Happy New Year for Sales and Unhappy New Property Taxes
French Property Insider Volume XI, Issue 50 Thursday, December 26, 2013 • Paris, France
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This is the last issue of French Property Insider for the year and in just a few days, we'll be able to say goodbye to 2013 and ring in the new 2014. During 2013, taxes have been the most talked about topic, thanks to the Hollande administration which is looking under every nook and cranny for increased revenues. Real estate has been hit as badly as any other sector. In today's FPI, we will outline what you can expect in new tax increases for 2014 as well as what gains have been made in property sales and prices. While the market is looking up, the question is how the new tax reforms will affect the market in general.
TAXES IN 2014
Notary taxes and fees:
Transfer taxes and fees paid at the time of a purchase, divided into county tax and municipal taxes and fees, currently represents a rate of 5.09% of the sale price of the property. Within this rate, the fraction attributable to departmental tax is 3.80%. A drafted finance bill for 2014 proposed to increase the rate by 0.7% over a period of two years, bringing it to 4.50%. Therefore, the new overall tax rate would be 5.8065%.
Example: With the announced increase, the additional cost to purchase an apartment of 500,000€ in Paris would be about 3,600€. To purchase a home in the amount of 200,000€ in Troyes, the additional cost would be about 1,400€.
The question is when this measure would come into force. If the authorities stick with the provisions of the General Tax Code, the increase would apply effective June 1, 2014. However, the discussion is still ongoing at the Parliament and it is possible that the increase will become effective earlier, as of March 1, 2014. The current tax for sales commitments signed before December 31, 2013 will remain as is.
"Transfer taxes" are included in what is mistakenly called "notary fees," which include all taxes and duties levied by the notary on behalf of the Treasury plus his own fees. Note that tax increases will not change the fees paid to the notary for his work.
The draft budget law for 2014, currently in the process of being adopted, also provides for the elimination of deductions during the holding period. These allowances will have to take into consideration the passage of time and thus reduce, over time, the amount of tax exemption and ends after a certain number of years.
Again, the effective date is uncertain. In principle, this change will apply from the beginning of 2014 but amendments have been tabled so that it will not enter into force until March 1, 2014. There is no provision at this time to maintain the current tax for pre-sale agreements signed before December 31, 2013. Therefore, only count on the actual date of completion of the sale or signing of the Acte de Vente.
As of January 1, 2014, under Article 68 of the 3rd Amended Finance Act for 2012, the standard rate of VAT was increased from 19.60% to 20%. For new real estate projects, all sales in future completion (off plan) will undergo an increase in the rate of VAT which will impact the final price paid by the purchaser. The operative tax is not the date of signing of the Acte de Vente but the date of the assessment for funds corresponding to the progress of work. The rate applicable to such assessments will be that in force on that date. Accordingly, all amounts paid before December 31, 2013 bear VAT at the rate of 19.60%. As for subsequent assessments of funds as of January 1, 2014 will include a VAT rate of 20%.
The following increases apply:
• The standard rate which applies to the majority of goods and services, is increasing from 19.6% to 20% • Restoration, sale of prepared food products, transportation and renovation of older housing will increase from 7% to 10% • the rate applicable in Corsica will increase from 8% to 10%.
SALES IN 2013 AND WHAT'S EXPECTED FOR 2014
Latest sales price information for Paris and Ile de France (as of December 20, 2013):
34,070 existing homes were sold from August to October 2013, up 11% compared to the same period in 2012.
The slight improvement observed since the end of the spring is compensating for the deficit of activity earlier this year. In the end, sales volumes in 2012 and 2013 could be close enough, even if these two years have very different profiles.
This slight improvement is fairly widespread. Between August and October 2013 in the resale of apartments gained 11% more sales compared to the same period in 2012, and 12% for houses. All departments have seen activity improve with an increase in sales, varying between 18% for Yvelines and 4% for Seine-Saint-Denis.
However, the activity did not find any real momentum. Thus, despite this progress, sales from August to October 2013 were down 4% compared to August to October 2011 and by 16% compared to the same period observed during a dynamic market.
In continuation of what has been observed for more than two years, the prices always fluctuate within a narrow margin, resistant to decline despite a low number of sales. In one year, the price of existing homes fell 1.3% in Ile-de-France, with a slightly stronger decline for apartments (-1.5%) than for houses (-0.8%).
In three months (July to October 2013), prices have stagnated, with a slight erosion of 0.3% for resale apartments in Ile-de-France, and changes only slightly positive or only negative in all departments. Taking into account the seasonality confirms the slightly downward trend (-0.6% in seasonally adjusted data). Houses recorded a small increase in price of 0.5% in 3 months with a little more marked variations in the west (1.3% in the Hauts-de-Seine and 1.1% in Yvelines). In Paris, the price per square meter of resale apartments amounted to 8,240€ to the end of October (-0.4% over 3 months). It fell by 1.6% in one year.
Advanced statistics on pre-sale agreements indicate a continued stagnation of prices in the coming months, whether for apartments in Paris and Hauts-de-Seine or for homes in Grande Couronne.
What does all this mean to our future as investors in the Paris real estate market?
If you own property and are thinking of selling it, then before August 31, 2014 may be a great time to take advantage of the "discount" offered on capital gains tax. Otherwise, hold it as long as possible to reduce your tax obligations and allow it to appreciate.
If you are thinking of purchasing property in France, then expect to pay a bit more in taxes at the onset, but know that there is little risk in price deterioration over the course of time.
What the lawmakers don't realize, is that while they are increasing taxes, they are affecting the way people will respond to these changes. Landlords will be forced into increasing rents in order to pay for their increased costs, something the lawmakers are also trying to legislate and control. If there are fewer and fewer incentives to own property, the market is sure to see a downtown and there will be even less affordable housing on the market...something that is already a serious problem.
Is the future as bleak as we think? I am the ultimate optimist and believe that what goes down must come up. We have seen the Holland administration's bad decisions backfire and force an immediate counter-solution, such as the "discount" offered on capital gains tax. Time will be on our side to enlighten the politicians and the people of France to realize that such stringent impositions on its people will not lead to prosperity.
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