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2. French Mortgage or Remortgage ?
2.2. Tax Relief on French MortgagesEven if you are able to buy your French idyll on a cash basis, you should consider whether it might be in your interest to take out a mortgage on the property.
In the first place, mortgage tax relief is available on the purchase or construction of a main home, for the first 5 years of the loan.
The relief is granted at the rate of 40% of interest incurred in the first year, followed by 20% of interest paid for the remaining four years. If the property is constructed to a strict low energy standard (Bâtiments Basse Consommation (BBC)), then the relief is granted at the rate of 40% for a full seven years. The amount of relief is capped at €1500 per person in the first year, and €750 for the remaining four years, subject to a total maximum relief of €3750 for a single, widowed or divorced person, and €7500 for a couple. These amounts are doubled where at least one member of the household is registered disabled. They are also increased each year by €500 for each dependant person in the household.
If you do not pay income tax in France (as is the case with around 50% of the population) then you would be granted a tax credit, in an equivalent sum to that you would otherwise have received in tax relief. In other words, the taxman would send you a cheque! Strictly speaking, at the time of purchase the property must comply with the basic standards of habitation, so you may well not be able to benefit if you are buying a ruin for complete renovation. The interest relief applies as much to self-build properties as those purchased from an existing owner. You do not need to use a French lender to obtain access to the tax break, as the use of a lender based anywhere within the EU is equally valid. Conversely, you will need to be resident in France, or buying with a view to becoming resident. Secondly, loan interest on a property is (French) tax deductible against rental income. Accordingly, if you purchased a property in France with a view to renting it out, you are able to charge mortgage interest costs against rental income.
Finally, debt on a property is deductible against liability to inheritance tax. Whether you are resident or non-resident, if you are likely to face inheritance tax liability, then a mortgage could be used to reduce your tax exposure.
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