Portugal Approves Major Housing Tax Reforms

- The approved housing package is part of a broader government strategy called "Construir Portugal" (Build Portugal), which aims to increase the housing supply at affordable prices. The estimated cost of the measures is between €200 and €300 million, an amount Finance Minister Miranda Sarmento described as "difficult to estimate" because it depends on public uptake. - A key component of the reform is the reduction of VAT to 6% on construction and rehabilitation of properties intended for sale as permanent residences or for the rental market with "moderate rents". This reduced tax rate applies to homes priced up to €648,000 or with monthly rents up to €2,300 and is set to remain in effect until 2029. - For landlords, the income tax (IRS) rate on rental income from properties with moderate rents (up to €2,300/month) will be significantly cut from 25% to 10%. Additionally, tenants will see their income tax deductions for rent expenses increase to €900 in 2026 and €1,000 in 2027. - The package also introduces a flat 7.5% Municipal Property Transfer Tax (IMT) for most non-resident buyers, a measure intended to moderate foreign demand. However, exemptions exist for non-residents who become tax residents within two years or who place the property on the long-term rental market under specific conditions. - This legislation follows the controversial "Mais Habitação" (More Housing) program from the previous government, which included contentious measures like suspending new licenses for short-term rentals (Alojamento Local) and a proposal for the forced leasing of vacant homes. - The approval process in parliament was fast-tracked by the minority AD administration, bypassing the usual committee stage and preventing opposition parties from tabling amendments. The bill was approved with votes from the Social Democratic Party (PSD), CDS-PP, and the Liberal Initiative (IL), while the Socialist Party (PS), Livre, and others voted against it. - Portugal has been grappling with a severe housing crisis, with housing costs soaring by 78% between 2012 and 2021, more than double the EU average. In early 2025, the country recorded the highest year-on-year increase in housing prices across the European Union at 16.3%. - To further boost supply, the government plans to auction 16 state-owned buildings in Lisbon and Porto and has secured a €1.34 billion credit line from the European Investment Bank to help finance 12,000 affordable housing units. The 2026 State Budget allocates nearly €1.2 billion to the national housing and rehabilitation institute (IHRU).