Income received by a resident is broken down into different categories: A) Salaries, B) Self-Employment, 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.
5) Rental Income – Long-Term Rentals (Category F)
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 second filing period in May. 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.
A contract is required by law when the rental period exceeds six months. With a proper contract, duly registered with Finanças, tenants should be eligible for a housing tax credit, much as they would as if they were paying a mortgage.
On ‘Anexo F’ of the IRS Individual Income Tax Return, you report your fiscal number, registration details regarding the property, the total amount of invoiced income as well as any deductible expenses. Finanças will add the net to other sources of income, such as pensions, interest, etc. Tax is calculated at a flat rate of 28% or on total income at marginal rates. 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
The main categories of deductible expenses that reduce notional or actual rental taxable income for tax purposes are:
▪ Maintenance, such as interior and exterior painting;
▪ Repairs, such as plumbing or electrical parts or repair;
▪ Condominium charges and, in apartment buildings, collectively shared expenses such as: doorman and common area cleaning costs; building security; elevators maintenance; energy for lighting, heating and air conditioning of common areas;
▪ Rates (‘IMI or Municipal Property Tax’) and municipal charges, such as sewage disposal, rubbish collection, etc; and Homeowner’s Insurance
Non-Deductible Expenses
The following expenses are examples of expenditures which are not deductible:
▪ Construction altering the structure of the building (additions, new roof, pool, etc)
▪ Land or building acquisition
▪ Installation of air conditioning
▪ Capital improvements, such as installation of irrigation systems, etc.
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.
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)
Invoices (‘Faturas’)
You must be able to substantiate any amounts declared with proper invoices. Portuguese law stipulates that all documents must be kept for the following five years in the event of a tax audit.
VAT
Rental Activity (Category F) is exempt from VAT.
By Dennis Swing Greene
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Dennis Swing Greene is Chairman of the Board and International Fiscal Consultant for euroFINESCO s.a. | www.eurofinesco.com
