Income is reported in different categories: A) Salaries, B) Sole Traders, E) Capital, F) Property, G) Capital Gains and H) Pensions and is taxable in Portugal regardless of its origin. For non-residents, only income actually arising in Portugal is subject to assessment.
Long-term property lets (usually having a rental contract between landlord and tenant) are included in Category F and are reported on “Anexo F” in the filing period between 01April and 30 June. This activity is different from Short-term Holiday Lets which are seen as a business called “Local Lodging” and reported on Annex B - Self-Employment Income.
Rental contracts must now be registered using “Modelo 2”. In addition, each contract is assessed Stamp Duty of 10% based on one month’s rent. With a proper contract, duly registered with Finanças, tenants should be eligible for a housing tax credit. Tax is calculated at a flat rate of 28% (autonomous) or on total income at marginal rates (aggregated).
If you receive payments from Rental Income Guarantees, they are also taxable in Portugal and must be reported in Category G (Capital Gains).
Deductible expenses are now without limit for necessary expenses for conducting the rental activity. As a general rule, expenses related to the structural upkeep are admissible as opposed to those relating to how the dwelling is used. The following are examples of allowable deductions:
- Indoor and outdoor painting;
- Repair / replacement in plumbing or electrical systems;
- Energy and maintenance of elevators and common areas;
- Expenses with doormen and hallway cleaning;
- Insurance premiums for buildings:
- Local taxes such as sanitation and sewage rates and Property Rates (“IMI”);
- Collective property security and other condominium expenses.
Landlords cannot deduct:
- Construction work making structural changes in the property;
- Purchase of furniture and decorations for the dwelling;
- Air conditioning equipment installation;
- Capital improvements, such as extensions or installation of automatic irrigation systems.
When properly documented, capital improvement expenses may enter into the calculation of the taxable base of the building for Capital Gains purposes when the property is eventually sold for up to 12 years before the sale).
Other non-deductible expenses include:
- Furnishings (normally dealt with on the deed of purchase/sale of the property)
- Mortgage costs (also deducted at the sale of the property)
- Utilities (except when included in condominium fee)
Losses may be deducted in subsequent years
If losses incur in conducting the rental activity, they may be written off over six years. This also applies to capital improvements to the property and, consequently, there were losses rather than profits. For this to occur, the building must be leased for at least 36 months, consecutively or not, over the following five years. The owner can do the work in a year when the property is not rented and present the spending up to two years later. However, as always, all expenses must still be documented with proper invoices.
Electronic Rent Receipts
Taxpayers who declare under category F are required to issue electronic rental receipt for all rental income received from their tenants. This receipt is issued through the Finanças website in an online application created for this purpose. Landlords over age 65 may use traditional invoices, reporting annually under “Modelo 44”.
Rental Activity (Category F) is exempt from VAT.
Next: Short-term Lets (Local Lodging)
Dennis Swing Greene is an International Tax Specialist and Chairman of euroFINESCO s.a. www.eurofinesco.com