Purchasing your home in the sun

Buying a house, or apartment, in Portugal is really quite a simple matter, and once a transaction is completed, the new owner can rest assured that everything is "above board" and those contracts are legal and binding.
In fact, it would be possible for the layman to organise the paperwork, without the need to use a lawyer or solicitor, although this method is not recommended if you are buying for the first time in Portugal by your own. Sometimes, the paperwork can take several months, and the various departments involved can be rather slow, although this is not always the case. There are instances where a purchase, including a mortgage, has been completed in two weeks, but this result may well depend on knowing the "right people".
It may not be necessary to contract a lawyer directly, as many estate agents, like us, will be able to offer, as part of their service, a legal representative, who is aware of local requirements and conditions. Your estate agent must carry out all the necessary work.
Must buyers will have found their property through a local estate agent, and it is best to get them to do as much of the paperwork as possible.
Obviously we all are selling "on commission", (we charge 5%, legal services included) so check if their legal service is provided as part of the price, or, if offered as a separate service, ask for a quote. Once you have made an offer for the property, a promissory contract will be drawn up and you will be asked to pay a deposit, (usually 10% of the agreed price). If, after signing the contract, you drop out the deal, your deposit will be "lost", and if the vendor retracts, he will be obliged to return twice the deposit.
If you do take the risk of buying property from the "nice" man you met in a local "tasca", get a good lawyer to make the property searches, you do not want to get caught up in a family feud, where relatives come demanding their "share" of the sale from you, after you have already moved in to the house.
Do not get carried away with the holiday fever that makes you do things that you would never dream of doing at home.
Property laws in Portugal are much the same as anywhere in Europe, so be wise, and consult the professionals before making any decision about purchasing your home in the sun.

Buying land in the Algarve

The witty but wise saying that the THREE golden rules for choosing real estate are: (1) location (2) location and (3) location is now a universal proverb in the business and is applicable just as much in the Algarve as anywhere else in the world.
Some property hunters favour a rustic setting and it is logical that land in countryside situations, isolated from most amenities, and facilities is obviously cheaper than in prime locations such as Quinta do Lago or Vale do Lobo with its secure environment and high standard of infrastructure.
There are, of course, idyllic spots tucked away in the hills and inland but if you are thinking of buying a plot to build your dream home outside of an urban development you should be very cautious as there are a number of pitfalls which you are likely to encounter unless you are extremely well advised by an expert and, preferably, you possess a good knowledge of the Portuguese language. It is by no means an uncommon occurrence for the purchaser of a nice plot in the countryside to complete the deal and then discover that the land is not eligible for construction because it forms part of the green zone allocated by the plano director municipal.
Many owners of land, mainly Portuguese, often produce evidence of planning permission for a certain plot which was granted many years ago and are convinced that it is still current or would be renewed automatically on application but this is NOT necessarily the case as permission to build is not automatically renewed or updated each year. Sometimes the boundaries of a plot are not clearly defined and, even if they are, the purchaser of the land may find that long established neighbours have a totally different idea of the boundaries and claim what they may well have been using for numerous years. Having a shepherd, his dogs and a flock of sheep wandering past your front door every day might not be the idea you had in mind when you planned tranquil, bucolic days in the 'real' Algarve.
Another problem often encountered is access to the plot, in more remote isolated country regions you can never be sure what will be built near your property which will adversely affect your quality of life and the value of the property. The territorial invasion of motorways, erection of antennae for mobile telephones and other properties, have all blighted life for some property owners in the country who were unaware of the possibility of their sudden appearance at the time of purchasing their plot.

Building costs

Building costs have climbed significantly since 1997 due to an increased demand for builders in the central Algarve. In Portugal such costs are usually quoted in m² of covered construction. But care must be taken because this can be confusing. Are the terraces included or not? What about the garage and the swimming pool? Does the quotation include garden design and layout? Is VAT (IVA in Portugal) included or does it have to be added?
The most sensible thing to do is to request a quotation that is clearly broken down into various sections so that you can see exactly what is included and what will have to be added. Clearly, the overall cost will vary according to the quality of materials used, the standard of fixtures, fittings and finishing you select, as well as the size of the villa. Once your architect has worked out all the details of a villa, the full set of drawings should be sent to a selection of builders who will then submit their quotation.
Quotations can vary tremendously. For the same villa, prices may range from PTE 120 million up to PTE 230 million. This is mainly due to the particular circumstances of the builders at the given time. One builder may be desperate, for example, to get a new contract while another may be so busy that he would only be prepared to take another villa on if the price is attractive to him. The trouble is that desperate builders are desperate for a reason. Why do they not have work? It is always a good idea to ask the builder to show you examples of his work and to ask for references.

Property taxes

A professional tax adviser should be consulted to obtain comprehensive advice relating to each specific case. However, below are a few general guidelines, when purchasing a property in Portugal the following taxes may be applicable:
PROPERTY TRANSFER TAX (SISA)
LOCAL AUTHORITY TAX (Contribuição Autarquica)
INHERITANCE AND GIFT TAX
INCOME TAX (IRS)
Please note in the above list that only the local authority tax is applicable in the case of a property being offshore-owned (unless there is a rental income), as the transfer of ownership is made by means of transferring the shares of the offshore company.

