When you’re packing up your life and moving to a place as beautiful as Lagos, Algarve, you’re looking for sun, peace, and financial clarity. You’ve navigated the visa process (maybe the D7 or even the old Golden Visa route), bought a stunning home, and now you’re ready for the next chapter—perhaps downsizing or releasing equity for that long-awaited travel fund.
The last thing you expect is to find a massive, crippling tax problem hiding in a forgotten piece of paperwork from five years ago. I’ve seen it happen, and it’s heart-stopping. I call it the Alojamento Local (AL) Tax Trap.
The Knowledge Drop: The AL Tax Trap and the 95% Problem
My job is to be the expert friend who tells you the uncomfortable truth. I recently worked with an American couple—let’s call them the Skippers—who were ready to cash in on five years of Lagos appreciation. Their plan was simple: downsize, release the equity, and use the cash to go “Spending the Kids’ Inheritance” (SKI) on world cruises. Great plan. Catastrophic tax trap waiting to happen.
Here’s the deal: They had converted a spare room into a short-term rental (AL) when they first moved to Portugal but hadn’t used the license in years. They assumed that because it was their permanent residence (their Habitação Própria e Permanente), they’d pay capital gains tax like a normal resident, which is currently applied to only 50% of the profit (Official Finanças Portal, IRS Code).
The Reality Is Brutal:
Due to that active Alojamento Local license, the Portuguese Tax Authority (AT) was ready to treat their home sale not as a personal residence sale, but as the sale of a business asset.
- Normal Resident Sale: Capital gains taxed on 50% of the profit.
- AL Registered Sale (Business Asset): Capital gains taxed on 95% of the profit (IRS Article 9-1, Category F).
For the Skippers, their substantial profit would have had 95% of the gain added to their annual income. This would have pushed them into the highest progressive IRS rate, potentially up to 48%. Their entire equity release goal—their whole “cruise fund”—would have been wiped out by an immediate, crippling tax bill. That’s a potential €200,000 surprise.
The Mindset Shift: Your Lawyer is Your Title Insurance
If you’re moving from a Common Law jurisdiction (like the US, UK, or Canada), you’re used to two things: speed and Title Insurance. You pay a premium, and a large insurance company guarantees your property’s title is clean.
In Portugal, we don’t do that. Your lawyer is your title insurance.
The reason the Skippers’ problem was caught is that we insist on deep, professional Due Diligence. We don’t just check the Certidão de Teor (the Legal Registry) and the Caderneta Predial (the Tax Record); we look at the official registrations, the permits, and the full history of the property’s use with the Lagos Câmara Municipal planning laws and the Official Finanças Portal.
- Challenge Your Assumption: Don’t assume that because you stopped renting out your property, the license is gone. It must be formally cancelled with the Câmara and the Tax Authority.
- Trust the Expert: This is why you must have an expert, experienced real estate lawyer working for you—not the bank or the seller. A good lawyer prevents the surprise; a great lawyer knows exactly where to look for this specific AL time-bomb (Law Firm Source).
Agent’s Actionable Advice: How to Fix It (The Sunny Steve Correction)
When we found the issue, we told the Skippers to pump the brakes. This wasn’t a selling problem; it was a paperwork and timing problem.
Here’s the strategic advice we gave them—and what you need to know if you’re planning to sell your property in the Western Algarve:
- Immediate Cancellation: Formally cancel the Alojamento Local license with the Câmara and the Finanças immediately. Get the official proof of cancellation.
- The 3-Year Wait: The tax law is clear. If a property is sold while registered for AL, or within 3 years of its cancellation, the tax is still levied on the higher 95% business ratio. You need to wait three full years from the date of cancellation for the property to fully revert to its status as a simple main residence (Official Finanças Portal, IRS Code, Article 9-1).
- The Ultimate Payoff (Exemption): By waiting, the capital gain is taxed on the normal 50% ratio. But here’s the ultimate win for Portuguese Tax Residents: You can then use the full sale proceeds to purchase a new, smaller main residence in Lagos or elsewhere in the EU/EEA. The portion of the gain that is reinvested is then completely exempt from taxation. This is how you legally and safely release equity!
I’ve seen people rushing the process only to pay a fortune in tax. Living here in Lagos, I know that life moves at a different pace—the sun is warmer, the pace is slower, and sometimes, the most profitable move is the one that requires a little patience.
Conclusion & Next Steps
Don’t let an old piece of business paperwork turn your retirement cruise fund into a massive tax liability. Selling your property in the Algarve should be a profitable, liberating experience. It requires meticulous planning and a deep understanding of the specific interactions between property use and tax law.
If you’re planning to downsize, upgrade, or release equity, don’t trust surface-level advice. Let me and my team help you structure your sale for maximum financial benefit, ensuring the tax structure supports your ultimate lifestyle goal.
Ready to plan your move or sale in the Western Algarve with confidence? Contact me today for a private consultation to protect your equity.
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