Welcome to the heart of the Western Algarve, where the sun shines bright and the property market continues to evolve. At Sunny Steve Real Estate, our priority is to ensure our clients—whether seasoned investors or first-time buyers—are fully informed about the latest legal and fiscal developments.
The State Budget Proposal for 2026 (OE2026), presented to Parliament in October 2025, acknowledges the national housing crisis and introduces significant measures to boost supply, particularly in the rental sector. While these measures are not yet law, their proposed impact on the Lagos and Western Algarve property landscape is clear.
🔑 Key Impacts for Buyers: The Cost of Acquisition Changes
The OE2026 introduces targeted adjustments to the Municipal Property Transfer Tax (IMT), the tax paid by the buyer upon acquisition. These changes create a distinct split in acquisition costs.
1. Increased Cost for Non-Resident Buyers
The most talked-about proposal is the increase in IMT for non-resident buyers (excluding Portuguese emigrants).
- The Goal: This measure is designed to curb speculative demand, particularly in high-pressure areas like the Algarve coast, and to slow property price inflation.
- The Impact: For international buyers purchasing a holiday home or an investment property, the upfront acquisition cost will rise. The exact surcharge rates have yet to be confirmed, but this policy signals a departure from past universal tax treatment.
- Our Advice: If you are a non-resident contemplating a purchase, it is imperative to consult a tax advisor now to model the potential effect on your total investment. We recommend acting strategically before the final law is voted on in November.
2. Relief for Young and Domestic Buyers (IMT Jovem Expansion)
In contrast to the non-resident changes, the government is making it easier for younger permanent residents to enter the market.
- The Change: The IMT Jovem scheme for first permanent homes is updated, increasing the tax-exempt threshold to approximately €330,500. The maximum bracket for a total exemption from IMT and Stamp Duty (IS) has increased, reflecting recent house price appreciation.
- The Impact: This will likely fuel demand for smaller, entry-level properties in the lower-to-mid market—apartments and townhouses in Lagos and surrounding towns such as Luz, Alvor, and Odiáxere.
💰 Key Impacts for Sellers & Property Owners: Incentivising Long-Term Rentals
The budget introduces compelling tax incentives to mobilise properties away from short-term tourism into the long-term rental pool at “moderate prices.”
1. Capital Gains Tax Exemption on Reinvestment
This is one of the most powerful proposed incentives for existing owners:
- The Change: Sellers who reinvest the proceeds from a property sale into other properties designated for ‘moderate’ price rental will receive an exemption from IRS Capital Gains Tax.
- The Opportunity: This significantly broadens the existing capital gains exemption, which previously only applied to reinvestment in a primary private residence. For sellers keen to secure an investment property in the Algarve, this offers a highly attractive, tax-efficient route to restructuring their portfolio.
2. Radical Reduction in Rental Income Tax
To further encourage long-term rentals, the tax on rental income (IRS) is being dramatically lowered for compliant leases:
- The Change: The autonomous IRS rate on rental income for contracts agreed at “moderate prices” (up to €2,300 per month, is proposed to drop from the current 25% to just 10%.
- The Impact: This massive reduction in the tax burden fundamentally shifts the economics of long-term letting in the Algarve, potentially making it a much more profitable option than short-term Alojamento Local (AL) in some instances. Property owners and investors with vacant properties or short-term rentals that fit the ‘moderate rent’ criteria should urgently model their yields under this new tax rate.
🗺️ Market Outlook for Lagos and the Western Algarve
These legislative changes will create a push-and-pull effect on our local market:
- Middle Segment Competition: The IMT Jovem expansion combined with favourable mortgage rates (which are currently predicted to continue to fall into 2026) will increase competition in the middle-market segment (€200,000 to €450,000), particularly for apartments in Lagos and Portimão.
- Luxury & Premium Stays Strong: The luxury segment—high-end villas with ocean views in prime locations like Porto de Mós or Praia da Luz—is expected to remain robust. While non-resident buyers face higher IMT, the appeal of the Algarve lifestyle and the strong potential for capital appreciation still outweigh this cost for many international clients.
- Rental Strategy Revolution: The most significant impact will be on the rental market. Owners of smaller units (T1s and T2s) that can qualify for the “moderate rent” designation now have a powerful financial incentive to opt for long-term tenancy, potentially easing the supply crisis for local residents.
Your Next Step: Seek Expert Guidance
The OE2026 measures represent a clear policy direction: support for local buyers and the long-term rental market. The complexity lies in defining terms like “moderate prices” and understanding the final version of the IMT surcharge.
At Sunny Steve we work hand-in-hand with the region’s best tax consultants and legal experts, ensuring you navigate every detail of Portuguese real estate law, including the intricacies of the IMT, IMI (Municipal Property Tax), and Capital Gains Tax rules.
Whether you’re selling a villa, transitioning an AL property, or buying your dream home in the Algarve, our team is ready to provide the most accurate, up-to-date guidance.
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