Capital Gains Tax on Rental properties

Insights into what is involved in buying, selling & living in Portugal

Owners of holiday rental properties face Capital Gains Tax blow

Two news items relating to the Alojamento Local (AL) registration system for those property owners involved in short-term lettings to tourists further have reduced the chances of anyone registering without being forced to.

Owners who have their AL licence and who later remove their property from the scheme, for whatever reason, then are liable to pay capital gains tax, whether they are selling their property or not.

The current percentage of properties covered by AL registration is a parlous 20% of the estimated total private rental market – a figure the government does not dispute while taking little action to ensure or force compliance.

To collapse the illegal rental market would hit tourism revenue - tourism being the economic sector showing the highest growth and the one that is allowing Portugal to adopt more of a swagger along the corridors of Brussels. The government needs tourists and needs them to spend money and to date has not acted to close the illegal rental market despite claims to the contrary.

For many property owners, the thought of being charged capital gains tax on top of the annoyance and cost of AL compliance is the final straw but those already registered are locked into a CGT charge should they withdraw from the rental market, so have decided to bear the costs of compliance, Social Security payments et al, whether they actually rent out their property or not.

This ludicrous situation, which everyone consider an absurd fiscal mess apaert from the governement, deters those applying for an AL licence to legitimise their property rental income while forcing owners wishing to return their property to private use to carry on.

“This issue of capital gains is one of the biggest obstacles to the legalisation of local accommodation,” said Eduardo Miranda, president of the Association of Local Accommodation in Portugal (ALEP), adding that some owners “keep the registration and do not cancel the activity,” just to avoid triggering a CGT charge which does not qualify for the usual 50% reduction, but is levied at 95% of the gain.

The little-known way around this is to register at Finanças under the category F tax regime where at flat rate 28% is charged but this may not be cost effective for many. A degree of specialist financial knowledge seems to be necessary in a market sector that should have clear rules and simple benefits for those who comply.

On the plus side, the recent amendments to the Alojamento Local registration system, that made it compulsory to gain the approval of other property owners if the property comes under ‘condominium rules’, are likely to be suspended until after the October 1st local elections - or may not be enacted at all.

The government has admitted that it did not bother to talk to everyone that could be affected by the law change and now is well aware that the proposed changes will not help its support at council level.

The revelation on June 2nd that Hortense Martins, a Socialist Party MP with shares in a hotel group, played a key role in developing AL amendments that disadvantage owners of properties under condominium rules, feasibly advantaging the hotel sector, does nothing to present a government that is on top of the Alojamento Local system. (click here)

The Secretary of State for Tourism, Ana Mendes Godinho, is riding on a wave of anyway increasing tourist numbers but has failed to respond to the private rental market’s needs in which the avarice of the tax department has been allowed the upper hand.

The AL system remains an embarrassing muddle with 80% of property ownwers deciding to ignore the rules while pocketing the untaxed cash.

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