advantage for corporate income tax (IRC) or personal income tax (IRS) taxpayers with organized accounting, within category B.
In these cases, certain rental income arising from moderate-rent residential lease agreements will only be considered under 50% for tax purposes.
This measure may be relevant for real estate companies, investment vehicles, owners with organized activity, and asset management structures that intend to allocate properties to moderate residential rental.
As with the regime applicable to individuals, essential conditions must be met: the contract must be exclusively for housing, the rent must be within the moderate rent limit, and the income must be earned up to December 31, 2029.
This opportunity is particularly interesting for investors considering converting real estate assets for residential rental, provided they accept the rental limits and associated obligations.
New Tax Deductions for Tenants
On the tenants' side, the package increases the annual limit for deducting rent for primary and permanent housing from income tax.
The limit will increase to €900.00 in 2026 and to €1,000.00 from 2027 onwards.
The concrete impact will depend on each taxpayer's tax situation, since the deduction operates within the general limits of the IRS (Income Tax).
Property Transfer Tax (IMT) for Non-Residents: The Impact of the New 7.5% Rate
One of the measures with the greatest impact for foreign investors and non-resident buyers is the creation of a 7.5% IMT tax rate on the acquisition of urban buildings or independent units intended exclusively for housing, when the buyer is a non-resident for tax purposes in Portugal.
In these cases, this rule eliminates exemptions or reductions that might apply under normal circumstances.
However, the legislation provides for two avenues of correction:
- if the purchaser becomes a tax resident in Portugal within 2 years of the acquisition; or
- if the property is used for residential leasing with moderate rent within the legal timeframe and remains leased for the required period.
For the purposes of adjustment based on leasing, the property must be used for moderate-rent residential leasing within 6 months of acquisition and remain leased for at least 36 months, consecutive or intermittent, within the first 5 years.
In these situations, the interested party may request the Tax Authority to cancel the difference between the tax paid at the rate of 7.5% and the tax that would result from applying the normal rates.
The request for annulment must be submitted within 6 months from the date on which the purchaser becomes a tax resident in Portugal or from the date of signing the residential lease agreement with moderate rent, depending on the grounds invoked.
The tax message is clear: the purchase of housing by non-residents for purely occasional use or passive investment becomes more expensive; however, actually moving to Portugal or placing the property on the moderate residential rental market is tax-favorable.
Reinvestment of Capital Gains in Real Estate for Residential Rental
The legislation broadens the logic of excluding capital gains from taxation on real estate to situations of reinvestment in properties intended for residential rental.
Until now, the exemption from capital gains tax was mainly associated with reinvestment in primary and permanent residence. With the new regime, a new opportunity opens up: selling certain properties and reinvesting the proceeds in properties intended for residential rental with moderate rent.
The reinvestment must occur within 36 months of the transfer, and the taxpayer must declare this intention in their income tax return for the year of the sale.
The acquired property must be subject to a residential lease agreement with moderate rent within 6 months of reinvestment or after the realization of the capital gain, if this occurs later, and must be leased for at least 36 months, consecutive or intermittent, within the first 5 years.
Furthermore, the following conditions must be met:
- maintenance of the property within the taxpayer's control during the required period;
- continued respect for income limits;
- Proper communication of lease agreements to the Tax Authority.
If the requirements cease to be met, the benefit may be lost and the previously excluded capital gain may be taxed again, plus compensatory interest.
The system provides safeguards for situations where the failure to comply with the minimum lease period is due to a breach attributable to the tenant, provided that this breach is legally pursued and reported to the Tax Authority in accordance with the legally prescribed terms.
This measure creates a significant opportunity for asset reorganization, but requires prior planning and tax monitoring.
Investment Lease Agreements (ILAs): The New Regime for Investors
One of the main new features of the package is the creation of Investment Contracts for Leasing, or CIA.
CIAs are intended for investors who undertake commitments to construct, rehabilitate, or acquire real estate for residential lease or lease for sublease, within moderate income limits.
These contracts are made with IHRU and can last up to 25 years.
In return, the regime provides a significant set of tax benefits, including, among others:
- exemption from IMT (Property Transfer Tax) on the acquisition of land, buildings or fractions thereof intended for the project;
- Stamp duty exemption on eligible transactions;
- Property tax exemption for up to 8 years;
- 50% reduction in IMI tax rate for the remaining period of the contract;
- reduced VAT rate on construction or rehabilitation contracts;
- AIMI exemption;
- Partial refund of VAT paid on architectural, engineering, design and study services;
- benefits associated with alternative investment schemes with assets covered by CIA.
