A New Tax Map for Portugal's Property Market

On 20 May 2026, Portugal enacted Decree-Law No. 97/2026 — the most significant overhaul of the country's housing tax framework in years. For international investors eyeing the Algarve, this legislation reshapes the rules of the game in ways that are both challenging and, for those who plan carefully, genuinely rewarding.

Here is what you need to know before your next move in the West Algarve market.

The Big Change for Non-Resident Buyers: A New 7.5% IMT Rate

The headline measure for foreign investors is the introduction of a 7.5% IMT (Property Transfer Tax) rate on urban residential properties purchased by non-residents. This replaces the previously more favourable standard rates that applied regardless of residency status.

However, the law provides two clear pathways to recover this additional cost:

• Become a tax resident in Portugal within 2 years of purchase — and the difference is refunded.
• Place the property on moderate-rent residential rental within 6 months of purchase and keep it rented for at least 36 months — and the excess IMT is cancelled.

The message from Lisbon is clear: passive holiday-home ownership by non-residents becomes more expensive. Active participation — either by relocating or by contributing to the rental housing supply — is rewarded.

Rental Income at Just 10% IRS — A Major Incentive

For landlords who rent at moderate rates (up to €2,300/month in 2026), the new law introduces a flat 10% personal income tax rate on rental income — well below the standard progressive rates that can reach 48%.

This applies to residential lease agreements signed before 31 December 2029, making the next three years a critical window for investors to lock in this advantage.

For corporate investors and real estate companies, the benefit is equally compelling: only 50% of qualifying rental income is counted for IRC (corporate tax) purposes.

6% VAT on Construction and Rehabilitation

Developers and self-builders get a significant boost: the reduced 6% VAT rate now applies to construction and rehabilitation projects for properties intended for primary residence or residential rental — down from the standard 23%.

For the West Algarve, where renovation projects in villages like Luz, Burgau, and Salema are increasingly popular among international buyers, this is a meaningful reduction in development costs. A €200,000 construction contract, for example, saves approximately €34,000 in VAT under the new regime.

Investment Lease Agreements (CIA): A New Vehicle for Serious Investors

One of the most innovative elements of the law is the creation of Investment Contracts for Leasing (CIA) — long-term agreements (up to 25 years) with Portugal's housing authority IHRU, designed for investors who commit to building or rehabilitating properties for residential rental.

CIA participants benefit from:

• IMT exemption on qualifying acquisitions
• Stamp duty exemption
• Up to 8 years of property tax (IMI) exemption
• AIMI exemption
• Reduced VAT on construction and professional services

The CIA framework takes effect from 1 September 2026 — giving investors a narrow window to structure projects ahead of the launch.

What This Means for the Algarve Specifically

The West Algarve — Lagos, Luz, Burgau, Salema — sits at the intersection of strong demand, tight supply, and now a more nuanced tax environment. The investors who will benefit most from Decree-Law 97/2026 are those who:

• Plan to relocate to Portugal (D7, Golden Visa, or IFICI regime) and establish tax residency
• Are developing or rehabilitating properties for long-term residential rental
• Are structuring investments through organised entities that can leverage the 50% IRC income reduction
• Are building their own home and can benefit from VAT refunds on construction costs

Pure buy-to-holiday-let investors who remain non-resident will face a higher entry cost — but the Algarve's structural supply shortage and sustained price growth (Lagos: +8.8% year-on-year in Q1 2026) means the fundamentals remain compelling.

The Bottom Line

Decree-Law 97/2026 is not a barrier — it is a filter. Portugal is actively rewarding investors who contribute to its housing ecosystem, whether by becoming residents, supplying rental housing, or developing new stock. For the right investor with the right structure, the new law creates some of the most favourable tax conditions in Western Europe.

At VerLuz.Homes, we help international investors navigate exactly these kinds of structural shifts — identifying opportunities in Lagos, Luz, Burgau, and beyond that align with both the new legal framework and long-term value creation.

Sources: Prime Legal — New Housing Rules in Portugal (June 2026) | Algarve Property Market Q1 2026 — SunnySteve