The Tax Benefits of Long-Term Ownership in France

Tonight I will be making a presentation alongside Brian Dunhill of Dunhill Financial titled “Financing French Property 101” — the subject of which was addressed fully in our March 24th issue of FPI.

A few readers have asked us if we could record these presentations in a way that those who cannot be in Paris could benefit from them…such as a webinar. That is a wonderful idea and we are working on producing these in the future…once our new Web site is launched (stay tuned) and other offerings are in place. Meanwhile, it is best to continue to read our publications or work with us on a one-on-one basis to benefit most from our entire team’s expertise…there is nothing better than personal/individualized professional advice.

One of the first questions our clients ask is about taxes, which will not be addressed in tonight’s presentation. Taxation in France is generally so high that it’s natural to think that property will be taxed as high as sales tax (VAT), income or social security…but fortunately it is not…not at all! Without going into too much detail, there is a simple way of understanding what you can expect to pay in tax as a property owner.

There are two annual taxes imposed on property:

1. “Taxe foncière” is the primary property tax, on the building and on the land, and is paid by the owner annually, due on January 1. When purchasing a property, the taxes are apportioned to both the seller and the buyer based on their amount of ownership during the year.

2. “Taxe d’Habitation” is paid by the occupant of the property on January 1, whether owner or tenant. The city administrators assess this tax and it is calculated on the basis of the “notional rental value of the property” — the rental value multiplied by the tax rate in that locality. There are variations applied if the residence is principle vs secondary or low income or with dependents.

Each of these taxes tend to equate to about .0001% of the value of the property in densely populated areas, such as Paris and higher in lower densely populated areas. This is because the “pie” — the budget — can be shared among many more contributors in urban areas where geographically there are many more residents and commercial establishments.

When making a purchase, the taxes paid in the past are normally disclosed to the buyer in advance of the purchase in order for the buyer to be able to make prudent financial decisions. There is no way of knowing if those taxes will change or increase in the future — these are decisions legislators make without the property owners’ permission! (Sorry!)

By comparison, property taxes in the U.S. are considerably higher. Most states impose a rate based on the fair market value of the property while others impose it on a percentage of the market value, with variables. “New Jersey has the highest effective rate at 2.38% and is followed closely by Illinois (2.32%), New Hampshire (2.15%), and Connecticut (1.98%). On the other end of the spectrum, Hawaii has the lowest effective rate at 0.28%, and is followed closely by Alabama (0.43%), Louisiana (0.51%), and Delaware (0.55%).” (Source: taxfoundation.org/blog/how-high-are-property-taxes-your-state)

The bottom line is that your cost of ownership in France is considerably lower than Stateside — so have no fear of these taxes!

If you rent your property, then of course there is taxation on the profits of your rental revenues. Resident or not, France expects you to report and pay these taxes, but you will also need to declare the income and the taxes you paid in France to your home country. Thanks to the double taxation treaties with many countries, you will not be taxed twice on the same income. The basic French tax rate is 20% on the net income after deductions. Deductions can include repairs, maintenance and improvements (excluding construction), local taxes, employee costs, mortgage interest expenses, management fees and insurance costs.

The bottom line is that if you have paid taxes, you have enjoyed a profit! Therefore paying a capital gain tax is desirable! When you sell your property, you will have capital gains taxes to pay, unless it is your primary residence, for which the tax is exempt.

There is a fixed rate of 19% which reduces over time after the first five years: 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and 4% for the twenty-second year.

On top of this, there is social security tax of 15.5% imposed at a different scale: 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive; 1.6% for the twenty-second year; and 9% for each year of ownership beyond the twenty-second year, ending with the 30th year.

The EJC

In February 2015, the European Court of Justice (ECJ) condemned France for assessing social security tax on property sales or rental income earned by owners who do not benefit from the French social system, however, in order to circumvent the ECJ ruling, France amended its Social Security Code effective  from January 2016, which means that social charges continue to be applicable at the rate of 15.5%.

An additional tax continues to apply for a secondary residence when the gain exceeds 50,000€ on a scale that increases as the gain increases, as follows:

     Amount of Gain          Tax Rate
    
     €50,001 – €100,000            2%
     €100,001 – €150,000          3%
     €150,001 to €200,000         4%
     €200,001 to €250,000         5%
     €250,001 and over              6%
    
Again, by comparison, capital gains tax high in the U.S. is the 6th highest tax rate in the OECD as the average top marginal rate is 28.6%. Only taxpayers in Denmark (42%), France (34.4%), Finland (33%), Ireland (33%), and Sweden (30%) face higher rates.

Long-term ownership reduces your tax obligations and increases your Return on Investment. This is not a property market where “flipping” is an advantage, but rather long-term investment is.

A bientôt ,

Adrian Leeds
The Adrian Leeds Group

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