Paying Capital Gains Taxes: Nothing Ventured, Nothing Gained

NOW’S A GOOD TIME TO “GET ON THE BAND WAGON!”

France is hot on the international property scene, according to TheMoveChannel.com which reports “French property popularity hits 20-month high.” It’s the second most sought-after destination for property investment after the U.S. and this is the first time France is in this illustrious position since January 2016.

Demand for property is increasing, pushing France up as Spain, Germany and Italy slipped behind. Confidence is the key factor to the positive outlook — President Emmanuel Macron’s promised to lower property taxes is one factor for the strong market, plus with prices on the rise, now’s a good time to get on the band wagon.

#    Country        Share    Change

1     USA             8.58         1
2     France         4.86        Up 1
3     Spain          3.82      Down 2
4     Germany     3.31        Up 9
5     Italy            2.62        Up 3

For the first half of 2017, the price of property in France ranged between 1,350€/m2 to 3,130€/m2 with a median price of 2,050€/m2. Recorded in the six-month period were 113,599 sales. The median price in the Ile-de-France was 3,860€/m2, the most expensive in the country, followed by the Provence-Alpes-Côte d’Azur with 2,980€/m2.

Read the full report, in English.

ESTIMATING YOUR CAPITAL GAINS TAX

Capital gains tax is not assessed on the sale of a primary residence, but for most of you who wish to own property in France for your occasional use, or already own property, it’s wise to know what your tax obligations will be if and when you sell the property.

SOURCE: notaires.fr/en/capital-gains-tax-property

“The calculations basis for the capital gain is equal to the difference between the sale price (less costs to sell and the amount of VAT paid) and the purchase price (including premium actually paid registration fees when buying or a flat rate of 7.5% of the purchase price) or the declared value when the property was received by gift or inheritance (plus actual expenses and any inheritance rights if they were supported by the donee or heir).”

This is already a “mouthful!” In other words:

Sales Price
– costs to sell, such as the diagnostic reports required or any fees paid to the Notaire
– any VAT paid (on new properties)
– the purchase price
– notarial taxes and fees paid upon the purchase or 7.5% of the purchase price or the declared value if the property was received by gift or inheritance.

One may also deduct certain property improvements done, but beware of this assumption (text edited for better comprehension):

“The purchase price may be increased by construction expenditures, reconstruction, expansion or improvement if the works were supported by the vendor (new build) and built by a company with the supporting statements (invoices subject to VAT). Note: materials and work done by the owner himself are not deductible, nor is work done by any unlicensed, non-invoiced supplier.”

“In all cases, the expenses of maintenance and repair, including major repairs, are not included among the expenses that can be taken into account for calculating the capital gain. They include those which correspond to work intended to maintain or restore a building in good condition and to allow normal use.”

Basically, this means that very little is deductible — mostly major works that improve the property, such as the addition of a bathroom or kitchen that didn’t exist upon purchase.

However, the seller can increase the value of the property being sold by 15% if it is owned for more than 5 years, at a flat rate, without having to establish the real costs of the work, the amount of work actually carried out or its inability to provide supporting documents. Fifteen per cent of the purchase price is a simple option for an ownership well over five years even if it does not equate to the costs actually borne by the owner. If the owner does not keep good records, maintaining all invoices for a proper assessment, then the flat rate is a viable option.

The allowance for holding period: The rate and pace of abatement for holding period is different for determining the tax base for the income tax and social contribution.
        

You may also consult the French website about the declaration of capital gains on property (in French).

Thus, in effect, the real estate gain is exempt:
        
    • after 22 years of ownership for income tax,
    • after 30 years of ownership for social contributions.

Ownership Years are counted from the anniversary of the acquisition of the property (purchase date, date of the gift or date of death). This means that the longer you own the property, the less tax you will be paying.

Tax rates on the capital gain are as follows:

Since September 1, 2013, the capital gain is based on a flat rate of 19% with a reduction of 6% from year six of ownership and on the social tax levies rate of 15.5% (also with a tapered reduction from the 6th year). The tax will be assessed and paid to the tax authorities at the time of the sale, via the notary.
        
An additional fee (from 2% to 6% depending on the amount of surplus value after application of the deductions) applies on real estate gains, other than on building sites, on amounts exceeding €50,000. The capital gains tax varies according to the selling price, the nature of the goods, and the holding period.

Properties exempt from capital gains tax are:

• The sale of the principal residence and its immediate dependencies needed and sold simultaneously or nearly simultaneously;

• the sale of a right of raising the conditions of the article 150 U II-9 CGI;
        
• the sale of a property located in France by non-resident taxpayers under certain conditions;

• the capital gains realized on the occasion of the sale of furnishings for a price less than or equal to €15,000 for a single person, €30,000 for a couple;

• those carried out on the occasion of the sale of property held for over 30 years;

• the sale of a property in the case of expropriation under the terms of reinvestment;

• The sale by retired or disabled.

Taxpayers who do not own their principal residence, may benefit from exemption from capital gains realized on the first sale of a dwelling under certain conditions:

• The transferor was not the owner of his residence, directly or through intermediaries, in the four years preceding the sale;

• The transferor must proceed to reinvest the proceeds of sale within twenty-four months from the disposal, for the acquisition or construction of a dwelling which affects upon completion or acquisition if later, at his main residence.

The bottom line is that making an assessment of your capital gains tax in advance is best done by a notary or advisor to assure your estimations are correct. In addition, be aware of possible double taxation.

The European Union Commission has argued that France cannot impose social charges on the property income of non-residents. Since 2012, non-residents with property in France have been liable for the social charges on the capital gains from the sale of real estate. The level of these charges is at the rate of 15.5%, but the non-residents have no benefit from these tax assessments. In a landmark judgement in February 2000, the Court confirmed that individuals should only be required to pay social charges in the country in which they were resident. The French Constitutional Council has ignored the European Union Commission’s decision that the levy of the tax is illegal under EU law.

What we have found is that the tax is assessed, and the seller must then seek retribution from the French tax authorities on his own. A formal complaint must be issued and ultimately lodge an action in the French courts.

What are your chances of winning? I’d say “good luck.”

One thing of great importance to understand and realize: the tax is paid on the GAIN. This means that the tax is only paid if you have profited from the ownership of the property and therefore nothing is lost…but only gained.

A bientôt,

Adrian Leeds
Adrian Leeds Group

Respond to Adrian:

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P.S. Monday Oct. 23 our brand new House Hunters International episode “Champagne Problems in Paris” airs. Details on our HHI page. Set your DVRs now!