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Capital gains tax and Alojamento Local

Many of our clients are operating holiday rental properties under the Alojamento Local (local letting) scheme which has clear requirements for the initial set up and also for the ongoing requirements. Many people do not consider the implications of a future sale of a property that has an AL licence, and this article will explain this.

Selling Your AL Property in Portugal? Beware the Capital Gains Tax Trap

Operating an Alojamento Local (AL) property in Portugal has been a popular investment, offering solid returns from the country’s thriving tourism market. However, many owners are unaware of a significant tax implication that arises not during operation, but at the moment of sale.

Selling a property with an active (or recently cancelled) AL license is treated completely differently by the Portuguese Tax Authority (Finanças) than selling a standard residential home. This distinction can result in a capital gains tax bill that is dramatically—and often shockingly—higher.

This article examines the critical differences in capital gains tax (CGT) between a residential property and an AL property, explains how to mitigate this high tax, and provides a practical example of the calculation.

The Standard Sale vs. The AL Property Sale

The primary difference lies in how the tax authorities classify the asset.

Standard Residential Property (Category G)

When you sell your main home or a second home (without an AL license), the profit is taxed as a capital gain under Category G (Capital Gains) of the Personal Income Tax (IRS) code.

  • Taxable Portion: Only 50% of the net gain is subject to tax.
  • Tax Rate: This 50% portion is added to your other annual income (like a salary or pension) and taxed at progressive tax rates (ranging from 12.5% to 48%).
  • Allowable Costs: You can deduct various costs to reduce the “net gain.” These include:
    1. The original acquisition cost (purchase price).
    2. Inflation coefficients (applied to the purchase price to adjust for inflation).
    3. Property Transfer Tax (IMT) and Stamp Duty paid on acquisition.
    4. Notary and registration fees.
    5. Real estate agency commissions
    6. Proven renovation and improvement costs from the last 12 years.
  • Key Exemptions:
    1. Main Home Reinvestment: If the property is your official main residence (and has been for at least 24 months), you can be fully or partially exempt from CGT if you reinvest the sale proceeds (minus any mortgage) into another main home in Portugal or the EU/EEA within 36 months of the sale (or 24 months prior).
    2. Pre-1989: Properties acquired before 1989 are exempt from CGT.

Alojamento Local Property (Category B)

When a property has an AL license, the Finanças no longer views it as a simple personal asset. It is considered a business asset used for a commercial activity. Therefore, the profit from its sale is taxed under Category B (Business & Professional Income).

  • Taxable Portion: A staggering 95% of the net gain is subject to tax.
  • Tax Rate: This 95% portion is added to your other annual income and taxed at the same progressive tax rates.
  • Allowable Costs: This is another major disadvantage. Under the Category B rules for this type of sale, the deductions for renovation costs, agency fees, and other expenses that are normally allowed under Category G are generally not deductible. The gain is calculated more simply (and punitively) as Sale Price – (Adjusted Acquisition Price).
  • Key Exemptions:
    • The main home reinvestment exemption does not apply, even if you live in the property. The commercial use (AL) disqualifies it.

Practical Example: A Side-by-Side Calculation

Let’s illustrate the difference with a clear example.

Scenario:

  • Purchased Property in: 2015
  • Purchase Price: €300,000
  • Sold Property in: 2025
  • Sale Price: €500,000
  • Inflation Coefficient (for 2015 purchase): 1.19 (This is an official rate set by the government)
  • Allowable Costs (IMT, fees, renovations): €50,000

Calculation 1: As a Standard Residential Property (Category G)

  1. Adjusted Acquisition Price: €300,000 (Purchase) * 1.19 (Coefficient) = €357,000
  2. Net Gain: €500,000 (Sale) – €357,000 (Adjusted Purchase) – €50,000 (Costs) = €93,000
  3. Taxable Gain (50%): €93,000 * 50% = €46,500
  4. Estimated Tax Due: This €46,500 is added to your income. Assuming you fall into a 37% average tax bracket, your approximate tax would be: €46,500 * 0.37 = €17,205

(This tax could be €0 if it were a main home and you reinvested the proceeds.)

Calculation 2: As an Alojamento Local Property (Category B)

  1. Adjusted Acquisition Price: €300,000 (Purchase) * 1.19 (Coefficient) = €357,000
  2. Net Gain: €500,000 (Sale) – €357,000 (Adjusted Purchase) = €143,000
    (Note: The €50,000 in costs are not deducted.)
  3. Taxable Gain (95%): €143,000 * 95% = €135,850
  4. Estimated Tax Due: This €135,850 is added to your income. This large sum would almost certainly push you into the highest tax bracket (48%). Your approximate tax would be: €135,850 * 0.48 = €65,208

Result: In this scenario, the AL license increases the capital gains tax from €17,205 to €65,208—nearly four times the amount.

How to Reduce or Mitigate This Tax

The solution is simple in theory but requires long-term planning.

The only reliable way to avoid the punitive 95% rule is to revert the property’s tax status from a “business” asset back to a “personal” asset before you sell it.

To do this, you must formally cease (cancel) your AL activity with the Finanças. However, this is not an instant fix.

The 3-Year “Cooling-Off” Rule

To qualify for the standard Category G (50% taxable) rules, the property must be sold more than three years after the date you officially ceased the AL activity.

  • If you sell within 3 years of ceasing the AL license: The Finanças will still consider it a sale of a business asset, and the 95% taxable gain (Category B) will apply.
  • If you sell after 3 years of ceasing the AL license: The property is considered a standard residential asset. You can then be taxed under the more favorable Category G rules (50% taxable), deduct all allowable costs, and even use the main home reinvestment exemption if you meet the criteria.

This means that if you are considering selling your AL property, you must plan at least three years in advance to optimize your tax position.

 

Conclusion: Plan Ahead 🗓️

The Alojamento Local license is an excellent way to generate income, but it fundamentally changes the tax nature of your property. While you may benefit from simplified income tax rules during operation, the penalty comes at the exit.

Before you even consider listing your AL property for sale, it is crucial to speak with a qualified accountant or tax advisor in Portugal. They can confirm your property’s status and help you create a long-term strategy—which will almost certainly involve ceasing the AL activity and waiting for the 3-year period to elapse. Failure to do so can lead to a devastating and entirely avoidable tax bill.