Wait Ten Minutes, the Capital Gains Tax Laws Will Change Again!

“Wait ten minutes and the capital gains tax laws will change again!” That’s the joke these days. First we saw a change as of February 1, 2012 doubling the years from 15 to 30 till a property was exempt from the tax (secondary and investment properties), then the social security contribution was added to it when François Hollande came into office and now the years of holding have been reduced to 22, plus there’s a special offering of a 25% discount if you sell your property between now and August 31st, 2014!

If you hear sarcasm in my tone, you’re right. What were they thinking? That suddenly there would be double the tax revenues? Did they not consider human nature? Or basic economics? If your revenue on the sale of a property were to be cut in half, wouldn’t you choose to simply hold it longer and not place it on the market? It’s worth more sitting there doing nothing but increasing in value while the tax burden is reducing, so why not?

And what did that mean? That meant that there was no property and no sales (sales in the capital in the first half of 2013 was 22% below the average of the past 10 years) and no tax revenue on the gain of the sale or on the purchase, thereby reducing their tax revenues, stifling the market on the whole and creating even more vacant properties, which is also one of their biggest problems! Everyone is suffering and that’s why they’re doing a bit of backtracking. So, stay tuned, it’s likely to change again soon depending on if it can really get the market back in business.

Here’s how it’s currently working:

Since September 1st, 2013, the real estate capital gains are exempt after 22 years of ownership of a property (instead of 30 years ago as was declared from February 1, 2012). This applies to second homes and rental investment properties as capital gains on primary residences remain exempt. The new tax arrangements will be included in the Finance Act of 2014. Building lots are not affected by this reform.

The holding period of a property affects the tax calculation:

Each year the capital gains tax will be reduced 6% from the 6th to the 21st year and then 4% the 22nd year. The social security contributions will be reduced as follows: 1.65% from the 6th to the 21st year, 1.60% the 22nd year and 9% of the 23rd to the 30th year.

To give the market a boost, there is an exceptional 25% reduction applied from September 1, 2013 to August 31, 2014. This discount does not apply if: the sale of company shares include real estate; disposals of property in favor of the spouse, civil partner, cohabitant or ascendants and descendants of the seller; disposals are for the benefit of a person with which the seller is or becomes associated during the sale.

You can benefit from a total exemption beyond 22 years of holding a property and for social security contributions, a full exemption is awarded beyond 30 years of holding.

The amount of tax is 19% plus social security contributions of 15.5% is added. Between 22 years and 30 years of holding a property, only social security contributions are due.

For example:

For a single person or married couple under a community property regime with an acquisition on February 1, 2003 for €190,000 with a resale September 3, 2013 for €420,000:

Sale occurring after 10 full years of holding, the calculation is as follows: Purchase price of €190,000 to which was added €14,250 “notary fees” (7.5% of the purchase price by default) and €28,500 of work (15% of the purchase price by default) is €232,750. The gain is taxable €420,000 – €232,750 = €187,250.

The situation until September 1, 2013:

The flip side of all this is that because the wealthy French are fleeing tax burdens imposed by the new administration and the sagging economy, they are leaving their large expensive properties behind while the tax incentive discount is in place!

The media is filled with articles about the “44 million euro ($59 million) Parisian townhouse near the Champs-Elysees being snapped up just six weeks after it was put on the block,” by a Qatari buyer. Buyers from all over the globe are taking advantage of the drop in prices on multi-million-euro properties once they realized that the tax burdens were affecting the French, not the foreign buyers. (Hollande imposed new taxes for 2013 on French companies and households.)

Foreign buyers account for almost 8% of the total market. Top agencies are thrilled with the new glut of luxury properties at bargain prices, but they are having to learn to speak more languages to be able to work with Middle Eastern, Russian, Chinese and U.S. buyers. Prices are down in the city’s chicest neighborhoods which will end up a lot less French than they were before as a result.

The Americans are back, in spite of the drop in the dollar. My guess is that investing in real estate is a safer haven than an offshore bank account and much more profitable and enjoyable in the end. We’re still talking about large expensive properties here. The normal market of properties under 1 million euros is still suffering as the capital gains taxes increased, increased levies on vacant properties and new laws that both tax and heavily restrict rentals.

Hopefully that will change with the latest change in the capital gains tax laws and with low borrowing rates. The agents are already reporting that the buyers are heavily negotiating, able to make purchases up to 20% below asking price…the first time we’ve seen this in a very long time!

A bientôt,

Adrian Leeds

Director of The Adrian Leeds Group, LLC

Respond to Adrian: [email protected]

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