Renting Your Home in The Central Algarve
As more and more tourists are visiting the Algarve annually it is worth considering renting your property as a way of reducing the annual costs of owning a holiday home.
It is fair to say that there is little (if any) downside to generating extra income except, of course, the obvious disadvantage that your property is not available to you and to your family and friends 100% of the time. If you are considering renting then there are a number of issues that you need to be aware of in order to avoid any problems with the Portuguese licensing and tax departments.
Rental Licenses (Licença de alojamento local)
The Decreto-Lei n.º39/2008 of 7 March and Portaria 517/2008 25 June states that properties which are rented out, but not licensed as a touristic development, require a Rental Licence. This license is available from the local council (Câmara) which has a number of requirements that need to be complied with but none of which are unduly onerous. The reasoning behind the licencing is to ensure the quality of accommodation for visitors to Portugal meets proper and acceptable safety and hygiene standards. The law has been enforced quite vigorously to date with ASEA (the overseeing body) carrying out spot-checks on rental agents to ensure that all properties that they have available for rent are properly licensed. With so many properties advertised on the Internet for holiday rental it is also an easy task for ASEA to review holiday rental sites to determine properties that are being rented that may not be registered with them.
How to Obtain a Rental License
These are issued, as stated previously, by the local Câmara and we would advise that you instruct your lawyer or property manager to arrange obtaining the proper licence for you. You will need to provide the following papers (may be some small variations from Câmara to Câmara):
- Copy title deeds
- Copy electricity, gas, etc. certificates
- Copy plans of the property
- Health and Safety plan for the property
- Floor plans of the property
- Caderneta predial
- Certidão predial
- Ownership details
You will also need to ensure that the property is equipped with the following and is of a reasonable standard which may be verified by an inspector from the Câmara:
- Fire safety equipment (extinguishers and fire blanket in kitchen)
- Emergency signs
- Connected to all mains utilities or with their own provision in place
- Hot and cold water
- Proper ventilation system (air vents)
- Properly furnished to a reasonable standard
- Proper exterior locks and on bathroom doors
- Adequate changes of linen
- Programme of cleaning
- Complaints book
- First aid facilities (emergency numbers prominently displayed)
- Book detailing rules and regulations of use of the property
- Instruction manuals for appliances
- Proper safety measures around swimming pool
Most of these will already be in place in most properties and, if not, can easily be put in place.
If the property is located in Portugal then Portuguese tax has to be paid on any income generated by the property. This applies even if the owner and the renter are based outside Portugal and if the rental is arranged without the assistance of a Portuguese-based agent
The property owner is legally obliged to file an income tax return declaring the rental achieved during the year. The tax authorities state categorically that letting to holiday makes for less than 30 days is viewed as business activity and must be reported in Category B. Long Term rentals must be reported under Category F. Only when an owner makes a contract with a rental agent may it be taxed under either of the categories but your fiscal rep can explain this in more detail.
The main reasons to comply with this scheme are:
ASAE and the tax authorities are checking rental portals such as AIRBNB, Holiday Owners Direct etc to ensure that properties advertised are legal and owners compliant. Fines are considerably higher for properties advertised without the AL license number.
Tax is considerably lower if you are on this scheme; as a non resident you pay as little as 8.75% tax instead of 28% (this is not a typo!). The tax is even lower for hostels, guesthouses etc where you rent out a single room instead of a villa, apartment etc.
Many expenses can be deducted from the gross income to arrive at the net taxable figure and these include:
- Annual Rates
- Property Management and Cleaning Expenses
- Works & Improvements on the Property
- Condominium Charges
- Changing Designation of Property to Services
If the property is being used for holiday rentals then it is possible to have the property designation at the local tax office changed from 'Habitation' to 'Services' and this usually results in a significant reduction in the Valor Patrimonial (Rateable value) of the property with a resultant reduction in the annual IMI payable on the property. This change can be particularly effective in having the value reduced below the € 1 million threshold for the new tax on properties over that figure.
Here are some frequently asked questions to help you understand a little bit more about renting your property and which you may wish to discuss in more detail with your fiscal rep and or lawyer before you make any final decision:
As a business, will there be complicated accounting / reporting requirements?
No, unless your income is over €200,000 per year, you will be classed on the 'Simplified Regime' and as the name suggests everything will be simple.
What is the Simplified Regime and what expenses can I offset against my rentals?
Most sole traders in Portugal elect to operate under the Simplified regime under which taxpayers cannot deduct professional and business will be computed automatically, based on income.
What is the tax payable on the Simplified Regime?
The effective tax rate on Category B for a non-resident property owner is 8.75% for apartments and villas and 3.75% for hostels etc.
Will I need to be VAT registered?
You will need to be VAT registered but you will benefit from a VAT exemption unless you choose not to be exempt or if your income exceeds €10,000 per year. However as the VAT you charge to holidaymakers is 6% and most of your operating expenses have VAT at 23%, you should be in credit in terms of VAT or have very little VAT liability.
Do I have to pay Social Security Contributions?
Since 1st Jan 2018, the local lodging activity is exempt of Social Security contributions. Bu this only applies where this is your only activity registered with the tax office. If you have other activities then contact your fiscal rep as other full or partial exemptions may apply.
How long does it take to get a rental license?
Registration at the tax office and the application to the tourism office can be completed in a week, and you should have your AL number two days after the application is submitted.
Do I pay Capital Gains if I decide to stop renting?
In most cases no, but it is advisable to see advice from your fiscal repo and or lawyer.
What do I need to report to SEF?
Property Owners need to report to the SEF (Emigration Office) the entry and exit of all guests with non-Portugese nationality.
Remember……………BEFORE making any decisions speak to your Fiscal Rep and/or Lawyer!