Waving the French Magic Wand Over Capital Gains Taxes

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Waving the French Magic Wand Over Capital Gains

French Property Insider
Volume XIII, Issue 1
Thursday, January 1, 2015 • Paris, France

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Visit Parler Paris Apartments: Parler Paris Apartments to view our full selection or email: apartments@adrianleeds.com for more information.

FREE one-hour consultation! Guests of Parler Paris Apartments or Parler Nice Apartments who are considering the purchase of their own “pied-à-terre” for pleasure and profit, can take advantage of a free one-hour consultation while enjoying the apartment in the City of Light or on the Riviera. Simply complete the request form to book your consultation.



Bonjour French Property Insider Subscriber,
 

French Propety Insider NewsletterHappy New Year! This is the year’s first issue of French Property Insider for 2015 and note that it’s the thirteenth year in existence — pretty amazing!

Early in the year 2002 when FPI was launched, the average price per square meter in Paris was 3,240€. In the third quarter of 2014, it was 8,110€ — 2.5 times more in less than 13 years and an average of 7.5% appreciation each year.

In the third quarter of 2012, the average per square meter was 8,440 — so we’ve had a down market for the last two years thanks to a number of variables, one of which are the changes in the capital gains tax laws. If the price of property had stayed the same or continued to rise, our investments would have appreciated at 8%, .5% higher.

See the official chart.

The capital gains tax laws have changed with the ease of a ‘magic wand’ by whatever administration is in office and needs to use them to reduce the country’s deficit. The problem is that while on paper it seems it is a solution, what has been forgotten is human nature — how a buyer or seller react to the change, or how the European Union might view France’s tax hikes as even unconstitutional by E.U. law.

In 2012, Socialist president François Hollande added 15.5% social security taxes to rental income and to the capital gains tax of secondary residences, but the E.U. argues that the tax is “illegal.” The tax violates E.U. law because “a person exercising an activity in one member state is only subject to social security regulation of that member state.” The social security tax paid to France would not be credited against the tax bill in their home state.

The French ministry said it would remove the “unjustified tax advantage” for non-residents, and European Union’s senior legal adviser concludes that France could be forced to reimburse more than €500 million non-resident property owners who have let out or sold their properties in the past three years.

The “Catch 22″ is that those who sold their properties must have applied for the rebate before the end of one year from the time the charge was paid, but this has not largely publicized. Anyone who sold a home in France in 2012 or 2013 could have made a claim this pas year, otherwise, the rebate is lost.

Magic wandInvestors are weary of France’s magic wand to change their tax laws in their desperation to reduce the country’s deficit. Other taxes are on the horizon targeted to the second home owner to bring part-time residences on to the market for families seeking primary residences. Local property taxes may rise as a result or there may be penalties for apartments or villas that stand empty much of the year.

The city of Paris poses an alternate threat to owners of secondary residences who cannot legally rent their properties with contracts less than one year (or nine months for students). These investors are caught between ‘a rock and a hard place’ with no way out other than to either cheat the system or sell out. The estimated 20,000 to 30,000 property owners to which this applies are caught in this conundrum. With property values lower in Paris since 2012, selling means a loss, not only financially, but from the use of their own property.

I was interviewed recently regarding the short-term rental laws in Paris by two illustrious news agencies: the BBC and Le Monde. Read what their journalists had to say in the recent articles:

BBC by Hugh Schofield

Le Monde by Isabelle Rey-Lefebvre (In French. You must subscribe or pay a small fee to read the entire article.)

Paris NotairesThe Chambre de Notaires de Paris Web site offers this very clear explanation of the tax, published in June of 2014:

Capital gains tax on property

The rules governing the taxation of capital gains on real property have been changed.

Before you sell, it is a good idea to have a precise idea of how any capital gain will be taxed.­

The capital gain is equal to the difference between the sale price and the purchase price or the value that was reported when the property was received as a gift or by inheritance.

The rules governing capital gains vary in accordance with the sale price, the nature of the asset, and how long the asset has been held. Capital gains made on the sale of assets are exempt when the sale price is less than €15,000.

This also applies to the gains achieved on the sale of a principal residence which are totally exempt, regardless of how long the property was owned. Since 1 February 2012, capital gains achieved on properties sold when the property has been owned for 30 years or more are also exempt.

In other cases, since 1 October 2011, the vendor is liable to pay tax on the gross capital gain at a rate of 32.5%.

The amount is reduced by:

    2% for the sixth to the 17th year of ownership;
    4% for the 18th to the 24th year;
    8% up to the 30th year.

