Rental expenses can be declared on a Portuguese IRS tax return by both tenants and landlords. However, the way in which each party reports rental income or expenses is different.
In this article, we explain how the process works in both cases and how rental payments are treated for IRS purposes.
Rental Expenses and IRS: Everything you need to know
Every year, many tenants and landlords have questions about how to complete their IRS tax return, particularly regarding rental payments.
If you are a tenant, you may be entitled to claim a tax deduction for eligible rental expenses.
If you are a landlord, rental income must be declared as taxable income.
Before explaining how each situation works, it is important to note that two requirements must be met for rental payments to be declared:
- the tenancy agreement must be registered on the Portuguese Tax Portal (Portal das Finanças);
- the agreement must have been entered into under the Urban Lease Regime (RAU) or the New Urban Lease Regime (NRAU).
How should tenants declare rental expenses?
Rent paid for a permanent primary residence may be deducted for IRS purposes.
The deduction corresponds to 15% of the eligible rent paid, up to the annual limit established under the legislation in force.
By declaring these expenses, tenants may increase their available tax deductions and consequently reduce the amount of IRS payable.
In practice, the rental amounts paid should appear automatically on the Portuguese Tax Portal from 15 March, under the section relating to tax deductions.
To declare rental expenses manually, you should complete Annex H of the IRS Model 3 tax return, specifically Box 6C.
If you choose to use the pre-completed tax return, these amounts should already appear automatically.
When completing the form manually:
- under Expense Code, select 654;
- under Taxpayer, enter your Portuguese tax identification number (NIF); and
- under Amount, enter the total rent paid.
The property itself must then be identified in Box 7 of Annex H by completing the following fields:
- Type of expense: select code 05;
- Parish (Freguesia): enter the parish code where the property is located;
- Property type: choose whether the property is omitted, rural or urban;
- Property registration number (Article): enter the property’s article number;
- Unit/Fraction: enter the relevant property fraction, where applicable;
- Taxpayer: enter your own NIF;
- Tenant’s NIF: leave this field blank;
- Landlord/Lessor’s NIF: enter the landlord’s tax identification number, which can be found in the tenancy agreement.
How should landlords declare rental income?
As mentioned above, rental income must be declared as taxable income by landlords.
There are two possible ways to report this income.
The most common approach is to classify rental payments as property income, which must be declared using Annex F of the IRS tax return.
However, if the landlord is registered as a sole trader (empresário em nome individual) and issues invoices or invoice-receipts as part of their business activity, the rental income may instead be declared as business or professional income, using Annex B.
How Is Rental Income Taxed?
Rental income is generally taxed at a special flat rate of 28%.
However, this rate may be reduced where the tenancy agreement has a duration of two years or more.
As a general rule, the longer the contractual term of the lease, the lower the applicable tax rate, with reductions that may reach up to 10 percentage points, subject to the conditions established under Portuguese tax law.
Conclusion
Declaring rental income or rental expenses correctly is essential to ensure compliance with Portuguese tax rules and to benefit from any available tax deductions.
Because the appropriate tax treatment depends on each taxpayer’s individual circumstances, it is advisable to seek advice from a certified accountant before submitting your IRS return. This will help ensure that your declaration is completed accurately and in accordance with the applicable legislation.