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The conservation and restoration of native vegetation is vital for providing key hydrological services (i.e., maintaining high water quality, atmospheric humidity, and precipitation patterns). However, this research area lacks fine-scale studies at the watershed level to evaluate opportunities for forest restoration and deficit (the shortfall of forest required to be restored or compensated), as well as the implications for watershed management. We provide the first fine-scale estimation of forest and deficit distribution, integrating permanent preservation areas (APPs, in Portuguese) and legal reserves (RL, in Portuguese), according to Brazilian environmental law, for the 41,300 km2 Itacai&uacute, nas watershed in the Brazilian state of Par&aacute, which has lost 50% of its vegetation cover. Using 30 m- and 10 m-resolution imagery, a multi-temporal land use classification was performed by geographic object-based image analysis (GEOBIA). The results were combined with a set of Brazilian regulations on the conservation and restoration of APPs and RL to assess patterns of forest cover and legal compliance. We found that the total RL deficit (4383 km2) was higher than the total forest surplus (above legal obligation) (3241 km2). However, most of this deficit (56%) could be compensated by protecting a forest area in another property within the Amazon biome, while 44% must be legally restored. Only 4% of the total forest surplus can be legally deforested, and the remaining 96% is already protected by law but can be used to compensate for areas under the deficit. We also found that, despite 57% (3017 km2) of the total APP being forested, only 26% (1356 km2) of the APP must be restored and 17% (881 km2) can remain deforested (consolidated areas). The 2012 law revision reduced the obligation to restore RL and APPs. This change could affect hydrological and ecological services. Compensation mechanisms could be used to protect forest within the Itacai&uacute, nas watershed, rather than in the biome, to reduce further deforestation pressure.