New exemptions

Article 5 of the French 2012 Finance Law has clarified the taxation of capital gains realized on the disposal of property built for residential purposes, when the property is of mixed use. There is now an exemption. It applies to the fraction of the capital gain that derives from the disposal of that part of the building used for residential purposes. The exemption can only be applied once as from 1 February 2012, on any sale chosen by the vendor, at the vendor’s request, provided all the other conditions have been met.

A taxpayer who does not own their principal residence, may receive an exemption of capital gains realized on the first sale of a home under certain conditions:

The seller has not owned their principal residence, directly or through intermediaries, during the four years preceding the sale (CGI, art. 150 U II, 1 ° bis, para. 1);
The transferor must proceed to reinvest the proceeds of sale “within twenty-four months from the transfer, for acquisition or construction of housing that affects, upon completion or acquisition whichever is later, to his main residence “(CGI, art. 150 U II, 1 ° bis, para. 2 – in limine).

In case of breach of any of these conditions, the exemption is challenged under the year of failure (CGI, art. 150 U II, 1 ° bis, para. 2 – end).

Concerning investment products, from 1 July 2012, it should be noted that payroll taxes will increase to 15.5%, and capital gains will increase to 34.5%.

Deductible improvements

Not all improvements to real property are tax deductible. Only the following improvements are deductible and, in order to benefit, the vendor must have kept the invoices and must not have deducted these expenses for income tax purposes in the past:

Improvements intended to make the property more comfortable or better suited for modern living, such as the installation of a lift, double glazing, a bathroom, etc.
Construction work

Extensions

Failing this, the vendor may make a flat rate deduction of 15% of the purchase price. To be eligible, he/she must have owned the property sold for at least five years.

In all cases, the cost of renovation work, maintenance and repairs may not be deducted from the calculation of the capital gain.

The notaire’s advice:

If you have made a lot of improvements to your second home, keep all the invoices, as the purchase price may be increased by the amount of the real cost of the works carried out, provided you have kept all the invoices. Failing this, a flat rate increase of 15% may apply, if you have no invoices to prove otherwise, provided the property has been owned for at least five years.

Practical example

Armand acquired his second home 17 years ago for the sum of €100,000, including the cost of the purchase. He has made improvements to a value of €20,000 and has kept all the invoices.

He now wishes to sell the property for €250,000. ­

Purchase price : €100,000 + 20,000 = 120,000
Sale price : €250,000
Capital gain : €250,000 – 120,000 = 130,000
Allowance 24% : €31,200
Capital gain after allowance : €130,000-31,200 = 98,800
Tax due : 98.80 x 32.5% = €32.110

Are you caught in the conundrum? Or wishing to invest and wanting to know how to make the smartest move? Contact us to discuss your options. As of today, January 1, 2015, Adrian Leeds Group® (dba Parler France Properties SARL) can list your property for sale and can assist you in finding a property that will meet your needs and goals.

Email contact@adrianleeds.com for more information.

Notaires de FranceSpecial Note re Notaires:

The Government has filed a bill on “growth and activity,” which involves serious status of notaries and making it impossible, if adopted as is, maintaining their service providing public information and public assistance. Therefore, the General Meeting of the Society of Notaries of Paris decided to suspend free consultations to the public information center of the Chamber of Paris as of 16 December 2014.

The notaries are aware of the damage caused by this movement and apologize to the public, but their work aims to contribute to the fight against projects whose consequences would be extremely serious and lasting for the vast majority of their customers.

Catherine Carely, President of the Chamber of Notaries of Paris, invites you to support their struggle by signing the e-petition supporting the French notaries. Sign the petition.

A bientôt,

Adrian Leeds - French Property Insider by Susi GottAdrian Leeds

Editor, French Property Insider

(by Susi Gott)

Email: fpi@adrianleeds.com

 

 

 
House Hunters International - Californians sell their VineyardP.S. 
Tune in to House Hunters International for “Californians Sell their Vineyard to Afford a Summer Home on the Costly Côte d’Azur” on January 2 at 11:30 p.m. ET / 10:30 p.m. CT and January 3 at 2:30 a.m. ET / 1:30 a.m. CT. When California winery owners Jann and Gerry decided it was time to sell up so they could afford a summer home in southeastern France, would they find a place with old-world charm for Jann but that was move-in ready for Gerry?

P.P.S. Apologies for getting the newletter out later than usual. It is, afterall, New Year’s Day. You understand, I’m sure–Schuyler


 Financial Planning for Expats

Brian Dunhill - Dunhill FinancialDunhill Financial, SPRL
International Financial Planners

For English-speaking expatriates residing in Europe who need assistance with financial planning, the Adrian Leeds Group recommends Dunhill Financial. To plan for your retirement, save for educational needs or arrange your estate, Brian Dunhill is happy to discuss your options during a telephone consultation or face-to-face meeting.

Visit Financial Planning for Expats for more information.


 

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