The measures approved by Decree-Law No. 97/2026 of 20 May, now subject to rectification, cover virtually every stage of the housing cycle—from construction to leasing—and seek to reduce the tax burden borne by those investing in or acquiring residential property.
Capital Gains Tax Exemption (Personal Income Tax – IRS)
The Decree-Law introduces an exemption from taxation on capital gains arising from the sale of real estate carried out between 2026 and 2029, provided that the proceeds are reinvested in the acquisition or refurbishment of properties intended for residential rental at moderate rents (up to EUR 2,300 per month).
The reinvestment must take place between 24 months before and 36 months after the disposal of the property. The taxpayer’s intention to reinvest must be declared in the personal income tax return for the year in which the sale takes place.
The measure applies to transfers completed between 1 January 2026 and 31 December 2029.
Reduced VAT Rate for Housing Construction
One of the most significant measures introduced by the Decree-Law is the application of the reduced VAT rate of 6% to construction works relating to owner-occupied primary residences, provided that the statutory requirements are met.
The reduced VAT rate applies to construction, and urban rehabilitation works intended either for owner-occupied permanent housing or for residential rental at moderate rent levels.
For properties intended as the purchaser’s primary residence, the reduced VAT rate applies, among other requirements, where:
- the sale price does not exceed the upper threshold of the second bracket of the Portuguese Property Transfer Tax (IMT) table (currently EUR 660,982); and
- the sale takes place within 24 months from the issuance of the documentation certifying the commencement of the property’s use.
For properties intended for residential rental, the reduced VAT rate applies provided, among other conditions, that:
- the monthly rent does not exceed 2.5 times the national minimum monthly wage applicable in 2026 (currently EUR 2,300, subject to future updates by Ministerial Order);
- the first lease agreement enters into force within 24 months from the issuance of the documentation certifying the commencement of the property’s use; and
- the property remains leased for at least 36 months, whether consecutive or non-consecutive, during the first five years following the commencement of use.
The reduced VAT rate:
- applies to construction and rehabilitation works relating to urban development procedures initiated between 25 September 2025 and 31 December 2029, provided that VAT becomes chargeable on or after 1 January 2026; and
- will remain in force until 31 December 2032.
The purpose of this measure is to reduce the overall cost of constructing new housing, facilitate residential construction by private individuals and encourage an increase in housing supply. The Decree-Law also establishes monitoring mechanisms to ensure that the properties benefiting from the reduced VAT rate are effectively used as intended.
Partial VAT Refund for Self-Build Housing
The Decree-Law also introduces a regime allowing individuals to obtain a partial refund of the VAT incurred on construction works relating to their own primary residence, provided that the statutory requirements are fulfilled.
This innovative measure is intended to reduce the financial burden on individuals who choose to build their own homes.
More Favorable Taxation of Rental Income
The Decree-Law amends the Portuguese Tax Benefits Code by introducing a new regime under which certain rental income derived from residential lease agreements may benefit from an autonomous IRS tax rate of 10%, provided that the statutory rent limits and all other legal requirements are met.
In particular, the monthly rent must not exceed 2.5 times the national minimum monthly wage applicable in 2026 (currently EUR 2,300 per month, subject to future updates).
This measure aims to encourage landlords to place more residential properties on the rental market at affordable rent levels.
For tenants, the most significant change is the increase in the annual personal income tax deduction for residential rents paid:
- EUR 900 in 2026; and
- EUR 1,000 from 2027 onwards.
Strengthening Incentives for Real Estate Investment
The Portuguese Tax Benefits Code also establishes a more favorable tax framework for collective investment vehicles investing in residential property by reinforcing the regime provided for in Article 24-A.
Under this regime, income distributed to investors may benefit from partial tax exemptions, with the applicable percentage increasing according to the proportion of qualifying residential assets held by the investment fund.
The objective is to channel additional private capital towards residential housing projects and increase housing supply.
Investment Contracts for Residential Leasing (CIA)
The Decree-Law also creates the Investment Contracts for Residential Leasing (Contratos de Investimento para Arrendamento – CIA), through which the Portuguese State may grant tax incentives to construction, rehabilitation or acquisition projects intended for residential rental purposes.
The tax benefits may remain in force for a period of up to 25 years, subject to investors complying with several conditions, particularly regarding the use of the properties for residential rental and compliance with maximum rent thresholds.
New Simplified Affordable Rental Scheme
The Decree-Law also introduces the Simplified Affordable Rental Scheme (Regime Simplificado de Arrendamento Acessível – RSAA), aimed at simplifying the execution of residential lease agreements with rents falling within the statutory thresholds, reducing administrative procedures and promoting long-term residential leasing.
The scheme grants a full exemption from Personal Income Tax (IRS) and Corporate Income Tax (IRC) on rental income derived from leases qualifying as “affordable rental”, provided that the rent does not exceed 80% of the median price per square metre applicable in the municipality where the property is located.
What Does the Rectification Declaration Change?
The recently published Rectification Declaration No. 26/2026/1 does not amend the substance of the tax measures introduced by the Decree-Law. Instead, it corrects drafting errors, legislative references and cross-references contained in the original text.
The main corrections include:
- the inclusion of the reference to the “5% to 10%” range in the table concerning the partial tax exemption applicable to certain real estate investment funds;
- the correction of the legislative reference relating to the sublease regime;
- clarification of the rules applicable to co-ownership situations;
- corrections to legislative cross-references concerning the Investment Contracts for Residential Leasing regime; and
- improvements to the wording regarding the updating of maximum rent thresholds.
Conclusion
Decree-Law No. 97/2026 represents one of the most significant recent tax reforms in the Portuguese housing sector, introducing measures aimed at reducing construction costs, encouraging real estate investment, increasing the supply of residential rental housing and creating new incentives to facilitate access to housing.
The Rectification Declaration No. 26/2026/1 does not alter the scope of these measures but enhances legal certainty by correcting technical drafting errors and legislative references.
Our Tax and Real Estate teams remain available to assess the impact of these measures on real estate transactions, investment projects and the specific circumstances of both individuals and businesses.