Buying a property in general should be for your own private use, at least that was the main reason for buying in the past.
Over the past 20 years, due to rise in rental and property prices, many (taking advantage of cheap money) shifted their focus, and the phrase “Buying to Let” has become a well-known slogan For instance, if you have cash of 300K, you could place it on a one-year deposit.
Suppose you get 2,5% gross interest from the bank, one has to remember that tax has to be paid. In fact the bank deducts the tax when the interest matures.
Tax applicable to interest on deposits
Interest paid by credit institutions on current or time deposits is subject to the payment of taxes.
If the depositor is a natural person, the personal income tax rate (IRS) applies:
- 28% for natural persons with tax residence in mainland Portugal and Madeira;
- 22.4% for natural persons with tax residence in the Azores.
In the case of companies, the corporate income tax rate (IRC) applies:
- 25% for companies with tax residence in mainland Portugal and Madeira;
- 20% for companies with tax residence in the Azores.
As you can see as an individual you have to pay 28% Capital Gains Tax so only 1,8% Net is left.
Another option is to consider rentals, which can be categorized as shortterm, mediumterm, or long-term. Short-term rentals are those lasting less than 30 days, medium-term rentals range from 1 to12 months, long-term rentals are fixed for 1 to 5 years While short-term rentals may yield the highest returns, they also entail significant hassle. Some people offer daily rentals, but most will not accept bookings for fewer than 5 days. Changeovers require efficient logistics, which can be challenging in the peak season. Additionally, governments are cracking down on short-term rentals as they jeopardize housing market for first generation buyers.
Another option to consider is purchasing at low cost, renovating or improving the property, and then selling it a higher price. Let us use the same figures.
Suppose you can buy something for € 175.000, 00 and have total budget of € 300.000, 00.
Buying cheap of course is essential. But if you buy through an estate agent please realise that in general 5%+iva will go to the agent which is over € 10.500, 00. Additional cost are:
- Transfer tax I.M.T. (gliding scale). In this case € 3.428,85
- Stamp duty (I.S) which is 0,8% = € 1.400, 00
- Title Deed (Escritura) around € 500, 00
- Registration (Registo) about € 250, 00
- Legal Fee (Advocado normally 1% + IVA = € 2.152, 50
This brings the total purchase cost already to € 182.731, 35 (In this case only 4,5% on top)
Suppose you spend € 40.000, 00 in doing the place up (including IVA), which brings the total investment to € 242.731, 35.
In the above case, I assume that no planning consent from local town councils is required, as no structural changes will be made. However, if approval is needed, you may face a lengthy and costly process involving architects, potentially resulting in a of one to two years before commencement.
Supp you can sell for €300,000.00 through an estate agent, which costs €18,450.00, bringing gross profit to €281,550.. You are allowed to deduct part of the additional purchase expenditure, amounting to €5,578.85. C.G.T. must be paid. In this case, the gross profit before taxes is €33,239.80. The tax (IRS) to be paid depends on whether you are a or Non-Resident. If you are a Resident, the gain will be added to your income. If you are a Non-Resident, you will have to pay €7,777.02, resulting in a net profit of €25,462.78.
It is likely less profitable than one might have initially anticipated
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