This regime may be particularly relevant for funds, real estate companies, institutional investors, developers, and public-private partnerships focused on residential leasing.
The counterpart is the existence of duties related to the execution, reporting, monitoring, and maintenance of the allocation of properties for leasing. This is not a tax benefit without commitment: it is a long-term investment scheme, subject to monitoring by IHRU (Instituto da Habitação e da Reabilitação Urbana - Housing and Urban Rehabilitation Institute).
The CIA regulations will take effect from September 1, 2026.
Simplified Affordable Housing Scheme: New Opportunities for Landlords
The decree also approves the Simplified Affordable Housing Regime, which establishes the requirements for qualifying lease and sublease agreements as affordable housing agreements.
This regime applies to contracts intended for permanent residence and, in certain cases, temporary residence, particularly when the tenant has their tax residence in a municipality different from the leased property.
The minimum timeframe is explicitly defined:
- 3 years for affordable rental contracts intended for permanent residence;
- 3 months for contracts intended for temporary residence.
Rent must respect maximum limits defined by type and municipality, based on the median of rent values per square meter, by municipality and type, published by the INE (National Institute of Statistics).
From a tax perspective, contracts that comply with the regime's conditions may benefit from exemption from personal income tax (IRS) or corporate income tax (IRC) on property income.
This is an important measure for landlords who wish to join a simpler affordable rental scheme, with potentially significant tax advantages, and for municipalities that wish to promote local affordable housing programs.
The Simplified Affordable Housing Scheme will take effect from September 1, 2026.
Affordable Housing: Benefits for First-Time Buyers
The package also includes tax benefits for the first purchase of affordable housing intended exclusively for primary and permanent residence.
In certain cases, there may be exemption from IMT (Property Transfer Tax) or the application of more favorable rates, as well as benefits in Stamp Duty.
This measure is primarily aimed at first-time homebuyers and intends to reduce the tax cost of entering the housing market.
The regime must be analyzed on a case-by-case basis, particularly regarding the qualification of the property as controlled-cost housing, its use as a primary and permanent residence, the absence of prior residential ownership during relevant periods, and the specific requirements applicable to the buyer.
IMT Payment Deadline: What Changes in Practice
The decree also introduces a practical change to the payment deadline for IMT (Property Transfer Tax).
The tax can now be paid either on the day of settlement or within the following 30 days, otherwise the settlement will be void.
Although this is not the most publicized measure in the package, it is a relevant change from an operational point of view, especially in real estate transactions that require coordination between the buyer, bank, notary, land registry office and tax authority.
Legal and Tax Considerations Before Benefiting from the New Regime
Despite the opportunities, the new regime requires caution.
First and foremost, it is essential to confirm whether the property falls within the moderate price or income limits.
Secondly, the purpose of the property must be verified: whether it is a primary and permanent residence, residential rental, affordable rental, subletting, or an investment contract for rental.
Thirdly, deadlines are crucial. Delays in sales, in signing lease agreements, in allocating the property to primary and permanent residence, or in submitting applications to the Tax Authority can jeopardize benefits.
Fourthly, the documentation must be prepared from the outset. Contracts, invoices, tax notices, occupancy permits, proof of tax residence, lease agreements and proof of notification to the Tax Authority will be essential.
Fifthly, when more than one benefit appears applicable, it should be analyzed whether there is cumulation, exclusion, or option for the most favorable regime. This analysis is especially relevant between the moderate rent regime, the Simplified Affordable Housing Regime, the CIA (Contract for the Acquisition of Housing) and benefits associated with investment undertakings.
Finally, the benefits must be analyzed on a case-by-case basis, because the loss of eligibility may imply tax adjustments, compensatory interest, and additional settlements.
What do these new measures mean for families, developers, and investors?
The new housing incentive package represents a significant change in the tax framework for the real estate sector in Portugal.
Their logic is clear: reduce the tax burden when the investment contributes to increasing the supply of owner-occupied housing, moderate housing rentals, or affordable rentals; and, at the same time, penalize operations that do not align with these objectives, such as certain housing acquisitions by non-residents without allocation to tax residence or moderate rentals.
More than just a package of tax benefits, the legislation creates a new map of opportunities for those who buy, build, rent, develop, or invest in housing.
The opportunity exists, but it's not automatic. It depends on planning, strict compliance with legal requirements, and legal and tax support from the structuring of the operation onwards.
For families, developers, and investors, the key is to understand from the outset which regime applies, what benefits are available, what deadlines must be met, and what conditions must be maintained over time.
This article does not replace consulting the relevant legislation, nor does it hold Prime Legal responsible.
