The Portuguese government has approved one of the most significant housing tax reforms in recent years. By reducing construction taxes, encouraging long-term rentals and introducing new incentives for housing investment, the measures aim to tackle the country’s housing shortage while maintaining Portugal’s attractiveness to domestic and international buyers.

Portugal’s housing market has spent much of the last decade balancing two seemingly contradictory realities.

On one hand, the country has become one of Europe’s most sought-after destinations for international buyers, expatriates and investors. Strong demand, political stability, a favourable climate and a high quality of life have helped support sustained growth across much of the residential market.

On the other hand, the rapid increase in demand has exposed structural weaknesses in housing supply. Construction activity has struggled to keep pace with population growth, international migration and changing housing needs, particularly in Lisbon, Porto and other high-demand regions.

In response, the Portuguese government has introduced a new housing tax package that seeks to increase residential supply while reducing fiscal barriers to development and investment.

The package, approved in May 2026, includes measures affecting construction, property taxation, rental income and capital gains. While some provisions have attracted greater public attention than others, the overall objective remains clear: encourage the creation of more housing.

Construction Takes Centre Stage

Among the most significant measures is the reduction of VAT on qualifying residential construction and rehabilitation projects.

From July 2026, certain housing developments intended for owner-occupation, moderate-cost housing or long-term rental markets may benefit from a reduced VAT rate of 6%, compared with Portugal’s standard VAT rate of 23%.

The difference is substantial.

For a residential development with construction costs of €1 million, the reduction can represent savings of more than €170,000. Industry professionals expect the measure to improve the financial viability of projects that may previously have struggled to proceed under existing market conditions.

The government hopes this incentive will accelerate both new construction and the rehabilitation of vacant or underused buildings, particularly in urban areas where housing shortages remain most acute.

A Broader Definition of Affordable Housing

One notable aspect of the reform is the relatively high threshold adopted for what the legislation defines as moderate-cost housing.

Properties with sale prices up to €660,982 may fall within the scope of certain incentives introduced by the package.

This threshold reflects the realities of today’s housing market, particularly in metropolitan areas such as Lisbon, Cascais and Porto, where average residential values have risen considerably over the last decade.

Rather than focusing exclusively on lower-income segments, policymakers appear to have designed the framework to influence a much larger portion of the residential market.

The intention is to encourage developers to build housing at scale rather than limiting incentives to a narrow category of projects.

New Incentives for the Rental Market

Increasing the supply of long-term rental housing is another central objective of the reform.

Under the new framework, landlords participating in moderate-rent programmes may benefit from a reduced taxation rate of 10% on rental income.

The measure represents a significant reduction compared with previous taxation levels and aims to encourage property owners to place additional units on the long-term rental market.

The government has simultaneously introduced a reference threshold of approximately €2,300 per month for qualifying rental contracts in certain locations and circumstances.

While the practical implementation will depend on individual cases, the measure is expected to encourage greater participation from private landlords and institutional investors.

Capital Gains Relief Encourages Reinvestment

Another important component of the package concerns capital gains taxation.

Property owners who sell residential assets and subsequently reinvest proceeds into qualifying housing projects intended for long-term rental use may benefit from exemptions on capital gains taxation.

The measure introduces greater flexibility by allowing reinvestment both before and after the sale of the original asset.

From a policy perspective, the objective is to encourage capital already invested in real estate to remain within the housing sector while supporting the creation of additional residential supply.

For investors, the change could facilitate portfolio restructuring and encourage the redevelopment of existing assets.

Institutional Investors Receive a New Framework

The legislation also introduces Housing Investment Contracts, a mechanism designed to attract larger-scale investment into residential development.

To qualify, projects must allocate at least 70% of their built area to residential use and comply with specific rental requirements.

The measure is widely seen as an attempt to attract institutional capital, including pension funds, real estate funds and professional investors, into Portugal’s housing market.

Similar models have been adopted in other European countries seeking to increase rental housing stock while maintaining affordability.

Impact on International Buyers

While much of the package focuses on increasing housing supply, one measure has generated particular attention among foreign purchasers.

The introduction of a 7.5% IMT rate for certain non-resident buyers represents a notable change in acquisition costs.

However, market participants point out that the broader context remains important.

Portugal continues to offer acquisition costs that compare favourably with several European jurisdictions, while financing remains available to many international buyers through Portuguese banks.

Furthermore, certain exemptions and reimbursement mechanisms may apply depending on the buyer’s circumstances, particularly in cases involving relocation or long-term residency.

As a result, most analysts do not expect the measure to significantly alter Portugal’s attractiveness as an international residential market.

What This Means for the Housing Market

The success of the package will ultimately depend on one key factor: whether it leads to a meaningful increase in housing supply.

If developers respond positively to lower construction taxes, if investors take advantage of the new rental incentives and if capital gains relief encourages reinvestment, the measures could help address some of the structural shortages that have characterised the Portuguese market in recent years.

The government’s approach differs from policies adopted elsewhere in Europe that have focused primarily on restricting demand.

Instead, Portugal is attempting to increase supply through fiscal incentives and targeted investment measures.

For buyers, the implications could be significant.

Greater housing availability generally leads to increased choice, improved market liquidity and a more balanced relationship between supply and demand.

Looking Ahead

Portugal remains one of Europe’s most dynamic residential property markets.

Strong international demand, demographic growth, ongoing urban regeneration and continued investment in infrastructure continue to support long-term market fundamentals.

The new housing tax package represents an attempt to ensure that housing supply evolves alongside that demand.

Whether the measures ultimately achieve their objectives will become clearer over the coming years.

What is already evident, however, is that the government has chosen to place housing policy at the centre of its economic agenda.

For developers, investors and prospective buyers alike, the reforms mark the beginning of a new phase in the evolution of Portugal’s property market.