Property transfer tax (sisa)
If you purchase any kind of real estate you will have to pay the property transfer tax before signing the notarial deed (escritura). Agricultural plots are taxed at 8% and building plots at 10% of the declared purchase price. All residential buildings, including apartments, have their property transfer tax levied according to the purchase price as specified in the notarial deed (escitura) or to their registered value, whichever is the highest. The tax brackets are changed annually by the government treasury and there are significant differences in the tax payable between price bands at lower levels. Nowadays, most properties will fall into the highest bracket (over PTE 31.5 million) at 10%.

Local authority tax (Contribuição Autarquica)
In addition to the official registration in Portugal (registo predial) properties are also registered in the finance department at a certain fiscal value. A copy of this registration (caderneta predial) can be obtained by the property owner. The caderneta predial consists of a plot description and the taxable value (valor tributavel) on which the local authority tax is calculated at 0.8% for agricultural land and, depending on the municipality, from 0.8% to 1.3% for residential properties. It is important to note that the local authority tax is payable in two stages, 50% at the end of April and 50% at the end of September. It is invoiced in arrears which means, for example, that on the 30th of September 2000 the 2nd instalment of the local authority tax is due for the year 1999.

Inheritance and gift tax
There is no specifically named inheritance or gift tax in Portugal. However, gifts and inheritances are subject to taxation and regulated in the property transfer tax code (codigo do imposto municipal de sisa e do imposto sobre as sucessões e doações). The level of tax payable depends on the declared amount to be inherited as well as on the inheritor's relationship with the deceased. To give an example; for an inherited property with a registered value of GBP 100,000 the children of the deceased would be taxed at 14% whereas non-related heirs would have to pay 36%. If the registered value is GBP 200,000 or more the tax rates would go up to 23% (children) and 50% (non-related heirs). All relatives other than children would be taxed at a rate between the two.

Income tax (rental income)
This refers to the rental income from private villas and apartments. This income is subject to income tax within the relevant tax brackets. However, if such income is below PTE 2 million, a rate of 15% is applied and normally immediately deducted by the rental agency (retenção na fonte). Expenses for management and maintenance as well as the local authority tax (contribuição autarquica) are deductible.

Income tax (capital gains tax)
This tax is applied to only 50% of the profit from the sale of a property and is subject to income tax within the relevant tax brackets. It is based on the difference between the original purchase price and the proceeds from the disposal of a property. This tax is only applied to properties purchased after January 1st 1989. Capital gains tax is not charged if the profit is reinvested in a private residential property within a 24 month period. This could be for construction, renovation or purchase of a villa or apartment.

Property purchasing procedures

The purchase of property in Portugal is relatively straightforward provided the ownership of the property is clear and the purchase laws are strictly adhered to. In the countryside it is not unusual, for example, to find a plot of land or farmhouse owned by a number of relatives who inherited it and only half of them want to sell. Happily, this situation never occurs in Quinta do Lago and the purchase of a plot or a villa is normally as easy as clockwork. All of the properties in the resort are well documented. The oldest villas were built approximately 25 years ago and many are only a few years old.
The purchase process, if it doesn't involve an offshore company, has 2 stages:

Preliminary or promissory contract
(Contrato Promessa de Compra e Venda)

This is a legally binding contract between both parties, provided that all signatures are verified by the local notary. Upon the signing of such a contract the purchaser pays a deposit which is normally 10% of the agreed purchase price. This is a non-refundable deposit unless specifically stated to the contrary in the contract. If the buyer breaks the contract he loses the deposit. Likewise, if the seller should default he is legally obliged to return the deposit plus compensation which is normally equal to the deposit paid. It is perfectly acceptable for the buyer or seller to request copies of the promissory contract translated into their mother tongue. This contract covers a number of key points which include the following:

Confirmation of the exact identity of the buyer and the seller
Exact description of the property
Confirmation of the clear title of ownership
Agreement for a deposit to be paid and the terms if the contract is broken
Confirmation of the official validity of the contract
Confirmation of the completion of sale date
Before this promissory contract is signed the vendor has to produce all the relevant paperwork relating to the property for the buyer or his lawyer. All of these documents then have to be checked and searches made to verify the information. These include the relevant extract from the local land register, an up-to-date copy of the caderneta predial for the payment of rates, and the habitation license, which confirms that the property has a residential licence.

Escritura
The second stage is the escritura which is the official document of the transfer of the property. This has to be signed in the office of the official notary who checks all of the documents mentioned above. Additional documents which have to be presented to the notary at this stage are confirmation from the local tax office that the property purchase tax (SISA) has been paid and, if relevant, a document to confirm power of attorney. Unless a buyer understands Portuguese, the notary will insist on a verbal translation into the mother tongue of the buyer. The contract is then signed by both parties. The full purchase price must have been paid to the vendor upon completion.

Land registry
It is then important that the property is transferred to the name of the new owner at the official land registry conservatoria and this is best done by the lawyer's office. The buyer should ask for a copy once it is registered.

Taxes and other costs
Property Transfer Tax (SISA) is paid by the purchaser before the signing of the escritura and is charged on a sliding percentage scale according to the agreed value of the property. All properties in Quinta do Lago fall into the highest bracket and are currently taxed at 10%.

Professional fees and costs
All costs to professional advisers, notary charges, land registry fees etc. are paid by the purchaser and are normally calculated on the value of the property. On the other hand, commission to the real estate agent is payable by the vendor. If the property is owned by private individuals and the purchaser wants to buy it offshore he must of course consider the costs of forming such a company and issuing power of attorney to the lawyer engaged to act on behalf of the company in the purchase.